Arthur J. Gallagher & Co. (AJG) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Arthur J. Gallagher and Company's first-quarter 2016 earnings conference call.

(Operator Instructions)

Today's call is being recorded.

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

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

These forward-looking statements are subject to 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, Chairman, President, and CEO of Arthur J. Gallagher and Company.

Mr. Gallagher, you may begin

Thank you, Donna.

Good morning, everyone.

Thank you for joining us for our first quarter 2016 earnings call.

With me this morning is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

There are four key components to creating long-term value for Gallagher shareholders.

Number one, we need to grow organically.

Number two, we need to grow through mergers and acquisitions.

Three, we improve our quality and our productivity every quarter.

Number four, we have to work hard to maintain a very unique culture.

We excelled on each and every one of those this quarter.

All in, we grew 4.8% organically in our combined brokerage and risk management operations.

We had another 6% of growth through net acquisitions, for a total adjusted revenue growth of 11%.

Our quality was recently recognized by J.D. Power and Associates as ranking the highest in customer satisfaction among brokers in the large commercial insurance space.

We became more productive, with adjusted EBITDAC growth of 15%, and we expanded our adjusted margins by nearly a full percentage point.

Our culture was recognized by the Ethosphere Institute as one of the world's most ethical companies for the fifth straight year.

Simply put, an outstanding quarter on each component of our strategy.

Let me spend a little more time on growth, both organic and acquisitions, and what we are seeing in terms of insurance pricing.

Doug will then go into greater detail on margins, clean energy, and capital management.

First, in our brokerage segment, let me talk about organic revenue growth.

All in, organic was 4.8%.

Excluding contingents, which are seasonally strongest in the first quarter, organic was 4.2%.

This is similar to the first quarter of 2015, and up about 1 point relative to the fourth quarter of 2015.

About half of this improvement is attributable to stronger new business, and about half was due to less drag from rate and exposure.

Focusing now on our domestic brokerage operations, which include our retail PC brokerage, retail employee benefits consulting, and our wholesale brokerage operations, these units account for about two-thirds of our brokerage segment revenue.

Domestically, organic revenue growth was about 4.5%.

Of that, retail PC was over 5%, benefits at 4%, and wholesale at a little over 2%.

Wholesale is feeling some impact from weaker property rates.

Commercial PC rates are still down, but they are a manageable head wind, and our exposure units are growing a bit.

In our employee benefit consulting business, a tight, multi-generational labor market, combined with rising cost of health care, especially pharmacy costs, along with increased regulations for employers such as the ACA, are creating more new business opportunities.

In the first quarter, the renewal impact from rate and exposure units had about a half of a percentage negative impact on our organic growth domestically, so no real change from the past few quarters.

I just came back from the RIMS conference in San Diego, and the tone from carriers seemed to be similar to what we have been hearing for the past three quarters: some continued weakness in property, but otherwise pretty consistent conditions.

Moving to our international brokerage operations, that's principally our PC operations in Australia, Canada, New Zealand, and the UK, which combined represent about one-third of our brokerage segment revenues.

Organic revenue growth was about 5% within our international operations.

UK retail posted about 3% organic in a relatively flat rate and exposure environment.

London and Bermuda specialty posted about 5% organic in a difficult rate and exposure environment.

Australia/New Zealand had a little negative timing, otherwise organic was flat, also in a difficult rate and exposure environment, but we're starting to see pricing bottom out in Australia/New Zealand.

Canada posted 6% organic in a flat rate and moderately down economic environment.

When you look at our larger international mergers that we did in 2014, they're all doing very well.

Integration is done in Australia/New Zealand, nearly done in Canada, and should be mostly done in the UK by the end of the year.

Let me turn to merger and acquisition growth.

Over the past 20 months, we've returned to our almost exclusive focus on smaller tuck-in mergers.

Today's competitive environment for mergers is similar to the last two to three years, and a lot like most of the early 2000s, for that matter.

But we're maintaining our pricing discipline, with weighted average valuations at about 7 times EBITDAC for the eight mergers we did here in the first quarter.

We can pay these valuations because the merger partners that choose us see the long-term value in joining Gallagher.

They see our vast capabilities, they see our proven track record, they embody our culture, and they see themselves being more successful as part of us.

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

To wrap up our brokerage segment, we posted first-quarter results of 4.8% total organic growth.

Total adjusted revenue growth was 12%.

Adjusted EBITDAC was up 16%, and our adjusted margins expanded by 79 basis points, a really strong quarter for our brokerage segment.

Let me move to our risk management segment, which is primarily Gallagher Bassett Services.

Risk management started the year with a good first quarter.

Adjusted organic revenue growth was 4.7%.

Adjusted EBITDAC grew 9%, and adjusted margins improved by 103 basis points to 17.6%.

Gallagher Bassett continues to deliver consistent, attractive top- and bottom-line results for shareholders.

GB's domestic claims management business delivered 6% organic growth in the first quarter, while international operations were closer to flat, excluding last year's run-off fees.

At 17.6% EBITDAC margin, we out-paced our margin target of 17%, while continuing to make investments that will drive future growth.

I spent some time at the Gallagher Bassett booth at RIMS, and I was able to see first-hand how we are positioning ourselves in the market place.

We have an amazing offering to provide clients.

GB, in my opinion, is simply the best.

Some of their recent innovations include Waypoint, our suite of decision-support tools based on cutting-edge machine learning technology; Luminos, our acclaimed risk management information system; and our new GB Go, a mobile application to enhance communication and engagement with injured workers.

All these innovations will continue to improve claim outcomes for clients, and bring additional revenue to Gallagher Bassett.

I don't want to forget to mention our clean energy efforts.

Another solid quarter, still on track to post 15% growth in annual after-tax earnings relative to 2015.

Is was a great start to the year.

Glad to have the first quarter in the books, and we really are hitting on all cylinders.

Over to you, Doug.

Thanks Pat, and good morning, everyone.

Like you said, it's nice to put first quarter under our belt.

I'll make some comments on margins, corporate and clean energy, cash and capital management, and the highlight a couple things in our investor supplement and CFO commentary documents that we post on our IR website.

Okay, first to margins.

Brokerage was up 79 basis points, and risk management was up 103 basis points, really excellent work by the team.

Within the brokerage segment, adjusted margin expansion was about equal between our domestic and international operations.

Domestic was up 75 basis points, international was up 90 basis points.

Recall, our domestic units are running annualized margins in the high 20%s, so to expand here in the first quarter shows excellent discipline.

Internationally, our Canadian, New Zealand, and London and Bermuda specialty units are also posting margins nicely in the 20%s, yet we do have some opportunity to further improve margins in our Australia and UK retail units over the next 18 to 24 months.

In terms of integration, the UK team is doing excellent work, and we remain on track to be nearly finished with integration by the end of this year.

Integration costs for the first quarter were right on our forecast, and we still expect 2016 integration charges to be about half the 2015 level.

As for risk management segment, we exceeded our 17% margin target during the quarter, and we still think 17% is a good margin to expect for the next three quarters.

Moving to the corporate segment, we landed a bit above the high end of the range we provided during our last earnings release, mostly due to clean energy.

Most of that was timing.

When you look at page 4 of the CFO commentary document, you'll see the timing between the quarters, yet our full year is effectively unchanged from what we previously provided.

For the year, we are still estimating between $109 million and $124 million of net earnings from our clean energy investments.

Okay, to cash -- let's move to cash and capital management.

Our first-quarter is seasonally our smallest cash-generation quarter.

Yet at the end of the first quarter, we had about $250 million of free cash on our balance sheet.

We are working on freeing up about half of it as part of our integration efforts in the UK, and the other half is in Australia, New Zealand, and Canada that we'll use were M&A, merger and acquisition opportunities, in those geographies.

We also announced a few weeks ago that we renewed and up-sized our line of credit facility to $800 million, and we anticipate closing a $275 million debt private placement in early June.

Our debt-to-EBITDAC ratio on March 31 was about 2.6 times on a covenant basis, and we're targeting a similar level at the end of 2016.

We believe free cash -- we believe between free cash and debt, we can fund our M&A program in 2016, similar to the levels we completed in 2015, with no net shares used.

To clarify, when I say no net shares used, there will be tax-free re-org mergers that require us to use stock, but we intend to offset that through buy-backs, just like we did in the first quarter.

All right, a couple items on housekeeping.

First, please don't forget that our first quarter is seasonally our smallest in the brokerage segment.

Please use the document on our web IR website called Supplemental Quarterly Financial Information.

We give you five years of both reported and adjusted results on a quarterly basis.

From that historical information, you can easily see our seasonality.

Second, we also provide a CFO commentary document on our website that has a lot of forward-looking information that should help you build your models.

You'll see that items for the first quarter are in line with the forecast we gave you during our last earnings call.

Some sound bites looking forward that you'll see on that document: FX headwinds are mostly behind us, integration is tapering off, and this is also now where we're providing all the guidance related to our clean energy investments that used to be in our earnings release.

A terrific quarter on all measures, and in the end we're really well positioned for the remainder of the year.

Back to you, Pat.

Thank you, Doug.

If you look at our first-quarter performance, it really was excellent.

I believe we continue to execute on our global strategy.

We believe that a key component to our execution is maintaining our culture, and we work hard to protect and promote it.

Very proud to be recognized as one of the world's most ethical companies by the Ethosphere Institute for the fifth straight year.

This is a testament to who we are as an organization, and to the caliber of colleagues we have at this great Company.

As we continue to grow and become more global, we are dedicated to keeping our Gallagher culture thriving and strong.

Donna, we're ready for questions.

Thank you.

The floor is now open for questions.

(Operator Instructions)

Ryan Tunis, Credit Suisse.

Hi, good morning.

This is Crystal Lu in for Ryan Tunis.

My first question was around the strong base commissions and fees growth this quarter in brokerage.

You mentioned in the remarks that the strong new business and better-than-expected rates in exposures drove that.

Do you have visibility on the sustainability of those two items going forward?

Well, I'll tell you, Crystal.

We get up every morning and we work really hard on getting the word out that we are the best, we believe, at taking care of clients' insurance needs.

In our pipeline, we use salesforce.

com, so I have a look into our pipeline.

We're a very aggressive new business Company.

All of us, every one around this table is involved every day in helping people put new business on the books.

We're focused on niche areas that we're very good at.

I think our new business will continue to be very strong.

I think we have an awful lot to offer our customers, and we've got a lot of people out on the street telling people they should be doing business with us.

Okay, great.

For the contingents in supplementals which are really strong this year, I know that you said that the contingents had a really strong quarter just because of seasonality, but could you comment on your expectations for those two for the rest of the year, as well?

Yes, I think the best thing to do on that is recall contingents are significantly skewed towards the first quarter.

I'd encourage you to use the supplement that we have on the website that shows you the trends in supplemental contingents in the next three quarters.

When you're building your models, I'd do some site picks off of that, but you can extrapolate just off the first quarter.

You've got to look at the seasonality that comes with those.

But overall, the carriers are recognizing the value that we provide in the process, and I think that we've got an upward trend in those that might out-pace the trend in our base commissions and fees.

Great, thank you so much.

Thank you, Crystal.

Elyse Greenspan, Wells Fargo.

Hi, good morning.

Good morning.

I just wanted to follow up on you guys had laid out an organic growth outlook for the brokerage business of about 2.5% to 3.5% for this year.

Obviously the Q1 came in a little bit stronger.

Do you think that for the -- now thinking about the full year, could we potentially see organic growth come in above that range?

Above the 2.5%?

The 2.5% to 3.5%

Yes.

Okay.

Then you had mentioned Australia coming in at about flat in the first quarter.

Directionally, what type of comp are we coming off of?

What type of organic growth did we see in the fourth quarter, can you just remind us?

Then based on your expectations thinking forward for the year, do you anticipate starting to see positive contributions from the Australia/New Zealand business?

Yes, Elyse, good question.

I was just down there.

I spent a couple weeks down with Australian folks.

If you recall, when we picked up that organization from the Wesfarmers folks, which is an industrial conglomerate, this has been a really terrific opportunity for us.

There was a -- they're starting to use the Gallagher play book.

They're starting to focus on sales the way we do in our sales meetings.

I see them as really turning the corner there.

They were fighting three things, first the lack of a sales culture that we're really changing.

This is Australia, Doug's talking about.

This is Australia, right.

In terms of the economic conditions down there, obviously Australia has suffered a little bit from lack of exports to China.

Then also, there was a rate -- there was rate-cutting going on there.

They had three headwinds.

I believe all three of those are turning.

I believe there's stability in the market place on the rating side.

I think economic growth is starting to come back in Australia.

I think the sales force is alive and well.

We launched a couple new products down there that are really good in the small business space.

The trend in that, we were seeing negative organic growth last year each quarter, and this quarter we're pushing more towards the positive territory.

Really good work by the team down there.

And New Zealand is killing it.

Right.

Okay, great.

Then as we think about the margins for the brokerage business for the balance of the year, you guys saw about 80 basis points of improvement in the first quarter.

Was there any kind of one-off items in that, or is that some type of run rate to assume if we see a consistent level of organic growth?

I don't know if I can say if it's a run rate or not.

Obviously, if you don't have 3% organic growth, we've said it's pretty hard to expand margins.

One of the things about it in the first quarter is that contingents have a large impact on that.

In our margin expansion in the first quarter, again relative to last quarter -- or last year same quarter -- if you look at the margin expansion without contingents, you get about half of that expansion.

That feels more logical to me then a full 80 basis points.

Okay.

Then in terms of the deal flow on the acquisition front, Q1 you had mentioned as seasonally a weaker quarter in terms of transactions.

Last year the Q2 was your strongest quarter.

Would you expect that to be the case again this second quarter?

How does the pipeline of coming deals look?

Thank you.

Well, we've closed four additional deals since the quarter ended, so we've got 12 done for the year, and the pipeline is robust.

Whether or not they actually close in the second quarter, third, or fourth, every single deal has its own life span, but we've got a very solid pipeline.

Okay, thank you very much.

Thanks, Elyse

Sean Dargan, Macquarie.

Thanks, good morning.

If I could follow up on Elyse's question about Australia, and tie that to a comment in the press release about cycle bottoming in select geographies outside the US, I know that you were experiencing negative organic growth in Australia.

I believe that was the only geography in the world in which you were doing so.

Is that item in the press release specifically talking about Australia?

Yes, Australia and New Zealand, in particular.

Okay.

All right, thanks.

Then in the shareholders letter with the March Annual Report, they mentioned trying to export the MMA market to the UK.

It occurs to me that's essentially what you've already been doing, creating a roll-up business there.

Do you expect any competitive threat from that?

I'm curious what your thoughts are on that?

We're really happy with our position in the UK.

If you remember, just two or three years ago we didn't really have a retail presence at all.

Today we're one of the five largest players in that market.

That group has come together very well.

The re-branding has been done, it's all Gallagher now.

You recall it was Oval, Giles, and Heath.

We're Arthur Gallagher across about 70 outlets through the UK.

Yes, it's a competitive market place, just like the United States, Canada, Australia, New Zealand.

But we think we compete pretty well.

Yes, I think it's nice affirmation of what we saw, too, that there is good opportunity in the retail space in the UK.

I think there's lots of opportunity there.

There's still some private equity owned firms there.

They're going to have to do something as time comes up.

I think people realizing better to be with a strategic than with an independent or private equity owned.

We're seeing terrific opportunities there.

All right, thank you.

Thanks Sean.

Kai Pan, Morgan Stanley.

Hi, this is [Chai Goyal] for Kai Pan.

First, I want to go back to the organic growth.

Pat, what has changed since December, now that you are expecting even higher than 2.5% to 3.5% organic growth?

What has changed from December?

The market place, I think, is probably a little bit more stable than I thought it was going to be coming into the end of the year.

October, November last year we saw probably a little bit softer market than we're seeing today.

Property is soft, no question about it, especially on the cat side, but probably a little bit more stable market.

I think our closing ratio's up just a bit.

We've got a very solid pipeline of new business opportunities, and our team is doing very well on new business.

I think also to add to that, the second quarter is our highest property quarter for us.

As you look at your models, I don't know if I would necessarily assume that it will be the same over the next three quarters.

You might want to caution yourself a little bit on the second quarter because of property rates.

Also, I think just since November and December, this is a stable environment.

I think our clients are having the opportunity to be able to see [really] the value that we bring.

In a stable environment we out-shine a lot of our other - smaller competitors, in particular.

When Pat's talking about our hit ratio being better, that's what we're seeing there.

Okay.

In terms of risk management segment, the organic growth slowed from 4Q.

Was there anything specific?

On top of it, the margin expansion was still strong, over 100 basis points.

Even with the mid-single-digit organic growth in that segment, you can post a strong margin for the rest of the year?

Yes, to answer your questions backward, yes.

When mid-single-digits, we believe there's an opportunity to still hit our 17% margin target in each of the next three quarters -- which is expansion over last year.

In terms of what's happening on the organic side, if you go back and look at our supplement over time, there have been some periods where Gallagher Bassett's growth has been in the 5% or 6% range, and then it jumps up to the 10% or 12% range.

The reason why is that as we look at some larger accounts, they typically will incept on January 1 or on July 1.

There are some times where they -- we get them in the pipeline, let's say in 2015, hoping that the incept on January 1, but switching over to us can take some time.

But we see more new business incepting July 1 this year than let's say maybe in the past where it incepted on January 1.

It's a little bit of a step function a little bit of a step function type business.

Some of these are pretty large accounts.

We're seeing good -- we had 6% growth in the US.

Australia is largely flat at this point, but again, there's some big programs that are coming up for proposal over the next couple years down there.

Okay, and last question on head count.

I think I saw head count number go down, and that's probably first time in a long time.

Was there something specific there, or is this to maintain margins, expenses?

I think what you're looking at is the head count on the brokerage side dropped about 45 heads between -- since the last period, yet we still had acquisitions that might have added 100 or 150.

We're probably net backwards 200 heads, and its largely as a result of our integration efforts, our productivity initiatives.

Most of that -- we didn't have big layoffs -- most of that was just through natural exits that happened in the business.

But it just shows that we're getting more productive every day.

Okay, thank you.

Thank you.

Jeff Schmidt, William Blair.

Hi, good morning, everyone.

Good morning.

Quick question on the wholesale business, and apologize if I missed this.

How is that doing from an organic growth perspective given property prices?

Is that about 20% of the brokerage segment?

It's a little less than 20%, but wholesale was up about 2% for the quarter.

Yes, they have head winds on the property side, and you need to know that the second quarter is their biggest property quarter.

Right, okay.

Then in the clean energy segment, are you seeing volume or consumption, rather, from coal plants?

Is it being affected at all?

I know there's stress in the industry, there's bankruptcies.

What's the outlook there?

Yes, let me tell you there's three answers in that question.

First, when it comes to the bankruptcies, most of those, when the coal mines go bankrupt it's usually holding company bankruptcy but the mines are still operating, because they have contracts they have to continue to deliver coal on.

A lot of these utilities have had -- required to take contracts.

The coal is still moving, even though the holding company might be bankrupt.

I think there's been five of them in the last year or so, as they restructure and make themselves more efficient.

Second of all, the power plants.

As you recall, when we put our clean energy plants in at a power plant, we put them earlier in the dispatch curve.

When we do our plants, these are plants that are more likely to run than let's say less efficient plants that only get dispatched during the high peak loads.

We are at the mercy of the weather.

We did have a little bit of a warmer winter that did impact us a little bit, but we still see that we're on track.

This program runs through 2021, so long-term displacement of coal to other fuels.

It takes a long time to displace a plants, and this program goes really for another five years.

Truthfully, the amount of displacement that's happened over the last eight years probably is not likely to repeat, because they displaced to natural gas in the plant that they couldn't.

They really can't move these plants to natural gas that we're operating on efficiently and effectively in the next five years.

Okay.

Go ahead.

In summary, I was going to say that I think we're still well positioned.

I still see us having 15% growth in our net earnings this year.

We still have other plants that we're working on putting in place that should continue to expand our earnings as you look into the future.

Overall, I would say it's a steady-state business.

Okay, very helpful.

Thank you.

Thanks, Jeff.

Bob Glasspiegel, Janney Capital.

Good morning, Gallagher team.

Good morning, Bob.

I was curious on Gallagher Bassett.

Were you saying your budging a little bit on your 17% margin expectations, given the good first quarter?

No.

I think the guidance was 17% margins for the year, and you came in above that.

I was wondering whether you're still managing to the 17% margin for the year?

Yes, the way that their compensation raise increases happen, it doesn't happen in the first quarter.

You'll see that be more like 17% going forward.

17.6% on $200 million of revenue might have been $1 million less than what -- of expense than we expected initially, but I feel 17% in the next three quarters is achievable.

Okay, so you will beat 17% for the year if you do 17% for the next three quarters, just for modeling purposes.

Just want to make sure, or it'll get to 17% for the year?

That's right, Bob.

Okay, got you.

Just a macro question.

Pat, you're good on talking about the environment and what implications at big companies mean.

With Zurich and AIG re-trenching and indicating that volume is not an objective and underwriting is, and they're going to write less business today, and with Chubb and ACE going through a big merger, we've got three of the very big players in some state of transition.

Does that have any positive implication to the environment, maybe a reason why you're a little bit more optimistic about organic for the year, or is it all just execution versus macro?

I think, Bob, for us it's more execution than it is macro.

Those are big trading partners for us.

In each instance, we've got deep, very meaningful relationships with each of them.

Each have their own issues that they're dealing with, but our trading relationship is very strong and continues to grow with all three of them.

It's really not those three driving the market.

I think really, we know that 90% of the time when we compete, we compete with a player who's smaller than we are.

In our 32 -- in the United States, our 32 areas of focus, our verticals, are very strong.

We know those businesses, and we think we're probably tougher than anybody in any of those; and new business is very strong.

Pushing your answer a little bit tighter, you're saying you're not seeing Zurick and AIG changing their underwriting behavior and willingness to cut prices to hold on to an account -- underwriting as normal for them?

Yes, I think -- what I've been impressed with over the last five years is we've had ups and downs in various lines of coverage that have gone soft or hard, depending on what those lines of coverage need.

But over the last five years, we've seen more discipline on the underwriting side than I have in my 40-year career.

I think that remains.

I think catastrophe property clients deserve a decrease.

The wind hasn't blown.

There should be no shock to anybody that cat property is off.

When you take a look at workers' compensation, depending on the geography, the state, what have you, when it needs to go up it goes up a bit.

When it needs to come down it comes down a bit.

D&O, same sort of thing.

What we're seeing is many cycles within the lines of coverage, based on what really needs to happen to those lines.

I think that's a level of discipline that the industry has enjoyed for five years that I'd never seen before.

I think it's more of the same of that, Bob, yes.

Those three companies have issues that they're dealing with, but by and large, they're trading on the street, they're doing very well.

Okay, thank you for the thoughtful answer.

Thanks, Bob.

Mark Hughes, SunTrust Robinson Humphrey.

Yes, thank you.

Good morning

Good morning, Mark.

You describe a stable environment in the P&C sector.

Does that mean pricing is relatively stable, or just stable down a few points?

No, I'd say pricing is relatively stable.

Look, at any account, you could go into any of our offices and go to a sales meeting, and you're going to hear a story of somebody getting a 25% decrease.

Someone's going to be shocked by it and what have you.

But when you look at our book of business across the entire platform, and you see that really rate and environment and rate and exposures cost us 0.5 point, that's no soft market.

It's not -- you can have an account that gets knocked down big time, but by and large, when you look across the entire platform it's a pretty stable situation, with the exception of the property business, and to some degree transportation.

Right.

Then what was your comment about wholesale outside of property?

I understand that is weak, but how about otherwise?

It's strong, we're good.

Casualty lines -- with the exception of energy and natural resources, our wholesale business is very strong, as is our MGA business.

Great.

Thank you very much.

Thanks, Mark.

(Operator Instructions)

Quentin McMillan, KBW.

Thanks very much, guys.

Doug, just to talk about Chem-Mod real quick, it was stronger in the quarter in terms of tax utilization.

I'm assuming that's just because of the stronger earnings that you had in what is a seasonally weaker earnings quarter for you.

First, is that the correct way to think about it?

Secondly, and I apologize for asking such a long-dated question, but do you guys have a plan for post-the Chem-Mod tax credits in 2021, 2023 time frame of what you may want to do to recover that attack strategy?

First question, yes it was.

Because we had a stronger first quarter, that caused us to recognize a little bit more.

When you have more organic growth, you have more earnings, and therefore you recognize a little more tax credit.

That's the first one.

Longer term, I think even though we talk about the end of this program to generate credits being expiring in 2021, our plan is to hit the end of 2021 with a long glide path of having a balance sheet with a substantial amount of credits in it that can continue to reduce our tax rate well into the 2020s.

Even though the generation phase may be over in 2021, the actual utilization of credit should go on.

I think right now we have about $375 million that's in our balance sheet right now.

We're using about $100 million a year.

I'd like to have a five or six, seven-year balance sheet by the time we hit that point.

Now, what do we have as opportunities after the fact?

Listen, we thought at the end of Section 29, which was the precursor to Section 45 credits that we were done.

There's something else that the government does in order to foster tax credits.

The government really understands that better energy is a good policy, and therefore they want to incent commercial enterprises to go out and develop new technologies to better the environment.

I think there could be another program after 2021, but we've got five years to work on that.

In terms of our cash generation, look at this as well into the 2020s.

Okay, great.

Long term, and you guys will replace it with something when the time comes, is the short answer of it?

We've done it only for the last 20 years, so I think there's something else out there.

Great.

Then one other question on competition.

There was an article or two on Liberty Mutual talking about unbundling their insurance and claims services to potentially lower claims costs for their clients.

Would that create more competition for Gallagher Bassett, a head wind on either the margins or the growth?

How do you guys view that?

Exactly the opposite of that, Quentin.

This is a great opportunity for Gallagher Bassett.

The market place has been an unbundled market place for large accounts for the last 20 years.

Liberty has unbundled at times, as well.

This is just more opportunity for GB to showcase their wares in terms of being able to convince clients that using Gallagher Bassett will lower their claim cost.

We're pleased that Liberty's coming that direction.

We have a lot of carriers that are recognizing their claim outcomes are better with Gallagher Bassett, because Gallagher Bassett can customize the claim delivery to the customer, not necessarily to the way the carrier wants to.

To be able to customize the delivery of the service that we provide will deliver better claim outcomes.

The carriers recognize it.

We do it for a lot of carriers.

We're really good.

When we're paying about $10 billion a year of claims, primarily in the workers' comp or general liability space, we are experts in that business.

Our outcomes are better.

This is another acknowledgment by a carrier that there are some things that we might be able to do better than them.

I think this is a terrific opportunity for us, as these carriers recognize that we can do things for them.

In addition to beneficial outcomes, do you think that your pricing might be more competitive, even more beneficial for the clients who might want to use the Bassett services?

Yes.

Great.

Thank you so much, guys.

Thanks, Quentin.

90% of the claim goes out in the claim cost.

Only 10% goes out in the adjusting cost.

If you can reduce the 90% by a little bit, you can sure have the pay for a lot of the 10%.

Donna, any other questions?

Charles Sebaski, BMO.

Good morning.

Thanks for getting me in.

I got on late, so I apologize if you guys covered this already, and I can go the transcript.

I was curious about the UK business and what's going on, particularly the announcement of Compass potentially looking at an NBO.

Overall, what's going on, what effect that might have?

Any color would be appreciated?

Yes, we did hit on this before, Charles, but I'll be glad to do it again.

We're very pleased with the progress we've made in the UK, especially on our retail side.

Our specialty business is second to none there.

Our London broking business is really top of the game.

Retail, you will recall is an acquisition of three players that we put together over the last couple years.

It's going extremely well.

We had about 3% organic growth in the quarter on our retail business.

It's all re-branded from Giles and Oval and Heath to Gallagher.

Organic growth is on the up-tick, and we see really good things happening there.

Yes, in terms of the Compass, the revenues on that are less than $5 million, so it's not a big deal.

That was a network of relationships that were provided to the UK retail space that came from either Giles or Oval, I can't remember exactly which one.

But truthfully, our guys don't need a network now because they're a part of Gallagher and they can trade within Gallagher.

They can get the resources and the capabilities that they need.

Compass really is an opportunity for smaller retail brokers, and it doesn't really work inside of Gallagher.

We're selling that off as a no, nevermind, to be honest.

Okay, so $5 million decrease going forward, and that's about it for that revenue?

Right.

Perfect.

Thank you very much, guys

Thanks, Chuck.

Josh Shanker, Deutsche Bank.

Yes, good morning, everyone.

Two questions.

One is the head-count reduction, I assume that's mostly integration.

Can we talk about whether there's further head-count reductions for integration going forward to the end of year that we'll notice?

To a [market], any thoughts for RPS now that Willis and Miller have hooked up together, what it might mean for the competitive market there?

Working backwards, when it comes to the Willis-Miller deal, the fact is RPS trades primarily with other than the large brokers, so it doesn't really have much of an impact to RPS.

I would say there's nothing there.

When it comes to the head count, I think because we're seasonally smallest in our acquisitions in the first quarter you see the decrease in head count more so.

I think that when you look at going forward, you'll probably see increases in head count as our acquisitions are coming on.

But underlying, yes we are controlling our head count through attrition, through becoming more productive.

If we didn't have the roll-in of acquisitions, you would probably see a decreasing head count just from natural attrition.

This is -- we're naturally getting better every day.

Okay, I appreciate the answers, and there's always room for a buy-back announcement.

Just letting you know.

Well, we bought some in the quarter to offset the shares that we used in tax-free re-org, so it's out there.

I know, thank you very much.

Take care

Thanks, Josh.

All right, Donna, I think that's it?

Correct, sir.

We're showing no further questions in queue.

Mr. Gallagher, do you have any additional or closing comments?

Yes, Donna.

Thank you very much everyone for joining us this morning.

We really appreciate it.

We're excited about the results for the quarter, and look forward to a strong 2016.

Have a great day.

Ladies and gentlemen, thank you for your participation.

This concludes today's teleconference.

You may disconnect your lines at this time, and have a wonderful day.