Arthur J. Gallagher & Co. (AJG) 2016 Q3 法說會逐字稿

Good morning and welcome to Arthur J. Gallagher & Co.'s third-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 meanings of the securities laws. These forward-looking statements are subject to the risks -- certain risks and uncertainties that will be discussed on this call and which are also described in the Company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today.

In addition, for reconciliation of the non-GAAP measures discussed on this call, as well as other information regarding the use of these measures, please refer to the most recent earnings release and the other materials in the Investor Relations section of the Company's website.

It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President, and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

We appreciate you joining us on our third-quarter 2016 earnings call. Before I get down to some serious business, I have to start the call by saying Go Cubs.

With me this morning is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. As I do every quarter, today we're going to touch on the four key components of our strategy to drive shareholder value. Those four are, one, organic growth; two, growing our business through mergers and acquisitions; three, improving our quality and productivity; and four, maintaining a very unique Gallagher culture.

The team executed on all four of these pillars this past quarter and on a year-to-date basis.

First, let me start with organic growth. In our brokerage segment, we posted all-in organic of 3.4%, up nicely over second quarter and right in line with our year-to-date organic of 3.6%.

I recently returned from the Council of Insurance Agents & Brokers annual meeting, where I met with more than 20 insurance carriers. Based on my conversations with carriers and consistent with our own experience and data, I continue to see the domestic pricing environment as stable. In fact, rate and exposure only had a little over 1 point of negative impact on our domestic property and casualty renewal results in the third quarter.

I also spent time with our leadership teams in the UK, Canada, Australia, and New Zealand over the past few weeks, and pricing outside the US remains broadly soft, so I see an environment for us that could lead to organic growth in the fourth quarter, similar to what we saw through the first nine months of this year. Clearly, that depends on our new and lost business in the fourth quarter, and you may recall we did have a very large new business month in December of 2015.

Let me break down our organic around the world. I'm extremely pleased that every single division around the world posted organic growth in the quarter. Our sales culture is truly alive and well.

Domestically, we saw about 4% organic growth; within our retail P&C operation, up 3%; wholesale was up 1%; and benefits up nicely over 5%. We did experience some incremental pressure within our wholesale unit, driven by continued weak property pricing in the quarter, but domestic casualty lines pricing remains similar to last year. Exposure units are showing some growth, offsetting some of the rate pressure.

The property and casualty insurance market remains at a level where our production teams can grow organically and outperform.

Our employee benefit consulting operation continues to see great new business opportunities. This business typically grows more in the second half of the year, and it did nicely here in the third quarter and organic growth looks promising for the fourth quarter, too.

In August, we released the results of our annual benefits strategy and benchmarking survey, one of the largest of its kind, with over 3,000 US employers participating. This type of thought leadership and research is of great value to our clients and invaluable when we are showing new prospects our vast capabilities and insights.

Let me move to our international brokerage operations. As I discussed in our July earnings call and at our September 23 investor day, all of our operations globally are working together. We have integrated sales plans and are living and breathing our unique Gallagher culture. This quarter, we saw 2% organic from our UK and Canadian teams and similar organic growth from our teams in New Zealand and Australia. This is simply excellent work, as these international teams continue to grow through a rate and exposure headwind that is stiffer than we are seeing here domestically.

Next, let me move to merger and acquisition growth. The average size for the seven acquisitions this quarter was $4 million of revenue at an average of 7.6 times EBITDAC, putting our year-to-date multiple at 7 times. Third-quarter acquisition activity was a little slower than normal, but our pipeline remains very robust.

We have approximately $90 million of revenue associated with agreed-upon term sheets and another $140 million of revenues with term sheets issued or being prepared. While not all these transactions will close, I do think we'll catch up to a more normal pace of transactions here in the fourth quarter.

Our pipeline is as strong as ever and full of small independent entrepreneurs with strong sales skills and excellent client relationships. Looking towards 2017, we will continue to focus on smaller tuck-in mergers, where we believe we can create value by giving these professionals full access to our capabilities, expertise, and resources.

I wanted to stop and thank all of our new partners for joining us and I extend a very warm welcome to our growing Gallagher family of professionals.

So how did we do through the first three quarters in our brokerage segment? Over 9% total adjusted revenue growth, of which 3.6% is organic. Adjusted EBITDAC growth of 11%, adjusted EBITDAC margin expansion of 47 basis points, and we continue to have an excellent merger and acquisition pipeline at fair multiples. I couldn't be more pleased with our nine months' result in the brokerage segment.

Next, I'd like to move to our risk management segment, which is primarily Gallagher Bassett Services. Risk management had a nice rebound from the second quarter, with organic back in positive territory. The turnaround from the second quarter is due to a smaller impact from performance bonus income and a more normal pattern of new business. Client retention remains strong and client satisfaction, both in the US and internationally, continues to enhance GB's reputation and standing, with new sales results surpassing prior year.

Going forward for the risk management segment, we believe we can deliver positive organic in the fourth quarter and even better organic in 2017 as recent new business wins in Australia and the UK come online. Our value proposition of delivering superior claim outcomes for clients will continue to be a differentiator of this business versus our competitors.

Further, Gallagher Bassett is an excellent complement to our brokerage operations, as it is another business that helps our clients manage and mitigate their total cost of risk.

Moving now to clean energy, once again we had an excellent quarter and we are three quarters into delivering nearly 15% growth in annual after-tax earnings.

Lastly, let me speak a bit on culture. I hope you had a chance to attend or to listen to our September investor day. Tom Tropp, our Chief Ethics and Sustainability Officer, discussed how our unique Gallagher culture drives shareholder value. I truly hope you can take away from Tom's discussion how our culture directly contributes to our organic growth, how it distinguishes us from others in a highly competitive merger environment, and how it is the basis for our people coming together as a team to service clients, consistently focused on doing the right thing.

After the meeting, we were asked why culture wasn't in Tom's title. There's a simple answer to that. At Gallagher, culture is every single person's responsibility and our culture continues to flourish.

Okay. Another great quarter and an excellent first nine months. Over to you, Doug.

All right. Thanks, Pat, and good morning, everyone. Like Pat said, another excellent quarter by the team.

Today, I have five items. We'll do a refresher on modeling revenues, some comments on margins. We'll do an update on winding down our integration efforts, and then I'll move to clean energy results and I'll end with some comments on cash and capital management.

Let's go to modeling revenues. I suggest using the CFO commentary document that we post on our IR website as follows. Starting on Page 2 of the CFO commentary, adjust fourth-quarter 2015 revenues for the impact of foreign currency exchange that we currently estimate at about $29 million. Remember, start by adjusting fourth quarter of 2015, not 2016.

Then apply your organic pick to that number. Next, layer in rollover M&A revenues from mergers that we completed in the first nine months of this year. Page 5 of the CFO commentary shows that we estimate about $28 million rolling in in the fourth quarter. And then, finally, make your own pick for new M&A revenue that might come from mergers we closed here in the fourth quarter, but please remember to assume a mid-quarter closing date. Following these steps should help you from over- or undershooting on revenues and avoid the related EPS impact.

Okay, moving to margins. Adjusted brokerage EBITDAC margin expanded 20 basis points in the quarter. We continued to get some margin uplift from our international operations, but overall margin expansion was a bit muted because we had some adverse domestic medical plan experience in the quarter. It cost us about 20 basis points. It's unfortunate, but does happen from time to time.

Looking towards the fourth quarter, if we hit 3% organic, and I'm not saying we will or we won't, we could hold margins flat with last year's fourth quarter or even squeak out a little expansion.

As for the risk management segment, margin of 16.8% was right in line with our expectation that we shared with you at our investor meeting in September. This is really great work by the team. With a return to low single-digit organic in the fourth quarter, we see margins in the lower 17% range.

Next, let's move to integration. We're nearly finished. We're about done combining the four large acquisitions we did in the UK. You can see it in the numbers. Third-quarter integration costs were $0.04 this year versus $0.10 last year, and in the CFO commentary document, you'll see our fourth-quarter estimates for integration are at about $0.03, also down from $0.10 in the fourth quarter of 2015.

I'll be back in London in a couple weeks and I look forward to congratulating the team for a really, really terrific effort over this last year. And also, it deserves mentioning, too, our Canadian merger is also substantially complete with their integration efforts, so it's really nice work to those folks up in Canada, too.

Moving next to clean energy, you heard Pat say that we had another excellent third quarter and we remain on track to deliver about 15% earnings growth over last year. Warmer weather helped us beat our forecast in the third quarter, but production might be a little lower in the fourth quarter because we haven't seen much cold weather yet. For example, you'll see that there is still a lot of green in the ivy at Wrigley tonight.

And don't forget that our production has not only reduced our current-year taxes, but we have also generated $430 million of credits that are sitting on our balance sheet. Effectively, that's a $430 million receivable from the government that will help us reduce our cash taxes paid for many, many years. We believe this has meaningful value for the shareholders.

We also have about $230 million of available cash on our balance sheet and, as I commented on before, we're making really good progress on our bank account consolidation efforts that help us unlock available cash.

So looking forward, you heard Pat say that our M&A pipeline is strong. We've got nice cash and nice cash flows developing. So I think that we can fund our activity for the remainder -- our M&A activity for the remainder of this year with cash and debt.

As for 2017, I see even stronger cash flows, given integration will be behind us and we won't have real estate moves that we had this year, either, so we should be well positioned in 2017 to continue funding M&A with free cash and debt.

So, those are my comments. Another great quarter and an excellent first nine months of the year. Back to you, Pat.

Thanks, Doug. Donna, would you open the line for questions, please?

(Operator Instructions). Mark Hughes, SunTrust Robinson Humphrey.

Thank you very much. Good morning. In the risk management business, could you talk about the claims volume? Was there also an issue, maybe headwinds, on underlying claims?

We are seeing some claim volume growth, but it's not as strong as it was a year ago. We're seeing about 1% growth in claims value -- volume or claims activity, down from probably 2%, 2.5% at this time last year.

And is that workers' comp or is that overall?

Primarily workers' comp, and I think it -- I believe the claim volume is an indicator of economic activity.

The benefits segment, it sounds like you got growth. I think you said 5%. Any update on the exchange, the additional help that clients need? Just some more detail there would be good.

Sure. I've said this many times. Personally, I was not in favor for our country to -- I was not a proponent of Obamacare, but for our Company, it has been the greatest thing in the world.

So, it's helped our merger and acquisition activity and it's a very, very complicated act, and what that does is create an awful lot of consulting opportunities for us. Our clients need a lot of help.

The exchange is one of the things that we help our clients take a look at as they decide how they are going to treat their employee base. We look really at what we're doing from a consulting standpoint as a view of the total rewards that a client is going to use to maintain the employment of their best people. Really, when you come down to it, every business is all about people, and so you have to look at the entire list of benefits that you are going to provide and then figure out how you are going to actually work the health insurance into that.

So, exchanges is popular. We've got probably about 15% of our clients out there taking a serious look at our exchange, and the rest are going to treat their insurance in a more traditional manner.

And one thing, as a northeast Ohio native, go Tribe.

(laughter). Good for you, Mark.

Elyse Greenspan, Wells Fargo.

Hi, good morning. First, in terms of the organic growth, I appreciate all the opening commentary, so it seems like you are pointing to brokerage growth about in line with the year-to-date level, which would be about, I guess, 3.6%, so a little bit of an uptick sequentially. Within that, how do you see going into the Q4, as well as into 2017, the components domestic and internationally. Do you think both should continue to pick up a little bit?

Domestically, we're seeing a pretty stable market, which has been a stable market now for about five years, which is pretty unusual in my career, and I think it's a very good thing for our clients.

The past, this hard and soft market cycle that we lived through for the last, literally, four years, that doesn't benefit clients at all. So today, we've got a stable market domestically, a softer market internationally. So what I see is continued international 1% to 2% organic and hopefully closer to 4% to 5% domestically.

I think on the year to date -- excuse me, the fourth-quarter 3.6% number you threw out there, remember we did have a big December new business quarter --

Last year.

Last year, so I think that 3.6% might be on the upper end of that.

Okay. Great. And then, the 1% to 2% and the 4% to 5% that you are referencing domestically and internationally, that would apply to 2017 as well?

I think so.

Okay. Great. And then in terms of the acquisition pipeline, you did mention a bunch of deals with term sheets. How do you see the multiples on those deals?

I did notice the multiples that you guys are paying did tick up a little bit in the quarter. Do you attribute that to potentially a slowdown in the activity or is it just taking longer, I guess, to get these deals on, fully signed?

And then, combined to that, I guess, if these deals do not materialize, would you guys consider repurchasing shares sooner, rather? I know in the past you pointed to maybe the end of 2017. Could that be pushed forward if these deals do not materialize?

Let me be clear about this. First of all, we see three uses of our cash, and we've said this literally for more than the last decade. The first is we're going to buy brokers. Secondly, we're paying dividends. And the third thing we're going to do is buy our stock back.

So if, in fact, for whatever reason the acquisition activity slows down and we're going to maintain our pricing discipline around our acquisition activity, I've been here before. Twenty years ago, the banks pushed prices all the way through the roof and we had a bit of a slowdown on our acquisition activity while they were doing that. They get their belly full. Private equity will eventually, as well, but if we have excess cash, we will buy our stock back.

Okay. Great.

As for the multiple, if you look at it year to date we're still about 7 times. It was a little higher, 7.6. I don't see us -- there is multiple pressure out there or pricing pressure out there, but I think there's a lot of sellers out there who see us bringing substantial capabilities to them that are willing to sell at a fair price, so those are the ones that we are going to be going after, nice, entrepreneurial, tuck-in folks that are willing to take a fair price and understand that together we can be better.

Okay. Great. And then one other question, I noticed the revenue hit from currency did go up in the fourth quarter, although the EPS impact did not change. How do you think about, I guess, the hit between revenue and expenses and what kind of currency hit we might see on earnings as we start -- given where exchange rates are today, as we start to think about 2017?

The uptick from our September 23rd guidance is because of the further strengthening of the dollar versus the pound. We do have a little bit of a natural hedge in the UK because we have dollar-denominated revenues and pound-denominated expenses that service those revenues, so that's why we end up with a de minimus amount of impact on our EPS.

And I'd say right now I don't know if the pound is going lower or not, but I would say that trend would continue, then, that you could have an impact on revenues, but not that much impact on EPS.

Okay. That's great. Thank you very much.

Kai Pan, Morgan Stanley.

Hi, this is Chai Gohil for Kai. First question on contingents and supplements, they have grown about 10% to 20% year to date. So, could you talk a little bit of what's driving that?

I think there's a couple of things there and I think it's a great question. If you listened to our September 23rd IR day, I got on my high horse a little bit about supplementals and contingents versus base contingent -- base commissions and fees.

I think that you should evaluate us using all inorganic or at least combine the base and supplementals, because contingents can be a little bit volatile. Like I said in September, it's important for everybody to understand in one year we may place a policy with a carrier that has strong base commissions and doesn't pay much in supplementals. The next year, that policy might be better for the customer to be placed with another carrier that pays higher supplementals and a lower base, or maybe that carrier would pay a contingent instead.

We are completely indifferent in how that gets classified in our financial statements, as long as we're being compensated appropriately and with full transparency to our clients. We've got to do the right thing for our clients first and we can't worry about where that gets posted in our financial statements.

So we have had strong growth in supplementals and contingents, and I think that's basically the carrier's preference on that, rather than to add pain-based commissions at this point.

Okay. So I guess one of your peers did comment that the contingents could decline as part of their declines, so how do you see that in 2017?

I don't see much of a difference in our contingents getting paid in the first part of 2017, based on our 2016 performance.

And I think contingents have a higher margin, so can you quantify how much they could have helped year to date?

The contingents and supplementals are higher margin for us. How much have they affected us year to date? They might've helped margins -- I got to pull out the number here and look at it, but maybe 15 basis points, something like that. Of our 47 basis-point margin expansion year to date, maybe one-third of that came from contingents.

Okay. Thank you.

Bob Glasspiegel, Janney Montgomery Scott.

Good morning, Arthur Gallagher team.

Good morning, Bob.

Just curious about, Pat, we've had four months post-Brexit vote and now we've got the ability of seeing how the world is changing. Curious what you think this does to your UK operation, Lloyds as a center of gravity, and is there going to be a movement to Ireland a little bit on the margin for you and the world?

No, I don't think so. From an insurance perspective, I think it's going to be pretty much of a nonevent. Now that's early days and obviously we're monitoring all that, and I think the people in the city of London are very concerned with what this means to the financial world, but from an insurance perspective, the expertise is in London, people have traded with that expertise for 300 years, and I don't see it moving.

And any impact to UK business flow that you've seen to date?

No, actually none. The only real impact has been the impact of the sterling decline.

Right. That's consistent with my perspective. The UK -- to leave UK becomes a little bit more painful with the currency where it is. You definitely move into a higher expense.

Besides, I really don't see any reason for anyone to decide that they have to move. That's going to differ by people in different industries, but when it comes to insurance, the Lloyds and London insurance community was incredibly strong before the EU and they will be strong afterwards.

Thank you. Wishing you a productive and fruitful and fun weekend.

It is going to be fun. Let's hope they win. Thanks, Bob.

Josh Shanker, Deutsche Bank.

Thank you very much. So I don't have to remind you, a little less than a year ago you guys might have said some comments that got people concerned about 2016. It's been a great 2016 for Gallagher.

Thank you.

Let's talk about 2017 now. Compared to how you felt about the year ahead last year, how are you feeling right now? I'm not asking for guidance, but your gut was very concerned, I think, a year ago. It turned out to be probably overconcerned. Do you have any thoughts on the year-over-year change?

Yes, I'm very bullish on 2017, and you are exactly right, Josh. You read my silence well. Finishing up last year, I was a little bit concerned, and we ended up having an incredible new business quarter in the fourth quarter last year. I'm really proud of the team.

And I see the pipeline -- we use salesforce.com; I can look into that pipeline. Virtually all our niches are strong; the new business opportunities are strong. Now we've got to close them, we've got to close it out, but I think 2017 will be another record year.

Very good. And a couple months ago, I asked you about healthcare exchanges, and you said that you were broadening your offering or maybe you were in discussion with a couple healthcare exchanges that currently you don't use. Can you talk about what that broadening was like and maybe give us some details on what your plans might be?

Yes. In fact, Josh, I appreciate the question very much. I'm really proud of our benefits team for how we position ourselves.

I think we took a lot of heat two to three years ago about not investing heavily in the technology to create our own exchange. And what we said to the investment community and to our clients at that time is that we're consultants. We're going to use exchanges where they are appropriate for our clients and we're going to have one to two to maybe even more exchanges than that, as appropriate, for opportunities for clients to deal with their exposures, and we're going to remain consultants. We're not going to be a product sales firm, and I think that's really worked out well for us.

We are viewed in the market as helping clients sort through all their opportunities. We have a very nice partnership with Liaison and we also have other exchanges that we're working with. And whatever is the most appropriate method of handling the clients' exposures and health insurance, we're going to bring that to the table, and I think that's the right position for a consultant.

What are the other vendors you are working with do for you that Liaison doesn't do for you?

Different geographies, different people on the platform, just a different approach.

And are they competitive models? Or is it an obvious thing that if client A needs an exchange, we are going to go through this provider, versus client B who has these issues, it's obvious that they are a Liaison customer?

Yes, that's exactly right

Okay. Thank you.

Quentin McMillan, KBW.

Hi, I just have a numbers-related question for you. Doug, the M&A schedule that you give in the CFO commentary is great, but could you just talk for the deals that you've closed now, what would that number look like for 2017? Not necessarily on a quarterly basis, but just for the revenue that's going to flow through into the next year.

Let me see if I can dig that out. If you go to Page 5 of that commentary sheet, the rollover impact into next year. Right now, we've closed deals totaling about $97 million, so I think just what we've got in the pipeline, $50 million of it should show up next year. Plus whatever we close in the fourth quarter will show up, also.

And as you said, the fourth quarter looks strong?

That would be 10 months [of] whatever we close this fourth quarter.

Okay, great. And then, if I could just shift to the follow-up on the contingents and supplemental commission question, just on a bigger-picture thought, because I get what you are trying to get at, that you don't really care how a client may be compensating you guys, but can you just talk -- is the commission percentage -- we use sort of a back of the envelope 10%, if that sounds about right to you both, but is the overall commission percentage when you add in the contingents and supplementals about the same, more, less than you are seeing?

I guess I don't understand the question, Quentin. Do that again. Is the commission more or less if we have a supplemental?

What I'm saying is you are saying that the client is paying you a commission, plus a supplemental on top of it. Would that overall number equate to the 10%, whether you had the supplemental or you didn't have the supplemental? It's more about we're going to get sort of a percentage of the overall premium and that percentage has held fairly constant?

No, I think if you have a supplemental or a contingent, you are probably getting an extra two points. And that's -- it's very important. That's completely transparent with the client and they agree that we can accept that.

All right. That's all I have. Thanks very much, guys.

Adam Klauber, William Blair.

Thanks. Good morning, everyone. Wholesale business in general is holding up pretty well. Could you tell us what's driving that, despite the market getting more competitive? And are the standard carriers beginning to inch in more in the last couple months than they were earlier in the year?

I'll take those backwards. The answer to the second question on are the standard carriers inching in, the answer is yes. That puts pressure on us as a wholesaler. Retailers are given to wanting to place their own business if they don't need a wholesaler. So, that's a headwind.

You also have the headwind of the property rates, and I don't think Matthew is going to make any difference to those property rates whatsoever. So we're going to continue to face softness there, and the reason it's growing is because we're just really good at what we do and we're getting a lot more business, both from our own retailers, as well as people in the field.

Okay. Thanks. As part of the overall US P&C market, commercial market, it seems like the competitive level is relatively rational. We are hearing rates down flat to maybe 2%, 3%, not too bad. Are you seeing any change in the loss environment? Are losses still relatively stable?

I think so. We see tort inflation, that continues. I don't see frequency going much.

Automobile is a struggle. Every one of our carriers, as we meet with them, is really shaking their heads at what's going on in the auto world, and it's interesting because what they're finding as they research their data is it's distracted drivers. You got everybody on their devices out there crashing into each other.

Right, right. And you mentioned tort inflation. Could you just maybe give us a bit more color on that, what you are hearing?

What we're seeing, it's the classic litigation environment. I don't have a percentage to put on, Adam, but litigation continues to grow and the costs of that litigation are more expensive.

Okay. Thanks a lot.

(Operator Instructions). Charles Sebaski, BMO Capital Markets.

Thank you. Good morning. I may have missed this if somebody asked about it before, but I'm just trying to get through -- I know you guys have repurchased some shares to offset some issuance, but the M&A activity to date would seem below your capacity, and so it would seem like there's -- unless there's a particularly heavy fourth quarter, that there is capacity for share reduction, and I'm just curious if I'm adding that up properly in terms of your cash flow generation and what you are doing.

Good question. I think that there's two headwinds against our cash flow this year. The integration costs were still there and, if you recall, we did some substantial moves in the UK as we consolidated operations there and we're doing some big moves here in the US as we move into a different Chicago-based building.

So those costs have pushed against cash flows this year. They won't be there next year. So next year, we should have substantially more capacity than what you are seeing on the surface this year.

I think M&A opportunities, there's tons of them there, and we are -- again, we just want to make sure we're picking the right partners to join us. But like Pat said, there's $250 million worth of deals sitting on the plate right now for the fourth quarter that we can see having some really nice success with those coming into the first part of the year.

Traditionally, our first quarter is the smallest, so we could see a little lull there, but also it depends on how the election goes. You could have a sentiment that moves against capital gains treatment on sale of businesses, so if that's the case, you could get a little bit of a rush to the door by the end of this year, or certainly before the legislature gets working next -- when they reconvene in January.

So, I think there's good opportunities. There is still fair pricing out there. It's an immense market. People are seeing our capabilities, so if we have a little lull right now, I wouldn't worry about it long term.

Okay. But if I thought about your guys' year this year, kind of $90 million of acquired revenue year to date, outside of kind of the Brexit and the headquarter relocation, would've thought at that level we probably would've seen a bit more in share repurchase activity. Is that --

No, I think that if you look at my commentary, if you go back maybe the beginning of the year, we had $100 million of cash on our balance sheet, where now we've got $230 million, something like that. Some of that's overseas, so I don't -- one thing we don't want to do is repatriate that money because we've got a lot of acquisition activities overseas, so that might be what's causing your -- for it to poke out in your models.

Okay. And then more on operational side, I know it's not huge numbers, but it seems like the compensation expense ticking up a little bit, just curious on a more overall basis as opposed to the quarter. Are you seeing pressure on compensation both from external, in terms of the competitive dynamic, people interested in your people, other things? Is there expectation that there might be compensation pressure going into 2017?

Yes. That's a great question. If you recall back in our September 23rd IR meeting day, I said that the raises typically are given in the latter half of the year, so some of that is hitting us right now here in the third and the fourth quarter, and then also we had benefit expense. We had a little adverse development on our benefit for, really, July and August. We didn't see that in September again, so that's pressure.

Is there overall pressure in the marketplace? Yes. I think skilled positions are expensive. They are going up in some of the IT security areas and other areas, and there's always competition for really good brokerage talent, too, that's out there. So there is a little wage inflation. We have an opportunity to continue to push work into our centers of excellence, primarily in India and the Philippines, and so we'll have an opportunity to maybe reduce the impact of the domestic wage inflation by continuing to move work offshore to our folks over there.

So, we have an opportunity to control it, but there is a little bit of inflation out there in the marketplace.

Okay. And then, finally, I recall a quarter or a couple quarters back, you mentioned that on some of the international acquisitions that there was a plethora of bank accounts and trapped capital that you and your team were having to work through to aggregate and free up, if you will. I'm just wondering where that process is and there is still left to go on.

Good progress is being made on that. We're down over 30% in our accounts. We've got a list of about another 60 accounts for another, maybe, 10% that are going to be wound out by the end of the year, and then I think most of that by the mid-part of next year should be done.

Part of that is freeing up that excess cash internationally that's coming from that exercise, so we're making terrific progress. I was in Glasgow where we do a lot of that work, in September, and the team has really got a good eye to get that done by the mid-part of 2017.

Thank you very much.

Thanks, Charles. Donna, any other questions?

We're showing no additional questions at this time. Do you have any additional or closing comments today?

Yes, I do. I would just make a quick comment. Thank you, again, for being with us this morning. As we've done all year and in the past, our focus remains on executing on each component of our value creation strategy. We're going to grow organically, we're going to grow through acquiring the best brokers, we will improve our quality and our productivity, and we're going to continue to invest in our culture.

I'm pleased with the first three quarters of 2016 and I'm excited about wrapping up 2016 and delivering a fantastic year next year, 2017. Thank you, everyone, for being with us this morning. We appreciate it.

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.