Arthur J. Gallagher & Co. (AJG) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s Fourth Quarter 2017 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 securities laws.

These forward-looking statements are subject to certain risks and uncertainties discussed on this call, or described in the company's reports filed with the Securities and Exchange Commission.

Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements.

In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding 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.

Thank you, Darin.

Good afternoon.

Thank you for joining us for our fourth quarter 2017 earnings call.

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

As I do each quarter, today, I'm going to touch on the 4 key components of our strategies to drive shareholder value: number one, organic growth; number two, growing through mergers and acquisitions; number three, improving our productivity, quality and margins; and fourth, maintaining our very unique Gallagher culture.

The team, once again, executed on all 4 of these this quarter, and wow, what a great quarter and a fantastic year.

Last year, around this same time, I said that 2017 Brokerage organic felt like it would be similar to 2016 and it turned out to be better at 4.4%.

I also said that I expected our 2017 Risk Management segment organic would improve over 2016, and it came in better at 5.2%.

Putting the 2 together for the year, the combined Brokerage and Risk Management segments posted 4.5% organic, truly a fantastic year that reflects our incredibly strong sales and service culture.

Now back to the fourth quarter results, starting with some comments about our Brokerage segment.

First, organic growth.

Fourth quarter organic growth was 6.8% all in, representing strong growth across all of our business units, both domestically and internationally.

In the U.S., our PC brokerage business generated 5.7% organic growth in the fourth quarter, with retail up 5.6% and wholesale up 6.3%.

In terms of the PC pricing environment in the U.S., we are seeing commercial auto up about 3%; property, up about 1.5%; other casualty lines, up about 1.6%; specialty lines, upwards -- up towards 1 point; professional lines are flat; workers compensation, down towards 2 points.

And frankly, when I look at that, that's a flat market.

So very little impact on our domestic PC Brokerage organic in the quarter, which is a slight improvement from what we had been experiencing earlier in 2017.

When it comes to exposures, we are seeing some better signs of exposure growth in the recent couple of quarters.

International Property/Casualty Brokerage organic growth was 7% in the quarter.

Australia and New Zealand were up around 9%, the U.K. was up 5%, and Canada was up 6%.

In terms of PC pricing outside the U.S., Australia and New Zealand are experiencing the strongest price increases in the mid-single digit range.

Our U.K. retail and Canadian operations are seeing a more stable rate environment, while our London specialty operations are now seeing a bottoming as underwriters are asking for rate.

Time will tell if that sticks.

Our employee benefits business generated organic growth of 7% in the fourth quarter and surpassed $1 billion of revenue for the year, a testament to the outstanding work of our more than 4,000 benefits teammates.

I'm proud of how this business has delivered so much valued advice to our clients over the years, trying to navigate the ups and downs of the ACAs, they tackle the task of managing their total employment costs in a competitive employment environment.

Next, let me move to merger and acquisition growth.

During the fourth quarter, we completed 9 brokerage acquisitions at fair multiples.

The average size of the 9 tuck-ins we completed in the quarter was $3 million of annual revenue.

And our merger and acquisition pipeline remains robust, with over $300 million of revenues associated with more than 40 term sheets, either agreed upon, issued or being prepared.

The pipeline is full of excellent fold-in opportunities mostly in the United States, but also some good opportunities around the world.

Not all of these acquisition transactions will close, but I feel good about our ability to attract acquisition partners in our typical small tuck-in size at fair pricing.

Our merger partners see our vast capabilities, believe in our unique culture and realize that we could be more successful together.

I'd like to 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 for the year in our Brokerage segment?

9% total adjusted revenue growth, of which, 4.4% is organic.

Adjusted EBITDAC growth of 11%, adjusted EBITDAC margin of 27.4%, up 52 basis points over 2016.

What an excellent year for our Brokerage business.

Looking forward, I think 2018 Brokerage organic will be similar to 2017, perhaps even a little better if PC pricing and exposures continue to improve.

Next, I'd like to move to our Risk Management segment, which is primarily Gallagher Bassett.

Fourth quarter organic growth was 3.3%.

Recall, we posted over 10% organic in the third quarter, and accordingly, we forecasted 2 to 3 organic in our December IR day, so a bit lumpy by quarter.

But at 5.2% for the year, a terrific uptick over 2016.

Stronger organic in the quarter was the primary driver of our adjusted EBITDAC margin of 17.4%, a great result.

In terms of productivity and quality, at Gallagher Bassett, we have an outstanding differentiated value proposition that continues to be recognized as best-in-class.

For example, in the 2017 Advisen Claims Satisfaction Survey, Gallagher Bassett was the highest regarded in casualty claims handling.

Not only were we rated significantly higher than all of the TPAs, we also ranked ahead of all carriers recognized in the survey.

Our technology was also recently recognized.

In the independent 2018 RMIS Report issued by 2 industry veterans, our LUMINOS system was recognized as the TPA leader with the highest Net Promoter Score and most comprehensive in system capabilities and solutions offered among all TPAs.

These are just 2 accolades that highlight the continuous investments we are making in the very best people, processes and technology that are necessary to increase productivity while consistently delivering the highest quality and demonstrably superior outcomes for our clients.

So for the year, in our Risk Management segment, 7% total adjusted revenue growth, of which, 5.2% is organic.

Adjusted EBITDAC margin was 17.4%, a very good result.

And we expect our Risk Management segment's 2018 organic and margin performance will be similar to the full year of 2017.

And finally, our culture.

We've built a very talented team of professionals who work across geographies, across divisions to deliver high-quality insurance, risk management and consulting solutions to our clients every day.

And we run the business according to a core set of tenants, which are focused on teamwork, ethics, outstanding client service and a dedication to the communities we operate in.

A great example of our culture is when we celebrated our 90th anniversary this past October.

We set a company-wide goal of 90,000 hours of charitable work over the next 12 months.

I'm proud of how our colleagues have responded already.

Just 4 months in and we are well on our way to exceeding that goal.

Okay, a great quarter, a fantastic year.

I'll stop now and turn it over to Doug.

Doug?

Thanks, Pat, and hello, everyone.

Like Pat said, a truly excellent fourth quarter and full year 2017.

Today, I'll highlight a couple of items behind the headline numbers in our earnings release.

I'll then move to the CFO Commentary document that we posted on our website to help you think about 2018 and tax reform.

And then I'll end with some comments on the forthcoming new revenue recognition standard.

Okay, to the earnings release.

Page 4, to the Brokerage segment organic growth table.

6.8% all-in organic.

What a great quarter and terrific finish by our sales and service professionals.

Under the 6.8%, we did have some minor timing.

Recall on our third quarter, and I explained that we have some negative timing that would catch up in the fourth quarter, and so it did.

That said, even level-izing for that timing, we would have had -- we would have posted about 6% organic growth, still really excellent performance.

Next, turning to Page 5, to the Brokerage segment EBITDAC margin table at the bottom.

Headline adjusted EBITDAC margin was up 37 basis points in the quarter.

Underlying that, we did have 2 one-off items that compressed our margin expansion.

First, our partially owned Mexico-based affiliate had a tough quarter due to the earthquake in late September that cost us about $1.5 million.

And second, we did have a one-off technology improvement project in our U.S. brokerage operation that cost us about $2 million.

Without those one-off items, margins would have expanded about 70 basis points, and that feels about right on organic of around 6%.

Looking towards 2018, it'd be hard for us to expand margins on organic growth of 3% or less, but there could be some margin expansion on organic over 4%.

As for Risk Management, nothing under the headline results, just really solid year at -- a really solid year at 5.2% organic and adjusted margins of 17.4%.

And like Pat said, we see, for the Risk Management segment, 2018 a lot like 2017 in terms of organic growth and adjusted EBITDAC margin.

Next, let's turn to Page 7 of the earnings release, to the Corporate segment, and then let's look at the clean energy line.

You'll see we have an excellent fourth quarter for clean energy.

A bit of that was due to the cold snap we had in late December but it capped off another excellent year.

$133 million of after-tax earnings.

That's up 16% over 2016.

We also had some better-than-expected results on the corporate line, mostly due to tax benefits from additional stock option exercises in the quarter.

Finally, in the corporate table, you'll see that we added a new line to the -- that shows the changes as a result of the U.S. federal income tax law changes.

It came in a bit better than we estimated on December 22, when we put out a special tax reform-related commentary.

As for cash, at December 31, we had about $350 million available cash on our balance sheet.

With our strong cash flows, we should be able to fund M&A with free cash and debt coming in 2018 as well as the pump-up in our dividends that we announced yesterday.

Let's leave the earnings release and move to the CFO Commentary document that we posted on our website.

Let's talk about Pages 2 and 3. On Page 2, you'll see that nearly all of the fourth quarter 2017 actuals came in very close to our estimates that we provided at our December 12 Investor Relations Day.

Also on both Pages 2 and 3, that we took a shot at some estimates for full year 2018.

However, because of the new revenue recognition standard, at this time, we're not comfortable providing 2018 quarterly estimate.

We hope to provide quarterly spreads at our next Investor Day.

A couple of noteworthy items related to 2018 estimates.

On Page 2, you'll see that with the dollar weakening, FX could turn to a slight tailwind in 2018.

At today's rate, it might -- rates, it might fuel EPS by $0.01 or $0.25 or so.

On Page 3, in the pink box, you'll see that most of the corporate line estimates for 2018 are consistent with 2017, except where we now get a federal tax benefit of 21% versus 35%.

As for our clean energy estimates for 2018, also that we show on Page 3, a couple of comments.

First, we're still working with our utility partners, but at this time, it looks like production levels in 2018 could be similar to what we experienced in '17.

And we also believe that production costs in 2018 would be similar to 2017.

However, those costs are now tax benefited at a federal rate of 21% versus 35%.

So you'll see that our range of earnings in 2018 is in the $105 million to $115 million range versus the $133 million we posted this year.

We still expect those investments to generate over $225 million of tax credits.

So tax reform does not reduce the amount of tax credits we can generate.

That's a really great outcome.

At December 31, 2017, we have approximately $700 million of tax credits that will reduce our cash taxes paid for a very long time, and that doesn't change much with tax reform either.

So talking of tax reform, flip to Page 6 of the CFO Commentary.

We've again provided our best look at preparing a pro forma for 2017 as if tax reform happened January 1 of 2017.

We hope that it's helpful in understanding the impact on EPS.

But a couple of important notes.

First, you'll see that our core brokerage and risk management operations benefit substantially from tax reform, but our corporate costs don't benefit as much.

Second, I've always said to be careful, as you digest in your thinking, when looking at EPS when it comes to clean energy.

It is not a core business, but rather an investment that generates cash that can be reinvested into our core operation.

So being a bit down in EPS really shouldn't matter.

Third, the most notable number to me is the amount of cash taxes paid.

In 2017, we'll pay about $56 million in cash taxes globally.

When we pro forma 2017 for tax reform, you'll see we would have effectively had no cash taxes paid, and that's globally.

We believe that will be the case in 2018.

So regardless of how you measure it, tax reform will deliver substantially more positive cash flow.

When you look at it longer term, here's how we think about it.

Because we have nearly $700 million of tax credits on our balance sheet and because we believe we can generate about $225 million of credits annually in 2018 and 2019, and then about $180 million of credits annually in 2020 and 2021, it looks, on a global basis, our net cash taxes paid will be about 1% of our EBITDAC for the next 3 or 4 years.

And starting in 2021 or 2022, globally, we'll be paying taxes of about 7% to 10% of our EBITDAC through the late 2020.

Clearly, a lot can change over the next decade, but that shows the cash generation power of our tax credit and investment.

So if that wasn't enough change for you to digest, let me offer a few comments on the forthcoming accounting change related to revenue recognition.

First, we're well along in our implementation of the new standard.

Second, we plan on doing a full retrospective method.

That means we will recast all historical numbers for each quarter going back to January 1, 2016.

We'll provide a reconciliation between old GAAP and new GAAP that explains the changes and also provide it in a format that allows you to easily compare the quarterly numbers under new GAAP.

Third, we hope to have a special Investor Day in late March or first week of April to give you that reconciliation of the new GAAP numbers.

That should give you time to digest prior to us releasing our first quarter of 2018 results, which will be solely on the new GAAP basis.

Fourth, here's what we know as of now, all of which can change over the coming weeks.

First, we believe that our cumulative effect of the change will be positive.

One could interpret that to mean that old GAAP was more conservative than new GAAP for us.

We also believe that new GAAP will change our quarterly seasonality in both the Brokerage segment and for our clean energy investment earnings that are reported in our Corporate segment.

But that won't have -- but the new GAAP will not have much quarterly movement at all in our Risk Management segment.

And then third, we believe that new GAAP will change our annual earnings upward in the Brokerage segment but no real impact annually to the Risk Management segment or to the Corporate segment.

Okay, with that said, let me once again congratulate our sales and service professionals for a fantastic quarter to end a great year.

We have terrific momentum coming into 2018.

Back to you, Pat.

Thanks, Doug.

Darin, you want to open this up for questions, please?

(Operator Instructions) Our first question is coming from Elyse Greenspan of Wells Fargo.

I guess, my first question, in terms of the organic, you guys said it was about 6% when you adjust for some seasonality in the shifting.

So when you're setting your outlook for, I guess, about 4.4%, which is -- or a little bit higher, which was up full year '17 level, why do you think things will change?

I mean, it doesn't sound like other than in the shifting, that things won't maybe get better from here, if you get some more price in 2018.

So I think what we're saying is right now, we think what we did in '17 could repeat in '18 and maybe a little better if pricing continues.

We did see an uptick in the fourth quarter.

As a matter of fact, we went, I think, 3% in the first quarter, 4%, 4%, 6%.

I don't think you can count on 6% in 2018.

We had a terrific quarter and we had a really strong delivery on several of our units, but we feel somewhere in that mid-4% range is better for '18.

And when you think like the mid-4% range for 2018, what type of pricing environment are you guys assuming in there?

It's essentially flat.

So if prices pick up, there could be some upside to that number?

That's right.

We're seeing some price increases across various lines.

For instance, cat-exposed properties getting some bump.

Transportation is, but there's still some softening areas like workers' compensation.

So overall, flat.

Yes, I think the bigger story for us would be exposure growth.

If you really do have an acceleration in the economy, that drops in pretty quickly.

Sometimes, prices come out strong but customers have the ability to opt out of price, and that's that they have the ability to take the deductibles up, buy less cover on the top end, so they will control their annual spend on insurance and we're talking about opting in and opting out all the time.

Exposure growth is something different.

It's harder for them to control for.

If they add another truck, they've got to insure the other truck.

And so if we get a hot economy, exposure growth could help us top over that 4.4%.

Okay, great.

And then in terms of the -- you guys provided a lot of disclosure on the pro forma impact of tax reform.

I know part of it is that your -- if we looked at the details you guys provided about a year ago, probably a little bit more of an upside to 2016 and '17 numbers.

And I think part of that was due to some deductions that you guys are losing.

Could you just give us a little bit of color there so we can understand the delta of more between the 2 years?

Right.

There's about 3 things there, but let's go to the first one.

First and foremost, when we provided our commentary last year related to '16, like I said, I think the most important number is the cash taxes that we pay globally.

Last year, I think, if my memory is right, we would have said that we would've paid in '16 about -- we paid about $66 million of taxes and had tax reform happened at '16, we would have paid about $40 million.

So only about a $26 million improvement in cash.

Our results now in '17 will show about -- over $50 million less cash taxes paid, so that's a good outcome.

Something that take on the rates, I think our outlook last year was done at a 20% rate and we're at 21% now.

I think that there were deductions that we lost in tax reform that we didn't anticipate in the '16 -- when we're looking at 2016 results.

So you add all that up, and then the other -- the last thing is the shift in income we have.

Last year, we had substantially more integration expense in our international operations that's not there now.

So as a result, those were in, oddly enough, higher tax jurisdictions now that erode some of that differential between the years.

But by and large, if you focus on the cash number, all these things will end up in a better cash flow situation despite how it looks on an EPS basis or a pro forma basis.

Okay, great.

And then one other question.

You guys -- the growth that you guys saw in the contingent and supplementals also looked pretty strong in the quarter.

Was there some seasonality there?

And then what's the outlook?

I know it's included within your all-in number, but for contingents and supplementals for 2018?

No, nothing special in the fourth quarter.

And looking forward, we're not seeing a lot of pressure right now.

Obviously, our Mexico affiliate got hit because of the earthquake.

That hurt us a little bit this quarter, but that comes through a different line.

But I'm not too -- I'm not bearish on contingents or supplemental coming into the year at all.

Our next question comes from Arash Soleimani of KBW.

Just the first question.

In terms of the benefits to the Brokerage segment from tax reform.

Obviously, it has a pretty nice tailwind there.

To what extent do you expect that to fall to the bottom line versus resulting in higher compensation or other sorts of items that could reduce the bottom line impact?

We don't run our company based on what the after-tax numbers are.

We're an EBITDA-focused company, so I think that's something that we'll continue to do, is focus on that number.

Second of all, when you really look at the information we gave you, interestingly enough, we're showing you the statutory rates.

I think it's important to know had we recast the last year's pro forma and used, really, when you get out a few years, 5.25% is what we'll be paying in income tax in our domestic operations.

When you get out about 3 or 4 years from now, because of the tax credits, the gearing that you would see in the Brokerage and Risk Management segment would go up a lot.

So it's already up 15% now in those core segments together.

You move that 21% rate down in the math down to 5%, you pick up a ton more increase there.

Okay.

So then based on the comments, where, obviously, you're basing everything or running the company based on EBITDA, it sounds like, that's something where it really should be expected to kind of hit the bottom line.

And it kind of, if anything, gives you more capacity for M&A.

That's right.

That's right.

And the IT refresh that you mentioned, can you just remind, like, how often would something like that occur in the business?

Every once in a while, we have an opportunity to really see it as an opportunity and improve something so we took it this quarter.

So it's just -- it's a little hit or miss whenever we do that.

Our next question is from Kai Pan of Morgan Stanley.

My first question, just follow-up on Elyse's question on the organic growth in fourth quarter.

Could you give a little bit more color as to what's really behind this 6-plus percent organic growth and why it's not repeatable?

Well, Kai, this is Pat.

We smashed it in the fourth quarter.

Our sales people killed it, and that just doesn't happen every quarter.

All right.

I'll take that.

Then on the margin front, just wondering, like, you grow [about] 4% and if you look at the margin for the full year, actually, it could expand a bit more.

Especially I'm looking at your comp expense ratio for the full year roughly flat year-over-year.

So why wouldn't it have more sort of wage or, like, expense leverage?

Well, first and foremost, remember what makes the money for the stockholders, that's our people.

And a lot -- we pay our producers based on what they produce and they participate in that.

So we like a comp ratio where it's been.

That comp ratio is kind of being the comp ratio for us for 30 years, 40 years, something like that.

So there's opportunities for some leverage in that.

But really, we saw opportunities in our operating expenses.

And Kai, there are wage pressures that are out there.

There's -- as we reach full employment in many of the countries, it's more competitive for people.

So if we can hold the comp ratio where it is, continue to go after our productivity, less on the operating expenses, we see that as a way we will expand margins, if we come in somewhere in the mid 4s.

Okay.

And one last question.

It's a number question, is that if you look at your reported and the pro forma for the corporate segments and especially the corporate lines, it looks like under the new tax law, looks like the losses will be double the prior sort of tax regime.

So -- but if you look at the forecast for your net earnings or net losses in that line in 2018, it's roughly the same as 2017.

I'm just wondering why is the losses not more in the corporate line.

There were some one-off items in the corporate item that we just don't see repeating again.

I think especially if you throw in the move and the tax reform items and the -- there were matters related to the litigation that we won 3 years ago.

They were running through there.

There was some costs that won't repeat, so that's why we think it's -- we'll perform about as well, even after tax reform.

(Operator Instructions) Our next question comes from James Naklicki of Citi.

I don't want to beat a dead horse here, but when we met with you guys in December, I believe the guidance in Brokerage was for 3% to 3.5%, and you did 6%.

So was there sort of a lot of upside to that number in the second half of December, or was there organic pulled from the first quarter at '18 into that fourth quarter number?

I guess, that's my first question.

Then I have a follow-up as well.

The answer to that's no.

Now, and also too, the guidance, remember, our guidance in the third quarter, I don't think what we actually said 3% to 3.5%, did we?

And if we did, maybe we were being just a little conservative on that.

I think our guidance really was we didn't expect any margin expansion, and we ended up getting 40 to 70 basis points on how you'd measure that.

But if we said that, then at the time, when we were sitting there in December, we had a terrific December.

So based on through November, we were probably someplace in that 3% to 4% range.

Got you.

So strong December, got it.

Okay.

And then my follow-up is on Corporate.

So before the adjustments, I thought you guys were looking for a profit there and there was a little bit of a loss.

So can you just walk me through what the weakness was for net income before the adjustments?

All right.

Let's go for the Corporate segment.

If you look at what we expected and what we published on December 12, we hit exactly what we thought on interest expense, maybe a little bit better, so we got better there.

We blew the doors off as Pat said, on the clean energy, so we came at the higher end of the range on our earnings on that.

And we also have less loss on the corporate line of Corporate there.

And maybe we didn't really forecast any lease move related to our headquarters, so that came in right.

So maybe you're looking at -- I don't know what you're exactly looking at, but we did book our tax reform adjustment, which was about a $29 million charge as we adjusted our deferred tax asset, as we adjusted our transition tax and a few other items that we adjusted, some actual -- the perm difference is there or a return to actual provision items there.

But by and large, I think all of our numbers actually beat the expectation that we laid out in December.

Got it, got it.

So it's tax reform?

Okay.

It's not exactly on a line you're not looking, looking through.

Our next question comes from Adam Klauber of William Blair.

Couple of different questions.

Wholesale had a good quarter.

After the tough weather, are you seeing more inflow of risk into the market?

Yes.

I would say that's fair, especially around the catastrophe stuff.

There's an awful lot more marketing going on.

People are pushing for rate there.

It's not holding across the board.

But yes, more people are entering the E&S market.

And is there -- can your remind me what the seasonality to the property renewals?

Is it pretty even?

Does more stuff come up before the summer?

No, it's pretty much second, third quarter.

Second, third quarter.

All right.

Those are the bigger quarters, right?

Yes.

Yes, right.

Yes, so we'll probably get a good idea after the second quarter if there is more of an increase in some of that property.

Is that right?

Correct.

Okay.

As far as the benefits business, I think you mentioned 6%, that seems better than it has been.

I'm not sure though who said that number.

But what's driving the growth there?

Well, I think that whatever -- we benefit from confusion and change.

And when you've got the reform stuff going on in Washington, changes to the ACA, our people need an awful lot of help with that.

Now the other thing that's driving it is we're making sure that our clients realize that we're not just about health insurance.

What we're doing is trying to help employers become the destination employer.

And in this work environment, where we're approaching full employment, that's important stuff.

So our voluntary numbers are up.

Our consulting numbers and HR are up.

Our health insurance numbers are up nicely, but it really is across the board.

And I know you've added in the last couple of years, you've invested in this practice, added a fair amount to it.

Is that allowing you to go up market, but I'm not talking about the jumbos but are you getting some of the larger clients also?

Yes.

Yes, it is, definitely.

We're competing well on multi-thousand life cases now against some of the stronger competitors.

Right.

That makes sense.

Okay.

What was it -- if you could give us even a general idea, what was the growth in your producer force in '17 versus '16?

And I guess, what are the thoughts on '18?

It's up -- our producer, AGCOM, was up 1%, excluding acquisitions.

But if you add acquisitions, which is accretive to production headcount, you've got that number.

Well, let's see if I can get there for you, Adam.

Okay, yes, I'd be interested in the total number.

And then as far as, one, then there is an investigation going on in London.

I'd be interested in your thoughts there.

And if I remember right, do you have a wholesale London business and if so, how big is that?

It's really big.

I mean, I don't have a revenue number for you off the top of my head, but it's -- we're one of the largest London brokers in the London market.

And yes, the FCA is looking at the entire wholesale industry, and we always believe that we do what's right for the client.

And frankly, we support the FCA's effort to look at that.

One of the things, too, is that the nature of our wholesale business in there is moving business into the London marketplace.

It's not nearly as big when you look at sidecars and programs and that, so it's not really that type of business that the popular press is talking about.

Right, right.

So my understanding, you haven't done a lot of the big facilities, a lot of the big programs that some of the other -- some of your other competitors have.

Is that -- in general, is that on point?

That's correct.

We added about 5% producer headcount as a result of acquisitions last year, also to follow up.

Our next question comes from Mark Hughes of SunTrust.

The M&A environment with tax rates going down, is that pushing up multiples?

Are either private equity or you all paying more for these after-tax dollars?

Yes, I think there'll probably a one turn and a multiple as a result of it.

Is that going to bring more deals to the market or should that be a tailwind in 2018?

Yes, I think so.

I think that -- but remember, the real motivation for somebody to join us is they want our capabilities and our resources, and that is also accelerating even more rapid pace.

So the money will be better for those folks that are selling, but I think that the reality of this is this gets to be much more of a complicated business, especially, take our benefits package we just talked about.

It is very confusing and we have some really, really great smaller brokers out there that when they join us, they continue to bring great service to their customers that when they throw on our capabilities.

So we see it as a really ripe environment next year.

And then any restrictions on the private equity leveraging up with tax reform?

Is that going to make a difference?

I haven't really looked at the math when it comes to the interest nondeductibility matter.

But again, to be honest, if somebody's interested in selling to a PE firm, they're probably not interested in adding capabilities to our resources.

They just want to be a part of a label.

We don't -- we don't do well with people that don't have any interest in our capabilities and the resources that we can bring, so I don't see it as impacting our results.

The number of blips that we'll have next year will be up and maybe for PE too, but I think there's plenty of them out there.

And then on risk management, we think about the workers comp claims.

Any commentary on the underlying trend there?

Any indication that the stronger economy could lead to increased frequency?

So far, we're seeing, Mark, about 1% uptick, but not a huge uptick there.

And that's just the same, no changes?

Not so far.

Payrolls go up, especially if we get into any big infrastructure spend.

The financial-type jobs, they don't have nearly as many workers comp claims.

But if we get into a big construction boom here in the U.S., you'll see those numbers go up.

Our next question comes from Arash Soleimani of KBW.

Just had a quick follow-up.

When you said the organic in 2018 would need to be closer to 4% than 3% for margin expansion, can you just remind me why it would be a higher organic requirement next year or this year?

We've already said that -- we've already said it's tough to expand margins if it's 3% or less.

There's a little wage pressure out there right now, so if we can -- if we get to 4%, is there some margin expansion?

Probably: some place between 3% and 4%.

We'll see how the year comes out.

I would hope so, but you just never know in this environment.

Being a low cost (inaudible).

Our next question comes from Kai Pan of Morgan Stanley.

I have 2 follow-ups.

Number one is could you talk a bit more about your technology investment and how do you think sort of technology could disrupt the Brokerage business?

Well, I think, Kai, if you take a look at the numbers around InsurTech investments, there's billions of dollars flowing into this industry.

We're doing, I think, a pretty good job of watching that.

And we're, of course, doing all we can to utilize technology to continue to improve our business.

But so far, the things that we've watched and followed, some are clever.

But I don't see them as being a drastic disruptor, in particular, where we stake out our position in the marketplace as a trusted adviser.

Yes, we do have some electronic broking that we do around cyber.

We'll quote a couple of hundred cyber quotes a month, literally touch free, and that's actually a day.

When I think about it, it's not a month.

It's a day.

But that's not a huge part of our business.

Where we make our money and where we hold onto our clients is by being the person that they rely on for advice, and I don't think that's going away.

I have 2 things.

If you look at InsurTech, that's really improvement of service tech.

We have some pretty exciting things going on in terms of helping us improve our service to the customers.

When it comes to distribution, RPS on the wholesale side is the place that's putting good wholesaler- to-broker-type capabilities and -- that will allow them to quick-quote cyber, umbrella, et cetera.

So those are the places that have, but when it comes to just pure distribution tech, selling insurance the new way, pretty hard when our customers are buying 4 or 5 different policies on the account.

Typically, those are 1-type -- 1-single-coverage-type policies, and that's really not what we specialize in.

We're a little further upmarket than that.

Okay.

That's helpful.

But my last one is on your tax strategy.

You have clean coal business to lower your effective tax rate, but now that U.S. tax law sort of changes, the playing field is more or less leveled.

Are you going to pursue other tech strategy up to expiration of clean coal in 2021?

Well, there's 2 different questions.

I just want to make sure that our credit strategy was always there to take our rate from the regular rate today of t rate, so that goes -- used to go from 35% to 20%.

Now with the way the law will work, we'll be able to take our rate from 21% of 5.25%.

So it's almost exactly the same 15% step-back in the rate.

So the amount that it produces for us is nearly identical.

When it comes to the longevity of the program, right now, we have credits that we believe, even with some rapid growth in the U.S., if you just model it out, that our tax credits will last us well into the late 2020s.

So what's the next step in tax credits?

We've got a decade or more to figure it out.

So it's not something I feel like we need to rush into today to put more money into something that we don't need tax credits in say, until 2030.

But I think we're pretty well positioned right now, for the next 10-plus years of our lives, when it comes to really paying -- if we can pay 5% U.S. corporate taxes for the next 10 to 12, 13 years, that would be terrific, wouldn't it?

(Operator Instructions) Our next question comes from Elyse Greenspan of Wells Fargo.

So I had a follow-up question on revenue recognition.

So Doug, you mentioned this would, I believe, be positive for your earnings.

It's my understanding that for the most part, annual revenue should be unchanged.

Please correct me if I'm wrong.

So then as we think about you guys adopting revenue recognition for 2018, I guess, that's margin accretive.

And then when we think about -- I know another broker had said that they would see an expense benefit in '18, kind of like a 1-year adjustment for the deferral of some expenses, is your comment that this is positive to your earnings stream?

Is that an ongoing, not just a 1-year comment?

Can you just kind of tie it, a few of those things together?

Yes, I'll do the best I can.

It's highly complicated and -- but I think that you've characterized it correctly.

I wasn't commenting on any onetime item other than the cumulative effect of the change that comes in, in January that will book basically 12/31/15 or January 1, '16.

In terms of why the earnings elevate is, in general, revenues will go up.

There will be a small impact on EBITDA that will go up.

I guess, that would probably wash out on the margin, to a certain extent.

But really, we've been pretty conservative on -- when we recognize contingent commissions and also direct bill or carrier billed or installment bill policies, so that will be something that pulls forward.

But then you also have the stuff we are [initia] that will get pushed back, but there's a net uplift in it.

And when is the plan that you guys are going to give us, I guess, the pro formas for 2017?

I think I said in my open commentary that we hope to have that to you by late March or early April.

And at that point, you'll also give us the corporate earnings projections by quarter for '18?

Because I notice we just got the full year outlook.

Yes, that's correct.

Okay.

And then one last question.

I know there was some -- an earlier question, just in terms of, I guess, the fact that things seem to have gotten better toward the end of December after your Investor Day.

Do you guys have an initial view on how January has been that you can share with us and tie to your full year outlook for '18?

No, because if we had that -- if we had that capability, I would have been able to tell you on December 12.

It doesn't all happen on the last day of the month.

So -- I wish I did, but this is a sales business.

I know there is a rush at the end of the month in order to get things booked.

But I think at this point, I really don't have a look at January at this point.

There are no further questions in queue at this time.

Great.

I will make a quick comment as a wrap-up.

As we said a number of times, 2017 was a fantastic year for Gallagher.

I'd like to thank each and every one of our nearly 27,000 colleagues for their hard work.

As we enter 2018, our focus remains on executing on each component of our value creation strategy: growing organically, growing through tuck-in acquisitions, improving our quality and productivity, and maintaining our unique Gallagher culture.

Thank you for being with us this afternoon, and have a great evening.

This does conclude today's conference call.

You may disconnect your lines at this time.