Arthur J. Gallagher & Co. (AJG) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s First Quarter 2018 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 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 very much.

Good afternoon, everyone, and thank you for joining us for our first quarter 2018 earnings call.

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

As I do each quarter, I'm going to touch on the 4 key components of our strategy to drive shareholder value.

These are: number one, organic growth, we are an aggressive sales team; number two, growing through mergers and acquisitions; number three, improving our productivity and quality; and fourth, maintaining our unique culture.

We had an excellent start to 2018.

During the first quarter, we delivered strong total revenue growth, excellent organic revenue growth, steady growth from our tuck-in merger and acquisition strategy and continued margin expansion.

This puts us in a great position for another outstanding year.

Let me start with some comments about our Brokerage segment.

First quarter organic was 4.9% all in, reflecting strong growth across all of our divisions globally.

Let me give you some more detail.

In the U.S., our Brokerage business generated 4.5% organic in the first quarter, with retail up 4% and wholesale up 7%.

U.S. property/casualty pricing was a modest positive across many lines during the first quarter.

Property and commercial auto are seeing the largest price increases, up 3% to 5%.

Casualty and specialty lines are flat to up 2%, while workers comp is flat to down about 1 point.

Insured exposures are trending higher, which is consistent with recent data points of U.S. economic activity.

So far, in April, pricing is similar to the first quarter, with some upward movement in property and commercial auto.

Internationally, property/casualty organic growth was about 6% in the quarter.

Australia and New Zealand were up around 6%.

Canada was about flat, and our U.K. businesses generated organic of about 8%.

Property/casualty insurance pricing in Australia and New Zealand is in the mid-single-digit range, with strength across all classes.

Our U.K. and Canadian operations are seeing a flattish pricing environment, while rates in our London specialty operations seem to be nearing a bottom.

Our employee benefits business also had a strong quarter, generating organic revenue growth of around 5%.

So when I sum it all up around the world, it looks like rate and exposure together are giving our organic growth a slight positive tailwind, call it a bit below 1%.

This is a change from a year ago when rate and exposure were flattish or a modest headwind.

This bodes well for 2018, which means we should be able to post similar or slightly better organic than we did in 2017.

Second, mergers and acquisitions.

In the quarter, we completed 6 brokerage acquisitions, which should add about $27 million of annualized revenue.

These new partners see our vast capabilities.

They embody our culture, and they see themselves being more successful together with Gallagher.

I would 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.

Looking forward, our merger and acquisition pipeline is full of many, attractive tuck-in opportunities totaling about $400 million of revenue associated with almost 60 term sheets either agreed upon or being prepared.

Now we don't expect all of these acquisitions to close.

However, we believe we will get our fair share.

Third, productivity and quality.

Adjusted EBITDAC margin was up 49 basis points in the quarter, a really nice result, organic, of about 5%.

The brokers' team is working hard to find efficiencies across the organization and further leverage our scale.

We discussed a number of opportunities at our March Investor Day, including optimizing our approach to small business, harmonizing our management systems and further improving through standardization and automation.

All of these will help us become better, faster and deliver higher quality service to our clients.

So for the first quarter in our Brokerage segment, we delivered 8% total adjusted revenue growth, of which 4.9% is organic; adjusted EBITDAC growth of 9%; and adjusted EBITDAC margin of 34.8%, up 49 basis points over the prior year, another really, really solid performance by the Brokerage team.

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

First quarter organic growth was 7.7%.

Domestic organic was 5%, while international posted over 20%, fueled by an excellent new business quarter.

The Gallagher Bassett team recently returned from the annual RIMS Conference, where we hosted more than 100 prospect and client meetings over the course of 3 days.

The team showcased advancements in LUMINOS, our leading risk management information system, and launched several new products at RIMS.

For example, we rolled out GBCARE, our best-in-class workers compensation, medical management platform; and GB litigation defense, our comprehensive defense counsel performance scorecard, just to name a couple.

Overall, RIMS was a very successful event and further demonstrated our analytical, outcome-focused approach to claims management.

So with organic over 7% in the quarter, an exciting array of new product offerings, some nice specialty mergers in the pipeline and a sense of excitement and momentum after RIMS, we see our Risk Management segment posting mid-single-digit organic and margins in the mid-17% range.

And finally, I'll touch on our true differentiator, number four, our culture.

Just a few weeks ago, Gallagher was recognized by the Ethisphere Institute as one of the World's Most Ethical Companies for the seventh year in a row.

We're the sole insurance broker recognized, and we are honored to be 1 of only 135 companies globally to receive the award.

7 years in a row of receiving this prestigious award is a testament to our professionals who dedicate themselves to delivering the highest level of expert advice and quality service, all grounded in the Gallagher way, our list of 25 key tenets and values that articulate our unique culture, a culture that is grounded in teamwork, ethics and outstanding client service across our 27,000 sales and service professionals around the world.

Okay, a really strong quarter, a terrific start to the year.

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

Doug?

Thanks, Pat, and good afternoon, everyone.

As Pat said, what a terrific start to 2018.

So today, I'll spend most of my time reviewing the CFO Commentary document that we post on our website.

Also, as an overarching reminder, all the numbers in our earnings release, our investor supplement and the CFO Commentary documents have been restated to reflect the implementation of the new accounting standards for revenue recognition.

We hope the materials we provided in connection with our April 11 Special Investor Call were helpful as you updated your model.

Today, before I plunge in, in the room today, as he has been for the last 15 years on each and every one of these quarterly calls, is Jack Lazzaro.

Today marks Jack's 40th anniversary with Gallagher.

Jack is our Global Treasurer and CFO of our clean energy efforts.

He was -- Jack has held about every finance role in Gallagher over the last 4 decades.

He was instrumental in our IPO.

He led our implementation of Sarbanes-Oxley, and he was one of a handful of folks that helped launch our clean energy efforts.

A sincere thanks, Jack, for all of your hard work and dedication.

Okay.

Let's move to Page 2 of the CFO Commentary, some takeaways from Page 2. First, it's still looking like we'll get a small tailwind from FX this year based on current exchange rates.

Second, you'll see that we did have some additional lease termination costs as we optimized our footprints around the world.

We might have some later in the year also, but we don't have an estimate at this time.

And third, for the first time in a number of years, we have absolutely no integration costs.

This is really nice work by the team to get those efforts squarely behind us.

Let's look to Page 3 to the Corporate segment.

We are now providing our quarterly estimates for the remainder of 2018.

That's the far-right pink columns.

Recall that we only provided full year estimates during our March 14 Investor Day as we had not yet released our restated new GAAP numbers.

Those March 14 numbers are shown in the gray columns.

Here are the takeaways on Page 3. First, compare the March 14 full estimates in the gray box to the full year pink box at the bottom of the page.

You'll see that our full year estimates have not changed dramatically for 3 of the 5 lines.

There's no real change on the clean energy, M&A or Corporate lines.

As for the interest expense line, you'll read in Footnote 2 that we plan to close a debt offering in late June.

Accordingly, we have updated our estimates for interest expense for the third and the fourth quarter.

And finally, you'll see a line called impact of U.S. tax reform.

As we digest the new tax legislation, technical corrections, interpretations and lawmakers consider amendments, we could be refining our December 31, 2017, estimate as well as more fully understanding future FX.

Accordingly, we'll have some tweaks over the course of 2018, as we did here in the first quarter.

The important takeaway is that these items, regardless if they're a book expense or a book benefit, they most likely will not impact cash taxes we pay.

This is because we have our clean energy and AMT credit -- tax credit carryforwards, about $730 million at March 31, in fact.

So we will not be paying much, if any, U.S. federal income tax for many years to come.

So this quarter, it's a small book expense, but not really a use of cash.

While we're talking about cash, at the end of March, we had around $350 million of available cash on our balance sheet.

We'll give another net $400 million from our debt offering in June.

And also, our cash flows for the rest of the year are traditionally stronger than in the first quarter.

So we should have plenty of cash for M&A this year.

A few other comments before we build your -- as you build your models going forward.

First, the Brokerage Segment adjusted margins were up 50 basis points in the first quarter and 4.9% organic growth.

As I've -- as I've said in the past, probably won't have margin expansion if organic is below 3%.

You should see some margin expansion if organic is over 4% and probably flattish margins in between.

Second, Risk Management adjusted margins.

You'll see in the footnotes in the earnings release that we would have posted about 17.2%, but we had a small make-whole settlement on a claim.

That cost us about $1.5 million.

We really hate these things and they don't happen very often, but on nearly $10 billion of claims that we pay annually from time to time, we don't get it exactly perfect.

Looking forward, we're still targeting margins in the mid-17% range for the rest of the year.

So those are my comments and clearly a great start to the year.

Looking at it together, 5.3% combined organic growth in our Brokerage and Risk Management segment with solid margin expansion, an extremely active merger pipeline with 300 tuck-in opportunities on our deal list, a strong cash position, and we have an unstoppable culture.

Clearly, you can hear that I'm excited about the rest of 2018 and beyond.

Back to you, Pat.

Thanks, Doug.

Omar, let's open it up for questions now and hopefully some answers.

(Operator Instructions) Our first question comes from Elyse Greenspan, Wells Fargo.

My first question.

So pretty strong organic growth quarter, about 5% in Brokerage.

Doug, I remember in March, you had said that the Q1 might seasonally be a weaker quarter.

I'm not sure if maybe that changed when you adopted the revenue recognition, but it seems like you're leaving your guidance kind of in line with the full year level, which is about 4.4%.

So what could change?

Or is it just embedding a level of conservatism?

And would the Q1 still seasonally be a weaker quarter post rev rec?

Three things on that.

I think that with our -- such a heavy-weighted (inaudible) first quarter, we probably won't see that kind of lower seasonality in the first quarter that we have in the past, but it will take us a year or 2 probably to figure that out.

In terms of our guidance going forward, I think with the rate tailwinds that we're seeing, exposure growing, seeing a little tailwind for that.

So I think that we'll see a full year '18 a lot like '17 but a little bit better.

So if we were in the mid-4s -- maybe we'll be in the upper 4s, there's no (inaudible) to interpret that at this point.

Okay.

And then in terms of margin, so about 50 basis points of margin expansion in the quarter, nothing that you would call that's one-off there.

So meaning if organic kind of was in line with the first quarter level, would you expect to see a level of margin improvement for the rest of the year?

Or does somehow the shifting of more employee benefits to the Q1 impact the margin improvement in the first quarter compared to other quarters?

Okay, a couple of questions there.

Yes, maybe a little bit fueled by the strong employee benefit first quarter -- but maybe 10 basis points, something like that.

Looking forward, we typically see most of our margin expansion that happens in the first half of the year.

And then in the second half of the year, if we get into midyear raises or whatever, we don't see quite as much margin expansion in the last half of the year.

But I think that for about 4%, there are some opportunities to continue to expand margins there.

Okay.

And then one last question.

So you pointed to the strong cash position, and you guys are adding some debt this year.

So I mean, I know this is a question that's been asked in the past.

If deals don't materialize that would use the available cash that you'll have, which will include proceeds from the recent offering, I guess when do you think you get to the point where share repurchase, I think, maybe becomes something that moves higher up on the list?

Or is the pipeline that strong that you could just see it using all of your cash on hand during the remainder of this year?

The pipeline is that strong.

In the event that we do have excess cash for the end of the year, we would repurchase stock, but our pipeline is pretty strong right now.

Our next question comes from Mark Hughes, SunTrust.

On the pipeline question, I think you said $400 million.

In my right memory, it was about $300 million last quarter.

Is there usually a seasonal uptick in that?

Or is that just underlying strength?

And if so, what's going on?

It wobbles all over the place, Mark.

This is -- we're constantly out talking to people.

Some take 10 years to close.

Others, you can get done in 6, 7 months.

So it just -- it rises and falls with the people that are coming on and off the list.

There's no real magic to it.

Closing is generally a little slower in the first quarter because there's usually a push to get something done by year-end.

So historically, we've closed more deals in last 3 quarters of the year than in the first.

And is -- the debt raise, is that a reflection of your increased optimism?

Would you have done it regardless if you weren't seeing the strength in the pipeline?

I think it's our confidence in the pipeline.

And then the contingents were -- you had a nice lift last quarter and then were down a little bit this quarter.

How should we think about those on a go-forward basis?

Yes.

I think that -- listen, we would have -- I think you if you add supplementals and contingents together, we're at somewhere around about $85 million compared to $83 million last year, up about 2.3%.

If we would have had another $1 million, $1.5 million, we would have been about 4%.

I wouldn't read too terribly much into that at this point, but they're growing 2.5%.

Maybe next quarter, they'll grow a little more right in that same range.

So I wouldn't overthink it too much.

Our next question comes from Greg Peters, Raymond James.

A couple of questions.

First of all, Doug, back to your opening comments, I don't want to parse words here.

You talked about the 50-basis point improvement in margins and the fact that 3% organic, you can't expand margins 3% or less in organic growth.

It seemed like the language changed a little bit though because now all of a sudden you threw out this 4% bogey that you can expect margins to grow -- expand beyond 4% but not really below 4%.

So maybe I just misheard it, or you can clarify that.

No, I think you've heard it -- I don't -- I have said it a couple of times before, but we're in that range right now, where as we look the way our margins are positioned, we have opportunities to reinvest in the business in certain areas that we think will fuel growth; and so at 3%, pretty tough to do, at 4%.

It kind of just happens in between.

One quarter, it might be up a little bit.

One quarter, it might be flat.

But -- so the words changed probably compared to where we were 3 or 4 years ago, but in the last couple of times we've had a chat about it, that's kind of where we feel right now.

Obviously, if we had sustained 3.3% organic growth for the next 5 years, you'd probably see some natural growth in margins.

But you also have to look at wage inflation, cost inflation.

So that's why I was saying probably in that 3% to 4% range.

Flattish -- up a little bit or flat is probably where we are.

Over 4%, I think it just naturally happens.

Perfect.

And then I wanted to go back to just the pipeline.

It really seems to be like you're laying out a pretty positive outlook there.

And so every time we turn around and talk to others in the marketplace, we hear about just such intense competition for M&A, and we hear about private equity involvement.

And so I'm trying to bridge the gap between intense competition around price for M&A and then your growing pipeline.

And I'm wondering maybe if it ties in with the interest deductibility, in tax reform.

Or what variables there are helping to drive your more positive outlook on M&A for 2018?

Greg, this is Pat.

Primarily a couple of things.

First of all, the capabilities that we've developed are second to none.

And so if you're going to look at a private equity roll-up or something like that, the cash numbers are what they are.

If that's the direction you want to go in, great.

But if you really are excited about expanding your business, if it's something that -- you love this business, you love to sell, you've been in the town, you've had a small firm, and you can't walk into the university and start talking about their insurance.

You're not going to get past the first door.

We do a ton of those types of accounts.

There's not an account on the planet right now, anywhere in the world, of any size that we can't do.

And that turns people on.

The analogy I use all the time is when you come for a visit, I am going to show you the candy store, and there's people who buy into that.

And then secondly, these folks, many of them are hypersensitive to culture.

They want to land their people in a place that feels like them.

And you can't do that in a private equity world.

So we don't win them all, and I'm not sitting here today with this pipeline saying we're going to close them all.

But we're competing on a different story.

And when that story resonates with people -- by the way, we're not asking them to give up a boatload of money.

We'll help them sell and grow and they'll make their earnout.

So it's not like we're not competitive.

But the fact is, the people who buy into those 2 things tend to join us.

And one final question for you.

Doug, in your CFO Commentary, when we get back to the gray -- I forget, the gray boxes or pink boxes as it relates to the Corporate segment and I look at the bottom numbers there for the full year, it looks like you've lowered the range from a loss of $21 million to a gain of $1 million, to a loss of $42.4 million to a loss of $19.4 million.

Am I missing something there?

Is that all of the interest expense?

Or is there something else there?

Yes.

If you look at the 5 lines, clean energy hasn't moved hardly at all.

Corporate hasn't moved at all.

M&A hasn't moved at all.

It's the additional interest expense that we will get on the new debt, and then we have the $6 million impact of tax reform.

Those are the 2 lines out of those 5 that have shifted.

Our next question comes from Kai Pan, Morgan Stanley.

So my -- I just want to follow up on the -- both the revenue growth, organic growth as well as the margin.

On the organic front, Pat, you mentioned like this year, probably about 1 point of tailwind; and last year, about 1 point of headwind.

So the delta is about 2 points.

So why 2018 would be 2 points or much higher than 2017?

Well, Kai, first of all, I think you know where I come from on this.

When I'm just short of 1 point up and I'm just short of a right -- at 1 point down, to me, that's flat.

It's just -- it's helpful.

It's not hurtful.

And really, what it does is, it lets us go out in the marketplace and sell these capabilities.

When you're in a historically old, soft market and prices are dropping 10%, 15%, someone that has no real capabilities can lob a quote onto the table that kills you.

So this is a perfect market for our organic growth, for our people to be out selling the things that we do so darn well and not have -- get whacked in the side of the head by a quote you never saw coming.

But 1 point up, 1 point down, frankly, Kai, that's -- to me, that's flat.

Technically, a year ago, we were probably flat.

We probably didn't have much lift or pressure from that.

That's really what are our comments were.

And then we're up -- we're seeing about 80 basis points right now.

So it's really not 2%.

It's 1% delta in the year.

Great.

And then specifically in the U.K., you're up 8%.

We saw some of your peers actually have some challenging in the U.K. I just wonder what you're doing differently there or you just compete in the different markets.

I think we're probably in different markets than some of those.

Our specialty operation in London has done just an outstanding job of growing through a soft market.

It's been quite remarkable, actually.

The specialty operation, including our brand, Alesco, have just really, really delivered.

So it's -- they've been very strong.

Our retail operations across the U.K. are sort of flattish, but together, they just -- they had a great quarter.

Okay.

Then on the margin front, so just 1% -- [3% down], maybe more.

So you said like you want to, like, grow 4% or more to -- in order to have a margin expansion.

If you think of wage inflation in -- typically, you say 2% to 3% range, I just wonder, do you see more wage pressure?

As well, how much do you think you will need additional investment to grow the business?

Right.

A couple of questions there.

Wage pressure is there, and we also -- we have an outlet for that though with our onshore centers of excellence.

We have the ability to move more work into lower-cost labor locations.

So that helps us control the wage inflation that you see in the U.K., the U.S., Australia and New Zealand, a little bit in Canada.

In terms of other cost pressures, just consumable.

They're not a big portion of what we do.

We have some desks and chairs and office equipment and communication.

There's still efficiency that we -- can be gained there.

So the real [play] comes in, the wage inflation.

And for us, our challenge is to become more productive, use technology more to our benefit.

And we think that will help control the cost side of the equation.

In terms of opportunities to invest in growth, we're seeing that all over in our organization.

People are using data more.

They're using creative advertising and direct marketing techniques.

So there's opportunities for us to use, to channel some of that, what I would call, service expense and channel it back into organic growth, fueling-type exercises.

So that's what we're seeing inside of the organization.

Okay, that's great.

Last one, if I may, on acquisition.

You mentioned there are competition for acquisitions.

But if you look at the first quarter, the multiple, you paid actually lower than your guidance range.

Just wonder what's behind that.

And also, I just wonder if you can comment on -- there's a recent broker IPO and [the same site] in pretty fast growing personal line area.

I just wonder if that's a market that you would be interested.

Yes.

I think that -- I think we're below 7x on our acquisitions this quarter.

I think that those were smaller mergers, and I think the price we paid is fair in light of their operations.

But I don't know if we'll hold below 7% (sic) [7x] going forward.

I think we'll be up -- probably average closer to 7.5 or 8x in the next quarter.

In terms of the recent personal lines IPO, I read the red herring.

I've looked at the price come out on it, the personal line.

We do a lot of personal lines.

We do...

And we want to do more personal lines.

Yes.

And so that -- those businesses, if they fit with us, we'd be interested in.

Our next question comes from Josh Shanker, Deutsche Bank.

I can't remember whether it was 3 months ago or 6 months ago, but on this call, you had said that you set your teammates down and you said, "Look, we have to have a conversation with our clients.

They should expect rate increases coming through." And we're now 6 months past the hurricanes.

To what extent is that materializing as planned?

Two, to what extent are those rate increases hurricane-related and after we get through these -- the reactionary price increases associated with the hurricanes, we reenter a stable market?

So I think first of all, yes, it is mostly hurricane-related.

Property, noncat exposed, is up.

Cat exposed, where there were losses, are up probably 10% to even a little bit more than 10%.

On those that are not cat exposed that didn't burn the market, you're still looking at 3% to 5%.

And I think that when you think about where the rates were pre-hurricanes, they were as low as they've been in over a decade.

So I do think that it's -- the rate increases are justified.

They are selling in the market.

Now some of the quotes that originally came out at more like 20%, 25% increases are -- those aren't going to hold.

But I don't see a return to a vast soft market anytime quickly.

Once the balance sheets have had a chance to heal a little bit and the wind doesn't blow, then you'll see the rates come down again.

And do you expect to see year-over-year rate increases come 4Q?

I do.

And I see that also in particular -- it's really interesting.

When I started, hard and soft markets were across the entire spectrum.

This is a bunch of markets inside -- by line.

So comp is down a little bit.

Well, it deserves to go down.

And then you have transportation is up somewhat.

Well, guess what?

In particular, distracted driving is crushing the market.

So these markets are moving, as they should, based on the results by line.

Our next question comes from Paul Newsome, Sandler O'Neill.

Just a couple of quick follow-ups on the pricing environment.

There's lots of conversation -- and I don't know if it's real or not, about, historically, the small market being sort of the least competitive and that changing of late.

And I was wondering if you're seeing any of that yourself.

And then somewhat similarly, also pricing commentary and I don't know if it's true or not, is that month by month -- it's getting a little bit better every month.

And I don't know if that's true either, whether that's your experience as well.

Here's the thing.

It varies.

As I travel the network globally, it varies.

So in Australia, for instance, you're seeing kind of mid-single-digit range.

Kind of almost everything is up.

You get to the London specialty market and we think we're getting close to bottom, but there's still a tad bit of softness there.

And you travel around the United States.

It's tougher in Florida than -- and in Texas than it is in Illinois, for sure.

But I think it's really -- Paul, when you step back from it, I continue to come back at this with you guys on these calls.

Rate is really not impacting our results much.

When you spread it across all that we're doing, some is up, some is down, but it's in this range of, "Okay, cat properties up, that's nice and that's necessary." But it's really a flattish market and it has been for about 8 years.

And I'd also tell you, down 3%, up 3%, I would call -- I'd tell you is flat.

I'm not going to lose an account, frankly, for 3%.

But I'll lose an account for 23%.

And I think that when I'm at 3% up, 3% down, which is now 1% up, 1% down, I can sit there with a client and talk about the fact that we've provided unbelievable service beyond the price of insurance.

The things that we do to help their business and help them grow their business on the property/casualty side or become a destination employer on the benefit side, that's really meaningful to them.

It's not just about the price.

So to me, it's kind of the perfect environment.

I have one other question that's completely unrelated.

On the Risk Management business, is there anything that would affect that market, especially the relationships you're trying to build with the carriers that's related to the M&A that we're seeing in the market itself?

And a little bit of a changing landscape amongst the carriers, does that have any impact on your Risk Management business?

No.

I think, in fact, it could be helpful.

Here's -- for 100 years, I've been asked, "Why Gallagher Bassett?

Why do you stick with the claims business?

Marsh got out of the TPA business.

Aon really didn't like the business.

Why are you hanging in there especially on the property/casualty side TP?

What is the reason?

You have billions and billions and billions of dollars of premium.

And every year, about $0.60 cents on the dollar turns into a claim." So if you're going to be helpful and you're going to really do a job for someone and you neglect the claims side of it, I think you miss an opportunity for our shareholders and you miss an opportunity to be really distinct in the market.

The fact that markets are consolidating, the fact that they're getting better and better at their own data and the fact that we're driving the belief that our outcomes are superior, and we're willing to put up our numbers.

We're -- this is -- if you want to do "as-of" dates off our system, et cetera, et cetera, types of claims, parts of body, geography, what country, we can do that.

And I believe that the next generation of CEO is not going to feel that their claim department is the be-all and end-all.

They're not going to say, "I can't outsource any of this because they will do a bad job." And I think that when it gets to a point where they're really looking at their returns and their ROE, they're going to have to say, "Maybe there's a better way to do it." And so no, I don't see -- the consolidation is not going to take claim work away.

It's just going to put it into one bigger house.

(Operator Instructions) Our next question comes from Arash Soleimani, KBW.

I guess just the first question, to what extent would you say there are opportunities on the free cash flow side to drive improvement there through working capital management, for example?

Good question.

We've been working on that a lot.

We said we'd consolidate our bank accounts and we've improved our international cash flow in particular -- or free cash in particular because when we did the kind of 4, 5 larger international acquisitions, we went through a consolidation effort and that's really paid off and generated a lot of cash.

Where are we in the U.S.?

That's pretty mature at this point.

So I don't see further working capital generation in the U.S. We've got a little ways to go yet internationally on that, but I think the big push on that, that we started talking about 2.5 years ago is pretty well behind us.

And the $6 million adjustment you mentioned for tax reform that shows up in Corporate, it didn't look like that got backed out of adjusted this quarter.

I just want to make sure I understood why.

Yes, a good question -- probably could have, but there's some component in there that's an adjustment for our estimates at 12/31.

There's a smaller component in there that might be a continued run rate if we don't get some technical corrections done.

But I probably -- we probably could put it as an adjustment, but we just thought that since it was a commingled (inaudible), just put out where it is and call it out.

Our next question comes from Mike Zaremski, Credit Suisse.

A couple of quick follow-ups on Gallagher Bassett to Paul's question, where growth continues to be very strong.

I guess then, can you remind me how to think about -- how you guys think about your market share?

Because I'm assuming you don't think every insurer thinks as Pat.

You think the next generation will think and some of them think that claims handling is a competitive advantage.

And I guess it's along -- separately, can you remind us if there is something structural there regarding margin and so that there's less operating leverage in that segment for certain reasons?

I'll let Doug handle the margin side of it because the answer to that is yes.

It's very labor-intensive.

But I'll talk to you about the -- what I see the business opportunities to be.

First of all, if you take a look at Gallagher Bassett paying $10 billion of claims out in a year, that market share is nil, it's 0. I mean, it's unbelievable.

You've got about 5 -- according to the Insurance Information Institute, there's about $5 trillion of premium in the globe, and that's including life, health and everything else.

Property/casualty, you'd know the number better than I. But when you take 60% of that number, let's just call it $1 trillion, we are so far from having any market share, which is a beautiful thing.

So you're right.

Not every CEO is going to start thinking the best thing in the world to do is outsource, but it's a fast-growing part of Gallagher Bassett's business that's become very, very meaningful.

We've organized around it as a separate segment for Gallagher Bassett.

And I think there is huge opportunity there.

When I have [someone] like partner market meetings at places like [The Broadmoor RIMS] and talk to some of our markets and I'll say to them, "What you don't realize is that Gallagher Bassett pays more claims than you do." And some of these are household names, and they'll go, "No." I'll go, "Yes -- no, we actually do." And we have more money to invest in our systems, new products, the things that I mentioned in my commentary today, than you do.

And it's kind of a shocking silence.

So I think that just over the next 20, 25 years get stronger and stronger -- and I do think the business outsourcing model, it won't dominate.

But I do think in the long run, it will prove to be a better model and those CEOs are not going to be able to overlook the return.

And remember also, we're not trying to pick up their entire claim handling organization.

What we're doing is we're going into deep verticals where we can improve.

We can customize the claim delivery.

We can deliver it in a way that they want with our expertise behind it.

We provide great career paths inside of this for the adjusters and the specialists.

And so as a result, in a deep vertical, we can provide superior claim outcomes.

It is a -- not -- it's not as geared, leverage-wise.

If you think about the brokerage business, 50% to 70% of the growth can possibly hit the bottom line organically.

In the Risk Management business, you're probably looking at 30% of it can hit the bottom line.

It's because it's still a labor-intensive business.

But our automation, our scale are coming on and it's allowing us to continue.

I mean, if you go back 4 or 5 years ago, I think our margin in that business was 13% or 14%.

So there is margin -- there has been margin improvement in it.

And so then if we think about longer term, is -- this a segment where Vishal Jain and his team -- there's more to be done in terms of more margin improvement versus the Brokerage segment?

I wouldn't say versus the Brokerage Segment just by the sheer size differential, but there is opportunity there.

There is still lots of opportunities for us.

And I'm glad that you remember listening to our Chief Service Officer talk in March to the group.

There is opportunity still on our Brokerage side, too.

Our next question comes from Mark Hughes, SunTrust.

Do you see in the Risk Management business, any sign of inflation within the workers comp business?

Inflation in what, Mark?

Just lost costs.

Oh yes.

I mean, a huge part of workers compensation is medical.

So you're going to constantly fight that battle.

And an awful large part of the comp business is medical only.

So there's -- that's why the managed care techniques are so important.

That's why the purchase of pharmaceuticals and how you do that and manage that is so important.

It's why getting people back to work is so important because there's huge inflation in that.

And add wage inflation to it, there's natural inflation there as well.

And you realize, though, that, that's not technically Gallagher Bassett's cost.

That's the self-insured or carriers that we provide the claim service to, but that's why they come to Gallagher Bassett because they realize you've got this undying inflation that's going on in medical cost, so what are the ways to leverage our scale, our knowledge, our capabilities to try to bend that curve a little bit.

Any sign of inflection or acceleration lately?

No.

No, I don't think so.

It's pretty steady.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Pat Gallagher for closing remarks.

Thank you very much.

Well, as you heard today, we had a great first quarter and I'd like to personally thank all of our employees across the globe for their hard work and our clients for their continued support.

2018 should be another great year for Gallagher as we execute on our value creation strategy.

We will grow organically.

We will grow through mergers and acquisitions.

We will constantly work to improve our quality and productivity.

And every day, we live and promote our unique culture.

Thank you for being with us this afternoon.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.