Arthur J. Gallagher & Co. (AJG) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s First Quarter 2019 Earnings Conference Call.

(Operator Instructions) Today's call is being recorded.

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

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

These forward-looking statements are subject to 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 reconciliation 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, Jeremy.

Good afternoon.

Thank you for joining us for our first quarter 2019 earnings call.

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

As we do each quarter, today Doug and I are going to touch on the 4 key components of our strategy to drive shareholder value.

Those are number one, organic growth; number two, growing through mergers and acquisitions; three, improving our productivity and quality; and four, maintaining our unique culture.

The team delivered on all 4 of our operating priorities to begin the year, resulting in a great first quarter.

Let me give you some highlights.

Our core brokerage and risk management segments combined to deliver 14% growth in revenue, 5.5% all-in organic growth, an adjusted EBITDAC margin expansion of 75 basis points.

We also completed 11 tuck-in mergers in the quarter, and our culture was recognized again by the Ethisphere Institute as one of the world's most ethical companies.

I couldn't be prouder of the team, just a great performance.

My comments today will be focused on revenue growth, insurance pricing and our dynamic culture.

Doug will go into greater detail on productivity, quality, clean energy and capital management.

So let me start with our brokerage segment.

First quarter all-in organic growth was 5.7% including base commission and fee growth pushing 5% and strong contingent and supplemental revenue growth.

Organic was solid across all of our divisions globally.

Let me give you some more detail.

In the U.S., our retail brokerage operations generated around 6% organic in the first quarter with benefits a bit lower, PC a bit higher.

Domestic retail PC pricing was positive across all our major lines of business, except for workers' compensation.

For example, property and commercial auto pricing were up over 5%.

And casualty and specialty lines were up a couple of points.

Within our domestic wholesale PC business, organic was about 4% and relative to retail, pricing is similar or stronger across most lines of business.

Moving to the U.K. Our organic was around 5% in the quarter with retail a bit lower and wholesale a bit higher.

Our retail PC pricing in the U.K. is up 3% on average with professional liability pricing up over 5% and most of the lines up 1 point or 2. The U.K. retail -- I'm sorry, the U.K. specialty market is seeing rates up 5% on average, and pricing on catastrophe-exposed classes is up over 10%.

Next in Australia and New Zealand.

Organic was about 8%.

Rates there continue to trend in the mid-single digits across most lines.

In total, I would characterize the market very similar to recent quarters, but we do see rate trending just a little higher than we saw in the fourth quarter of 2018.

As we look forward, 2019 brokerage base commission and fee organic feels like it will be around 5%.

Next let me talk about brokerage merger and acquisition growth.

In the quarter, we completed 11 brokerage acquisitions at fair prices, which should add about $70 million of annualized revenue.

So far in the second quarter, we have completed 3 brokerage mergers, including Stackhouse Poland with estimated annual revenues of almost $80 million.

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.

Looking forward, our merger and acquisition pipeline is very full.

In addition to the previously announced JLT aerospace acquisition that we hope to close late in the second quarter, our pipeline has around $350 million of revenues associated with about 60 term sheets either agreed upon or being prepared.

While we won't close all these mergers, we continue to be the partner of choice for brokers that are excited about our capabilities, aligned with our unique culture and realize that we can be more successful together.

Next let me move to our risk management segment, which is primarily Gallagher Bassett.

First quarter organic growth was a solid 4.1% with no significant variance between domestic and international operations.

We recently announced our new GB specialty division, which is focused on the resolution of complex claims in construction, health care, transportation and products liability.

This has been an area of growth for Gallagher Bassett, and the new GB specialty team will be showcased at the annual RIMS Conference in Boston next week.

Also on display at RIMS will be our new treatment quality index and our smart claim benchmarking methodology, 2 recent examples of innovation that GB is utilizing to drive superior claim outcomes for our clients.

And finally, I'll touch on what really makes our company unique, and that's our culture.

It's a culture that emphasizes doing things the right way for the right reasons with the right people.

Just last month, Gallagher was recognized by the Ethisphere Institute as one of the world's most ethical companies, an award that underscores our commitment to ethical business standards and practices.

This is of our eighth year in a row receiving the award, an accomplishment less than 40 companies globally can claim.

And we were once again the sole insurance broker recognized.

This distinction is a direct reflection of our 30,000-plus colleagues united, working as a team, grounded in the Gallagher way.

Every day, all of our people get up and work diligently to maintain our culture, to promote our culture and deliver our culture.

Okay.

An excellent quarter on all measures.

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

Doug?

Thanks, Pat, and good afternoon, everyone.

As Pat said, another really excellent quarter of top line results and a strong way to start off 2019.

Today, I'll make a few comments referencing the earnings release.

I'll then move to the CFO commentary document we posted on our website, and then I'll wrap up with some comments on cash and M&A.

Okay.

Let's turn to Page 2 of the earnings release to the brokerage segment.

You'll see that we posted $1.45 of adjusted earnings per share.

As you compare our results to your models, it looks like there are about 3 puts and takes compared to consensus.

First, it looks like contingents came in better than most of you thought, call it an additional $8 million or about $0.02 after incentive compensation and taxes.

However, there are 2 offsetting items.

First, it looks like your picks for M&A rollover revenues were above our March 12 guidance by about $8 million or $9 million.

And second, noncontrolling interest picks were lower than our March 12 guidance by about $2 million to $3 million.

Combined, that's $10 million to $12 million or about $0.03 after expenses and taxes going the other way.

So net-net, these items about offset, bringing us back to about $1.45 of EPS or even $1.46.

One last comment on Page 2 of the earnings release.

Only one significant non-GAAP adjustment this quarter, a onetime $0.17 net gain from divesting of some smaller brokerage operations in the first quarter.

It's a bit of old news given we discussed the largest one during our January earnings release and conference call but you can see it there now.

Otherwise, a very clean quarter.

Next let's turn to Page 3 of the earnings release, to the brokerage segment organic table at the top of the page, and then go down a little bit to the contingent revenue section.

That's where you'll see contingents being organically up $8 million in the first quarter as I just mentioned.

About half of that arises because 2018 developed more favorably than previously estimated.

The other half is due to new agreements and a slightly more bullish outlook for 2019 based on our view of premium growth and rate increases.

But remember that new GAAP accounting requires us to estimate these amounts many times a year or so before we receive them.

So it does create a lot of estimation risk.

Loss ratios look decent now, but if those deteriorate over the year, contingents might not develop as we currently expect.

Next let's turn to Page 4, to the brokerage EBITDAC margin table in the middle of the page.

Terrific margin expansion this quarter, up by 61 basis points.

Actually, it would have been even better given stronger contingent commissions, but offsetting that is the roll-in impact of M&A, which did compress margin expansion by about 60 basis points.

The dilutive impact of mergers on our first quarter may actually happen annually.

With first quarter now seasonally our largest, you'll see margins are over 35%, and then they drop into the mid-20s in later quarters.

You can see that in last year's numbers.

Very few of our merger partners have that type of seasonality, especially in our P&C mergers, nor do they run annual margins that high.

So most of them will naturally be dilutive to margin in the first quarter but wouldn't have that impact on a full year basis.

In the end, stronger contingent revenues offset by M&A roll-in margins about wash.

So being up 61 basis points feels about right when posting base organic growth of about 5%.

Still on Page 4 but moving to the risk management segment organic growth table at the bottom of the page.

You'll see that we posted 4.1% organic growth.

That feels right for the full year.

However, we see a little lumpy.

We see more like 2% in the second quarter because of a difficult comparison to last year's second quarter when we posted over 10% organic.

So again, it will be a little lumpy quarter-to-quarter but somewhere around 4% to 5% for the year.

Turning to Page 5, to the adjusted margin table at the bottom of the page.

17 points of margin, that's up over 60 basis points, and right at the lower end of our 17% to 17.5% range for the full year.

We still feel that, that range seems about right for an entire year.

Turning to Page 6, to the corporate segment table.

Interest and banking line and the acquisition line, right in line with the guidance we provided at our March 12 IR Day.

Clean energy actually came in a little better than we thought at that time mostly due to better production in the last half of March than we saw in the first half of the month.

And finally to the corporate line.

With tax reforms settling down, we have collapsed the line we previously called impact of U.S. tax reform into the corporate line.

During our March IR Day, we forecasted those 2 lines combined to a $14 million after-tax loss.

You can see we came in about $4 million better, but much of that is timing of a couple of tax-related items.

So when you get to the CFO commentary document, our full year 2019 forecast for this corporate line hasn't changed that much.

So let's go ahead and shift to the CFO commentary document that can be found on our IR website, to Page 2. You'll see that most of the first quarter items were in line with our March 12 forecast.

And looking forward, foreign exchange integration and amortization are fairly straightforward.

Then when you get to Page 5, that's where we provide our estimate for rollover revenues from M&A.

As I mentioned before, please take an extra few minutes to tighten up your models for your roll-in revenue picks.

And finally, cash and M&A.

At March 31, we have around $700 million of available cash on our balance sheet.

About $350 million was used in early April to close on the Stackhouse merger, leaving $350 million as free cash.

That plus expected free cash for the remainder of the year and maybe some more debt should bring our full M&A capacity to around $1.5 billion before using any stock.

So those are my comments.

A truly excellent quarter, and we're in a terrific position for another successful year.

Back to you, Pat.

Thanks, Doug.

Jeremy, I think we can go to questions.

(Operator Instructions) Our first question comes from the line of Elyse Greenspan from Wells Fargo.

My first question, going back to just the organic guide for the year, you guys would say that's 5%.

So is that guide all-in?

Or is that before the impact of contingents and supplementals?

And I guess as part of that answer.

I believe at your March Investor Day, you guys had said that the Q1 is seasonally weaker on organic.

Is that still the case?

Would you expect the remaining 3 quarters be above the first quarter?

And is that a comment both before and after considering contingents and supplementals?

All right.

A lot of questions there.

I'll jump in on, and if Pat wants to add, he can.

I think that when it comes to base contingents -- or excuse me, base commissions and fees, somewhere in the 4.5% to 5% range -- 5.5% range seems about right, right now.

When it comes to contingents and supplementals, the positive development we have from last year and then our -- a little bit more bullish outlook here in the first quarter, I would hope that would continue for the rest of the year.

Where does that all stack up, maybe a brokerage total organic between 5% and 6%.

Does that help?

Yes.

And then in terms of the margin guide so -- or maybe just some color going forward.

So 60 basis points this quarter and then you did 0.2 negative impact from some of the recent deals that you've done, which I would resume should benefit margins during the out quarters.

So can you give us a sense of just the type of margin improvement we should expect to see just given if organic remains in line kind of that 5%, 5.5% range, what kind of margin improvement we could see in brokerage?

Yes.

I think that -- like I said, I think that for the full year, if we post between 5% and 6%, maybe the full year will come in at 50 basis points of margin expansion for the full year.

Gets a little harder later in the year when raises go in.

As for the impact of M&A, it's mostly pronounced in the first quarter.

In this case, the acquisitions that are rolling in right now don't have big seasonality in them like we had last year in the third quarter.

So because we posted nearly 36 points of margin this quarter, the impact will be more dramatic in the first quarter.

When you get to the second and third quarter, maybe it's 10 basis points, something like that.

10 basis points negative or positive?

That should be a little positive in those quarters.

And then my last question, in the U.K., a couple of things going on.

We've had some of the wholesale and the other reviews going on, they've kind of been settled.

And I know in the past, I felt like you guys insinuated that however those reviews kind of shipped out that this could be an opportunity for Gallagher to take advantage.

And so could you comment on what's going on over there?

And then also there has been a sizable deal by one of your peers.

And I would think if there's any kind of shakeout that maybe you guys could benefit either in the U.K. or other areas.

So are you seeing that impact your U.K. opportunities as well?

I mean start with the JLT aerospace, that was a great opportunity.

That came to us because of the EU and the -- our competitors getting (technical difficulty) so yes, I think there is going to be great opportunities frankly globally, and we just will take them one at a time.

We'll take a look at them, and we'll be cautious.

It will not just be London-focused by any means.

In terms of the London market and how we trade, we are confident from the beginning that the way the wholesale business was run and managed was going to come through review just fine.

And that's in fact what happened.

So what you're going to see is business as usual, but it does get more costly to operate in London.

Regulatory pressure is greater and greater, and that gives us opportunities on the M&A side and the team recruiting side.

So really Gallagher is in a very good spot in London, around the U.K. and globally to take advantage of some of the dislocation.

Our next question comes from the line of Mike Zaremski from Crédit Suisse.

First question is on -- probably to Pat on the pricing commentary.

Any thoughts on what the impetus of why pricing is increasing?

Do you think it has momentum?

And maybe also any bifurcation in pricing between small, middle or large accounts?

So if you take a look at our results, and this is -- and I've said this probably almost every quarter.

Typically, we've said rate and exposure has contributed something like 1% of our organic growth.

This quarter, it was probably closer to 2%.

So when you hear my commentary on the rates around the world, don't take them to mean that we're facing a firming, hard market.

There's offsets to that.

When D&O goes up, workers' compensation is likely to go down.

If you look at the last probably 11 or 12 years and you look at a graphic of what's happened to PC rates, they'll go up 2%, they'll come down 3%, they'll go up 4%, they'll be 5% flat, that is a really good market for us.

I grew up in an environment where every 10 years there was total dislocation, rates were jumping 50% to 70%,

insurance was a complete sellers' market and clients were really unhappy.

The market would then start to soften, and anybody that had a license could beat you on a price sometimes very substantially just by getting to a market that nobody thought even had appetite.

So with a market like this, our skill set really makes a difference.

No one out there can just run to XYZ company, get this crazy [logo], I mean it does happen from time to time, but it's just not a general rule.

So when we're working in the 2%, 5%, 3% up, 4% down environment, then the skill set makes all the difference in preparing the risk management approach for the client.

So this is really a good environment, a little firmer, and that's really what I want in my remarks to say.

Don't go out and say, wow, we're going into a hard market.

A little firmer, and I think that's probably justified by cat losses and by some capacity shrinkage, in particular, in the London market, and by other disciplined underwriters.

You saw Travelers' results.

I mean those guys are -- they're smart underwriters.

Okay.

That's helpful.

Maybe for Doug, the restructuring initiatives, you took last year some of the charges, is there kind of a rule of thumb on the payoff for those in 2019?

I don't know if there's like a -- is it a one-for-one or a 50% payoff you'd get in the subsequent year.

Just thinking about margins.

I think that in terms of what we did for some of the headcount reductions that we took last year, we actually reinvested that into data and marketing and some of our system needs and including cyber.

So the actual payback on the displacements directly was pretty high.

The payback came probably within about 9 months.

But we turned around and reinvested that into our data initiatives, which are really taking off well.

I think that you're seeing that we built another service center, that's really paying benefits there.

So we reinvest it, but the payback on that actual takeout was pretty fast.

Okay, guys.

And if I could sneak one last one.

I'm just curious, and maybe it's too early, but do you know if the intern class for 2019 is growing versus last year?

Yes.

It's going to grow a bit.

I mean we're kind of getting to the stretch point at 450 young people coming in to learn about our business, but it'll be up a skosh.

Our next question comes from the line of Ryan Tunis from Autonomous Research.

First, I had a couple for Doug on just trying to understand what's going on with these contingents.

First of all, should we think about -- I mean the upside that's being driven, you said it's $8 million.

Is that pretty much 100% margin?

Or is there a cost associated with that variance?

First answer to that is typically the contingent commission line is what helps fuel the incentive compensation for a field leadership.

So I would not say it's 100%.

It's probably more in the 60% range that would hit the bottom line.

Okay.

And then I was a little bit -- I think it was from Elyse's question.

Doug, it sounded like you thought that there might be the possibility for more of this favorable development over the remainder of the year.

Could you just give me some idea of what exactly was driving that in Q1?

And what potentially could make that continue to be additive in the coming quarters?

Yes.

I think to understand it I think you've need to -- I think that if my memory is right, we had about $90 million of contingent commissions last year.

So when we're talking about tightening up a $90 million estimate by $3 million or something like that is really what's happening here.

It's not a big variance around the pack, right?

Second of all, in our case, we might have several hundred or more contracts that all contribute, some of them bigger, some of them smaller, to the contingent commission number.

So we're talking about a very small change in estimate on a per contract basis.

Looking forward, if we had good performance in 2018 on these contracts that developed a little bit better, it probably stands to reason that we might have a little bit better development on 2019 assuming we don't have loss ratios deteriorate substantially between now and the end of the year.

So as we ask -- or as we stand here in the first quarter and we're trying to estimate what we're going to get a year from now, we might be a little bit more optimistic today than we were a year ago at this same time.

So maybe it's a couple of million bucks, but I don’t know if there's a large trend here.

I think it's just more just tightening up our estimates on a large variety of contracts.

Understood.

Okay.

And then one on the M&A pipeline, I think you said that there's $350 million in the pipeline.

Just curious how much of that -- if you could give us some idea of how much of that are these bigger type of acquisitions?

I mean Stackhouse is obviously very big.

Or is most of that $350 million the much smaller deals that we're more accustomed to?

When you take a look at the number of acquisitions that are in the pipeline, the dominant number are small tuck-ins.

But you're right, there are 1, 2, 3, 4 in there that are sizable that would be substantially bigger than even a number of the tuck-ins combined.

So it's a very -- it's an eclectic mix.

It's across the entire set of our geographies.

As you know Stackhouse Poland was U.K. There's others in there that are a little bit sizable that are in the U.S. But by item count and as we do our announcements and put out our press releases, most of those are going to be tuck-ins.

Yes.

And when we say sizable, too, we're talking about $20 million to $50 million-type revenue shops, too.

So Pat, do you think we'll see another $100 million-plus deal this year?

Yes.

(Operator Instructions) Our next question from the line of Yaron Kinar from Goldman Sachs.

As a follow-up to Doug's answer to Elyse's questions on margins.

Did I understand correctly that you're thinking that, that margin expansion will be in the 10 basis point range in the second and third quarters?

No, that would be the impact of roll-in acquisitions on the margin expansion in the second quarter and third quarter.

Okay.

That's helpful.

And can you maybe talk a little bit about some of the other puts and takes that would go into margin expansion throughout the rest of the year?

One of the things that we're -- wage inflation does exist, but we've been fortunate since 2005 to have invested substantially in our journey on creating some lower-cost labor locations.

Right now, we have 6 locations around the world.

We're pushing 5,000 employees there.

And so as a result of that, we have a little bit of a safety valve on wage inflation.

So we think that our productivity lifts not only using our off-shore centers of excellence but also through technology investments that we're making can help offset that natural wage inflation that you're seeing out there in the market.

Competition for talent is getting tougher, but we do believe that we have a safety valve for that.

So pressures on the margin are going to come from wage inflation.

You're seeing the real estate costs are going up.

So that's in there, but we have techniques in order to better utilize our real estate footprint.

And then also just the amount of money that's necessary in order to have a rock-solid cyber platform in order to be able to deliver the technology needs, that's an expensive proposition in itself.

So looking at margin expansion, when we have 5% organic growth if we can do 50 basis points of margin expansion it's really good, especially when we're talking about 450 interns that are coming in.

We're talking about cyber.

We're talking about wage inflation.

We're talking about other services that are so necessary for our clients in the placement of their insurance and then also paying their claims.

That's really good work for us to be able to harvest that kind of margin expansion.

Got it.

And when you look at some of the larger acquisitions, Pat, I think you said there may be something in the $100 million or more range coming in, or the JLT aerospace business.

Are those immediately margin accretive?

Or are they dilutive and you need to do a little bit of integration there?

How should we think about that?

Depends on the nature of the business.

I mean we're not afraid to go out and buy a really well-run shop that's for some reason is running 20 points of margin even though we're coming in the high 20s in terms of the brokerage margins.

If there's something about the way their business is run and what the clients need for service, we would not be afraid to buy a 20-point margin business just because it would roll in to our business and maybe be slightly dilutive on margins.

The point is it's about the growth.

What is their EBITDA doing?

How do we have an opportunity to be better together?

So most of the ones we're looking to tuck in, they come in pretty close to what we're at.

And I would say, yes, that -- and I would say some of the big ones, I think, they'll come in close to our margin once we've had them onboard for a bit.

When we bring in a sizable PC or benefits operation and then get them moved to, as Doug was talking about, our centers of excellence where our lower-cost labor is, we impact those margins favorably.

So I think you should look at them as probably coming in pretty close to what we've got.

Our next question comes from the line of Mark Hughes from SunTrust.

I'll ask the usual question about the workers' comp.

Just sort of curious, Pat, you've -- I think you've expressed in some recent quarters that you've seen an uptick, but we don't seem to see that flowing through to any of the carriers' losses.

None of them are really describing any sort of uptick in frequency.

No.

No.

No.

I've not said uptick in comp.

I've said just the opposite.

We've seen decreases in comp...

Oh, I'm thinking claims frequency.

I'm sorry, I misspoke.

Yes.

I was thinking of claims frequency.

Just sort of curious to get your latest thoughts on that.

We are seeing about something like 2.5% increase in the claim count that's coming through Gallagher Bassett on existing business.

I think that's because the economy is robust.

You do have more people working, and they're working longer hours.

You also have the whole distracted driver thing, which is really driving a big part of the auto market being very tough, but it also was bleeding over into some of the losses in the comp world.

And so I think that's a natural thing.

When we go into some form of a recession, our claim counts generally drop pretty substantially because our clients are reducing workloads and closing down shifts.

Now shifts are pretty robust, and you have a little bit more -- and hopefully, our clients' loss control that we assist on can help mitigate that.

So the uptick in claims is a good thing but a bad thing, and we'd rather be on the side of preventing than counting them.

It seems like the risk management growth, the 4%, still good organic, but you've had a very strong and stronger growth in the past.

Is there anything that's a restraint on the growth?

I know you've got a tough comp in the second quarter, but aside from that, anything holding the growth back there?

No.

In fact, I think what's happening is, Mark, there's even going to be more and more differentiation around outcomes.

And that's what we're out in the marketplace talking about.

Two things that I think are going to make a huge difference over time in that business.

The idea that you can just, as a risk manager or as a buyer of these services, just keep pushing down the price and get the same work for cheaper, cheaper, cheaper, that's a cheap thrill.

And it's going to start to show up very, very clearly an outcome.

The other thing is I think you're going to find more and more carriers and captives outsourcing their work either in lines of cover that they want to get into, geographies they want to get into and in some instances, full-on situations like their entire risk management book.

It's becoming a much more relevant approach.

So I think the really good providers in the claims business globally have an unbelievable future.

4.1% was a very nice quarter given the comparable to last year.

And I think, Mark, if you look at it, we had 4% in '17, we had 7% in '18 organic growth.

Some of that -- some of the business that comes into our risk management segment can be kind of elephant hunting as we pick up some larger like work comp -- WorkCover schemes down in Australia and some of these larger governmental programs, and then carriers too tend to find that our claim outcomes are pretty compelling so they start bringing work.

So it wouldn't surprise me that this is a business that you see 5% 1 year and you see 8% or 9% another, and there is a little bit of the impact on that.

This year, if we can bring it in at 5%, between 4% and 6%, I think that'd be a pretty good year coming off of a total of 7% last year.

Our next question comes from the line of Josh Shanker from Deutsche Bank.

I'm going to try one more that everyone's trying to throw a curveball, and I guess I'm into the same thing.

There's just a lot of talk about market conditions changing.

Can you tell us anything maybe about difference of flow at RPS versus your retail outfits in terms of market conditions causing a change in the way people are buying insurance?

Yes, definitely.

I can tell you that.

In fact, as an example, coming out of London.

So when markets get a little dislocated, people start to search the world market for capacity and for rate.

And so submissions at RPS are up nicely.

Now an awful lot of that too comes from the fact that we're spending heavily at RPS on marketing.

We're doing a lot with the independent agents around the United States.

Our MGAs, MGUs in Australia, Canada and the U.K. are having good years as well.

So yes, I think that what you're seeing is as people face -- and in the catastrophe-related areas, in particular, if you're looking at a 10% to 20% increase, that retailer is going to take it out and shop it.

And that bodes very well for RPS.

And to what extent is it structural that business is just leaving Lloyds, I guess.

Is that business that will not return there?

Or is the market always going to be in flux?

I think the market will always be in flux.

I've only been at it for 45 years.

It ebbs and it flows.

And I think that's not a bad thing for clients.

The capacity, the capital, is pretty global in nature.

The insurance-linked securities world is something that's developed strongly over the last 20 years.

That adds a whole another element to capital for clients.

And clients are smart.

They know where -- they find good capacity wherever it's located in the world.

Our next question comes from the line of Meyer Shields from KBW.

I just had a very basic question.

It sounds like things are run really, really well in the U.K. Would they be stronger without Brexit as an overhang?

Or is that really just not making a difference?

I don't think it's making a difference.

I mean it's driving everybody crazy.

You can't -- I mean you can't get up in the morning without having that be the topic of conversation, and it's in every newspaper.

And you've got a whole group of people who are actually wanting a hard Brexit.

You got other people saying, "Oh my God, our entire farm economy is going to collapse." Who knows?

It's a distraction to, I think, all the citizens of the U.K.

First of all, we don't do all that much business in our London base with the European Union.

So we've got to be cognizant of how that business has to be done, and we are, and we know how to do it.

But 99-point-plus of our business is not coming from the EU.

So the overhang for us with regard to Brexit could be if there was an economic slowdown, then our retail business would hurt because exposure units would drop.

The wholesale specialty business in London, I don't think it's going to have much impact.

Our next question comes from the line of Elyse Greenspan from Wells Fargo.

Just had a few additional questions.

My first, so in response to an earlier question, you guys had mentioned that there could be another $100-million-plus deal this year.

Obviously, you also throughout the call mentioned the big pipeline that you see.

So does this all -- even if there isn't another $100 million deal, I guess this all would be able to be satisfied with the cash that you have on hand.

And Doug, you made a -- can you -- if you can just respond to that.

And then also Doug, you made a comment in your introductory comments that there might be some additional debt.

Could you just help us think about those 2 things?

Yes.

What I said was is I think we'd do about $1.5 billion of acquisitions this year using only free cash and debt.

And when I talk about debt, we're very cognizant that we want to keep our debt ratio squarely in the investment grade level.

There is an opportunity for us to buy a few more shops this year and put some more debt on it.

I think that it will be in the third or fourth quarter that we have to decide whether we burn through our cash and debt capacity and whether it makes sense to use stock in acquisitions.

At the end of the day, if you really look at the multiple that we pay, we're right around 9 in the first quarter, 9x EBITDA.

We've -- that would be 8.3x if we didn't have one particular international transaction that we did.

So we're still seeing a terrific arbitrage to our trading multiple in that right now.

So there are tremendous opportunities to be in that 8 to 9x range.

And we'll see where we get in the third quarter, whether it's something that we'd have to use any stock on.

Okay.

Great.

And then my last question.

So you guys have given us the guidance for your clean energy earnings assuming that those 2009 Era Plants, now that the law's expired towards the end of this year, I believe it was kind of like the end of November where you would stop generating credit.

So I guess we're still about half a year away, but do you have any kind of update on the legislative front or if you think maybe some of those laws could be extended to allow you to continue generating credits?

Yes.

I don't have any insights today on the legislative front, where we might be in terms of law changes on that.

But I do know that one of our large workhorse locations in our 2009 Era Plants, we have completed substantial engineering that will allow us to maybe take a lower utilized 2011 Era mixer and shift it into that location.

So we feel like the dropoff between 2019 to 2020 will not be nearly as great as we thought before, assuming engineering goes favorably [and our usual partners] happen, even with or without any type of law change on it.

Is there any way you can quantify that?

Or would you rather wait, I guess, until you give guidance later on for next year?

Yes.

Let me give guidance on it because I just want to make sure that we've got that.

But I think that if you look at -- I think there's about $17 million or $18 million of production that comes from that Era Plant.

I think it's on Page 4 or 5 of the CFO commentary.

And that -- this one plant is probably 60% to 70% of that number or 60% of it.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

And I would like to turn the call back to management for closing remarks.

Thank you, Jeremy.

Thank you again for being with us this afternoon.

We had a great first quarter, and I would like to personally thank all of our employees across the globe for their hard work and our clients for their continued support.

2019 should be another great year for Gallagher.

We look forward to speaking with you at our June 13 Investor Day and have a great rest of the evening.

Thank you for being with us.

This does conclude today's conference call.

You may disconnect your lines at this time.