Arthur J. Gallagher & Co. (AJG)

Investor meeting

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Jun 13, 2019

Good morning, everyone. I'm Ray Iardella, Head of Investor Relations at Arthur J. Gallagher. I want to welcome everyone to our second quarter. I'm sure this is. Investor Relations meeting, including those of you here in Rolling Meadows, and those of you who are listening in via the webcast. We have a great lineup of speakers today. The format's going to be very similar to what we've done in the past. Each speaker will probably give 15 to 20 minutes of prepared remarks, and then open it up for Q&A for those of you here in Rolling Meadows. We do have a microphone here in Rolling Meadows, so for the benefit of those listening in via the webcast, please wait till we get to you to give you a mic so everyone can hear the question that's been asked. Additionally, we just handed out our updated CFO Commentary document, and we posted the same document to our website at www.ajg.com/june13materials. An 8-K regarding this information was filed this morning as well. Before we get started, I'd like to make a quick legal comment. Some of the comments made during today's meeting, including answers given in response to questions, may constitute forward-looking statements within the meanings of the securities laws. These forward-looking statements are subject to risks and uncertainties that may be discussed today or described in our reports filed with the SEC or our CFO Commentary. Actual results may differ materially from those discussed today. With that out of the way, I'm going to hand it over to J. Patrick Gallagher, Jr., our Chairman, President, CEO. Pat. Thank you, Ray. Patrick, you have me on? Thank you. Welcome again, everybody, really appreciate those of you that have traveled and are spending your time listening to our story. We appreciate your time, and we appreciate your interest. The day will probably follow, as I look around, I see an awful lot of familiar faces. I know many of you have been to our investor days over the last number of years. The format will stay pretty much the same as what you've seen. Our senior leaders will address the four areas that we focus on every single day to try to continue to grow the shareholder value of the company. Those four things, of course, are organic growth, which means that we focus very hard on going out and generating new business. We have a huge effort afoot to always make sure we retain and renew the business we have. I'm proud of the fact that in most quarters, we stand out as one of the better organic growers in our industry. The second thing, of course, is mergers and acquisitions. This is a core competence of the company. I'll touch on that a little bit in my prepared remarks, but we're really good at mergers and acquisitions, and we have a pipeline like I've never seen in my career before. The third thing is productivity and quality, and you'll hear people talk about our Centers of Excellence. We're now up to about 4,500 people in India. We have another Center of Excellence that's growing in Las Vegas, and a small center in the Philippines. The work that comes out of these centers has made us a better company, has really created a lot of value for our clients, and of course, has created a lot of value, I believe, for our shareholders. The fourth thing, of course, is our culture. I'll spend a little bit of time on that. From a CEO's vantage point, where we are as a company today, I think we're in a really sweet spot. When you talk about market rates, people are talking about, well, this is great. Rates are firming. Yes, you can say that there are firming rates in various lines. By and large, the rates and exposure units are contributing something on the order of 1%-2% of our organic growth. For someone that has been in the business for 45 years, this is not a hard market. Sometimes various lines of coverage will become hard. For instance, right now it's difficult with transportation. Some large property schedules are having some difficulty. The London market in itself is seeing some dislocation. The fact is, when you look at the rate environment overall, comp is a little down, property's a little up. If you're seeing something like a 2%-3%, what the world would like to call a tailwind, I still refer to that as a flat market. When I look at our organic growth, I see very similar to what we saw in 2018. I feel like organic, we did 5.5% in our first quarter. I think we'll probably be right around 5% again for the year. Again, what we're doing every day is focusing. When we focus on organic growth, we're very strong in our verticals. In those verticals, there's about 30 niches that we know that we're as strong as anybody in the marketplace, if not stronger. We're doing an awful lot to continue to hire talent. We have a program called HireRight, which is going out to find people that are good salespeople in different industries and bringing them here to teach them insurance. That's working out well, and of course, we've got our internship, which is going on right now. I spoke to the interns yesterday. We have about 450 interns that we're introducing to this great business this summer. I'm real proud of that. It's interesting. Business Insurance is starting what they're going to call the Business Insurance Institute. They want to take a lead role in trying to get the word out on college campuses that insurance is a great industry. We've been doing this for 50 years. I was an intern. When you think about the fact that we're now up to about 450 young people, we start by getting them after their sophomore year, if we can, introduce them to insurance and insurance brokerage. If they like what they see here and we like what we see in them, we invite them back for a second year. It's kind of funny, actually. After sophomore year, when you bring them in, they're still pretty much goofy high school kids. They got weird clothes and they're doing weird stuff, and they're late, and you're like, "Come on." After junior year, when you bring them back, A, they've made a signal that they like this business and they like this company and they'd like a job. B, they know the clock is ticking, and they need a job. It's a very maturing year, and it's really fun to watch that. Having these kids in the program for the summer really adds a bounce in our step. Every summer is fun. I used to say when there were hard markets, that if I ever had a tough meeting, I would take an intern because you can't yell at interns. You just can't be mean to them, right? I'd characterize the market as stable and as I said, I think we'll probably project out about something on the order of 5% in organic growth. Let me talk a little bit about mergers and acquisitions. Our pipeline is unbelievable. This week I've been in three merger and acquisition meetings with people that are very seriously looking at it. We have signed term sheets with them. We have about $400 million of revenue with about 60 term sheets. You think about it, our average acquisition that comes aboard is something on the order of $5 million to $7 million. People talk about our tuck-in prospects and our tuck-in acquisition activity. If you look at Business Insurance's July issue, which will be out next month, they do the top 100 in the U.S. There are 11 agents and brokers, ourselves included, that do more than a billion dollars in revenue. Number 100 last year did $28 million in revenue. The spread there is so huge. It's unbelievable. According to Bobby Reagan, who studies our industry and who I have a lot of respect for, there's 39,000 agents and brokers in America. Man, I don't even know if he's right, but that's incredible. 38,900 are smaller than $28 million. People ask me all the time, "Are you going to do a big deal?" A big deal when you get to number 50 is $50 million. You have this vast inventory of small agents and brokers. Bobby Reagan had a conference about a month ago in Atlanta. I was on a panel discussion there, and it was very interesting. 250 people in the audience. Probably 40 or 50 of the top 100 private agents and brokers in America represented in the room. 250 people in the room, four women, one African American, and the rest were all 60 years old or older, and they were gray and fat. They looked like me. I can say that because they looked like me. That's not the future, right? When you think about our acquisition activity, I looked out at this audience, I thought, trying to perpetuate those agencies. The other thing that's happening to them is that the spread between what they can do internally as a private firm and what they can get selling to a strategic, that spread has got to be almost 100% today. If you're a young person in the agency, sure you want to buy it from the principal at $0.50 on the dollar, but the principal's thinking, "I got to retire, and I can get $1.00 on the dollar." There's a conflict there. I think that bodes extremely well for us. When people look at us, you'll see today as you talk to each of our division leaders, each of them is working hard on acquisitions. People go, "How can you bring 50 acquisitions in in a year and change their culture and bring them aboard?" The secret sauce is we don't change their culture. If their culture in our due diligence doesn't match the DNA of our company, we don't do the deal. The reason we can do 50 is that we have so many people in each division doing acquisitions, that if the Midwest region does three in a year, it doesn't strain the Midwest region. If the Eastern region does three, and the Southeast, et cetera. That's our P&C operation. We've got that going on in our benefits operation, in our wholesaling operation, and of course, in our international operations. A lot of opportunities there for us to continue to grow. Third, productivity and quality. Really, really proud of what our Gallagher Centers of Excellence are doing for us. This is a sales point for our people in the field. We'll do about 2 million certificates of insurance out of our Gallagher Centers of Excellence this year. That 2 million certificates will go out probably within 15 minutes of the request, and the accuracy rate on those certificates will be 99.99%, and an error would be a bad number and an address. Why does that matter? Because certs are important to our clients. A, if you're a contractor and you don't have a proper certificate, you're likely to get thrown off the job. You're still paying your people, they're just not doing any work. It goes on from there. People can't rent buildings without certificates, et cetera. To be able to say to a client, "I can tell you that you're going to get them in 15 minutes, and they're going to be 99.99% accurate," that's a sales point. That's just one of about 300 services that our service centers provide to the company, to the various operations around the world, and it's a real differentiator. What you're seeing happen out there is you go back to this point of 39,000 agents and brokers, and you think about the fact that 38,900 are smaller than $28 million. You think about the capabilities that we're building and the opportunities that we're generating, and you realize that that market just can't compete. They just can't compete. We also know that 90% of the time when we go out in the field to compete with somebody, we're competing with people that are smaller than we are. The Marsh, Aons, and Willises and ourselves compete about 10% of the time. We do well against them, and they do well against us, and we have an awful lot of respect for all our competitors. They're very good firms. We all differentiate ourselves in different ways. The fact is, our capabilities as an organization are growing to such an extent that when we go out against that local broker, they just can't stay toe to toe with us. I know our division heads will go through that with you as the day goes on. Last point on acquisitions. Because we're doing so many tuck-in acquisitions and you're not seeing us do marquee names, our multiples are still staying somewhere in the eight to eight and a half times EBITDA range. Lastly, before I open up for questions, let me talk a little bit about our culture. This is our secret sauce. The culture is what brings mergers and acquisitions to us. If you think about what we're trying to do every day, we're trying to hire more people to come aboard and understand the company and go out and sell. We're trying to buy more people that are really good at what they do, that have successful businesses, and come aboard. We hire, and we acquire, and we sell more insurance. That's what we're trying to do every single day. What drives that entire thing is a culture where people will actually work together. I can't send a memo, I can't send an email out to the field and say, "Henceforth, please cooperate." That's not going to work. The fact is, I am in meeting after meeting with prospects and clients, and I see people from L.A., N.Y., Houston, New Orleans, London, Canada. The teams come together naturally. Virtually, I have not been involved in an argument over splitting commissions in years and years. Our teams just work together well, and it's a hallmark. It sets us apart. Finding the best talent to the point of sale every single time is what gives us the leg up on organic growth, and it all revolves around the culture. We like each other. We're a broker run by brokers. We understand the business. When someone calls and says, "Pat, I've got a problem with a claim with XYZ carrier. Can you get involved and help?" It's not my first claim. I've been there. I understand what they're going through, I can interact with the client in a really positive way. Again, we're really thankful for your time today. I think you're going to find that the story remains the same. I'm proud of that. I think those of you that have been following the company for a long time realize that this has basically been the same story for 25 years. We just get better at executing every single quarter, that, I think, should keep us on a good growth track. With that, I've got about five minutes for questions. Elyse? Thanks. Elyse Greenspan, Wells Fargo. My first question, just tying back on the organic growth side. Glad you've been consistent, I guess, saying about 5% for the year. I think on the last call, Doug said it could be 5%-6%, but you guys saw about a two-point pricing and exposure tailwind in the first quarter. Given what we're hearing about commercial lines prices getting better, couldn't that tailwind pick up and put you guys more towards closer upper 5s for the year when you think about- It's a great question, you did the math. Historically, the last four or five years, we've been saying that really rates and exposures have been sort of influencing us by a point, now we're saying 1.5 to 2. It's a fair question. I just think that with the competition. Remember, I think, first of all, this rate environment is really good for us. When you have a truly hardening market, when prices are going up 25%, 30%, 40%, everybody's pissed off. Nobody's happy. That leads to a lot of competition, someone that can come in with something that's 15% below you steals an account. What you've got right now is really kind of flattish. It's up. Certainly D&O's up, transportation's up, property's up, comp is down. That balances out. I'd love to see us generate 5%+. I think in terms of building models and what have you, there's a lot of competition. The other thing is when clients see prices going up, oftentimes they buy less. You can see some influence there, but you also see people go, "Ah, I'm not going to take $100 million umbrella. I'll drop it to $50 million." Our people, of course, a big part of our role is to mitigate any kind of price increase that's coming down the pike. Oftentimes, part of doing that is negotiating your commission. I think if you're building models, I'd stick around the 5. Okay. Thank you. My second question, it's still early days. Marsh and JLT closed that deal at the start of this quarter. Lots of folks we've seen in the headlines, obviously, leaving JLT or in some cases, Marsh. Have you guys been hiring more overseas? Aside from the hiring, have you guys started to see business potential opportunities resulting from that larger merger? Well, we thrive on change. That's a big change. Yes, I think we're going to see some opportunities. One of the greatest opportunities that we never would have had was the whole aerospace opportunity that we've now closed ourselves. That came about because the EU was not going to let Marsh have that market share. Dan Glaser and I got our heads together and figured out a way to help him sell a piece of the business that he needed to sell. Frankly, our folks are over the moon in terms of excited about that opportunity. If you want to talk about, do these dislocations and these aggregations create opportunities, that's the one I'd point to as saying by far the biggest, and puts us on the map literally as one of the absolute top aerospace brokers in the world. Of course, are there places around the world where there's some dislocation and some opportunities? Yes. Meyer? Thanks. You talked about how the resources that you've collected over the past few decades have widened the gap between what smaller companies can do and what Gallagher can bring. Yeah. Thank you. That's a softball. Well I like that. I'll hit it out of the park. This is kind of fun for me. I started full time in 1974. Gallagher was known to some degree in Chicago, but nowhere else. We were known as being very good at religious and not-for-profit accounts and public sector accounts. When we first started going to RIMS, nobody came to our booth. Today, 45 years later, I can categorically stand up in front of any audience, and I can say any account of any size located anywhere in the world, we can do it and do it really well. Those capabilities are deep, and they're broad. That's come about largely because of our acquisition activity. Doug has a comment that he makes, and our acquisition partners really like this. He says, "Yes, of course, as the CFO, I need to make sure we're getting a revenue and earnings stream. What the company's actually getting every time we do another acquisition is brains." Our brainpower today is second to none. It's really fun. At my age and my job, in many new business opportunities, I'm the talking head. Right? "Thank you very much for the opportunity. We're really pleased to be here today. We're honored, blah, blah, blah, blah. Now hear from our marine people," or our aerospace people or whatever. Then I do an out-of-body. I just sit there, and I go, "Damn, we're good." I mean, we're really good. These people, I'd buy from these people. When you look across the geography now, whether it's in Latin America or whether it's in Australia, New Zealand or Canada, the U.K., Europe, there's nothing we can't do. Whether it's ILS out of Bermuda or Europe, it's incredible. Those capabilities have come about because the people that we have bought have stayed. That's the secret. I was hoping you could talk a little bit about how that plays into commission rates. In other words, the fact that you can do more for clients, has that increased average commissions, or is there another way of framing it? No, as you know, we're 100% transparent with our clients, particularly here in the United States. They know every single dollar we make, whether it be contingent commission, a supplemental commission, or a straight commission. No, I don't think. Interestingly enough, people in your industry told me in 2005, going into 2006, when we went transparent, that after having watched what happened with stock selling in the '70s, that commission rates were going to get smacked. That hasn't happened. Our clients actually understand our value proposition, but it remains the same. It's not going up. Thanks. As you grow at a much faster pace than the overall industry, due to M&A largely and better organic growth, are you able to garner higher commission rates from the insurers as you gain-? No, I think that was Meyer's question. No, not really. Okay. Got it. No. We toil at about the same standard rates. In fact, we'll oftentimes, and Mike will be up next, he can talk to this. Oftentimes, what we'll do is we'll scan our book of business and find out, because we let our production force negotiate their deals, right? We don't have a placing unit and a selling unit. We'll oftentimes find out that we're actually selling at a little bit less than the contractual rate of commission that we've got with that carrier. We'll go back to the carrier and go, "Whoa, time out. Now let's get this at least to what you're normally paying." No, we're not driving more commission. Okay. Lastly, you mentioned it's tougher for the other 90% to compete against Gallagher over time as you guys have invested in the business. The companies you're buying are largely part of that 90%. Yep. Do you find that you're able to make them grow faster after you buy them, or are you buying maybe of that 90% the top, the faster growers? No, absolutely grow faster. Here's why. If you're the smaller broker, and I always use the Jones Agency, and you're in Dubuque, Iowa, or wherever you might be. You happen to be best friends with the guy that runs Iowa State University. You can't do Iowa State. Your best buddy, that's your golfing buddy, isn't going to bring you in and have you meet the board and talk about what you're going to do for their risk management program. Frankly, their risk manager isn't going to talk to you. You sell to Gallagher and the conversation changes the next week. "Mike, we do more colleges and universities than anybody else. Can I at least introduce your risk management team to the folks that I've now joined?" Of course you can. We get a bump in organic growth from that potential that that smaller broker has never been able to eke out of the market. We put them on a new plane. Why that's important is multifold. Again, part of that is, that's part of the excitement of joining us. Again, if the seller comes aboard, takes his money, and we're paying a lot of money for these properties, and they can go to Florida. They can go to Florida the next day. If they do, that acquisition will not work out very well. If they stay, our returns are substantial because we bring them in, we tuck them in, we surround them with opportunities, we help them build their book of business, and to your point, they grow faster. I think that's one of the reasons we do so well in organic growth, is that these people come aboard, they're stoked, they want to go out and sell more. They've got a whole host of companies they couldn't call on before. The largest contractor in Des Moines isn't going to talk to you, Mike. It's not going to happen. We're really, really good at contractors. Let's go. That helps us grow the business. Mike, that organic doesn't show up in the first year. That's a good point. Just to set the table straight. All right. Is that it? Any more? Okay. I'm done. Thank you again for coming. I really appreciate it. I'll turn it over to Mike Pesch. Next up we have Mike Pesch. Thanks, Jim. He's the leader of our U.S. Retail Property/Casualty Operations. Mike, the next 25 minutes are yours. Good morning. Thanks for taking some time this morning. Like Ray said, my name's Mike Pesch. I'm responsible for our retail Property/Casualty operation here in the U.S. I've been with the company now going on 27 years. I was an intern back in the early 1990s, so it still blows me away. I spoke to our team yesterday, our interns, and seeing a room full of 450 young people is just really impressive because I came from a class of about six back in the early 1990s. To see what it's become is just tremendous, and the opportunity for those folks going forward to help us not only perpetuate our own firm, but to help grow organically is just tremendous. I'm really excited to be here. The business that I run, the Property/Casualty operation, is about $1.4 billion in overall revenue. It makes up about 30%-33% of the overall enterprise. We're located in just about every major geography here in the U.S. Margins right in the mid to upper 20s, and organic growth in the single to upper single digits. It's a great business that runs very efficiently and effectively. I took this role in 2016, since that time, we've had a great stretch of growth and opportunity. I'll talk about the same four things that Pat shared with you. I'll talk about organic growth and some of our strategies that we're doing to make sure that we're continuing to grow the business. I'll talk about M&A and where I see that going here in the U.S. and what our opportunities are. I'll talk about productivity and quality, and where we're seeing our use of our service centers and what's next on the agenda for us here in the U.S. I'll finish up with our culture, and then some questions. From an organic growth perspective, I heard a lot of talk about the marketplace and so forth, and I'll get into that. Some of our core strategies, our key strategies, center around, and you may notice this lapel pin. I've talked about it in the past. It's our value proposition that we call CORE360. It's our way of differentiating ourselves from our competitors. As an insurance broker, and I started in this business as a producer, and I was telling our young people yesterday, we sell a product that somebody already has. Never in my career have I ever picked up the phone to try to get a meeting with somebody, I told them we were going to come out and talk to them about their insurance, and they were like, "Oh, my gosh, we need that. Can you please come out here right away?" Right? It's a challenge. How do you differentiate yourself? The CORE360 concept is about walking a client through all the different things, all the different resources and tools that we continue to invest in and reinvest in to differentiate ourselves from our competition. It's not just simply about going out to the marketplace, getting a price from the carrier, and coming back. That's basically the difference when we talk and Pat talked about maybe some of the smaller brokers out there who we compete against and their model and maybe their aging model of simply being the provider of coverage. Instead, now providing resources and tools that help make those clients better, help make them safer, help make them better at whatever it is that they do. That consultative approach is really a big part of what we have to think about and do every single day. I'm very fortunate that we're able to take a lot of the proceeds that we make every single year and not only contribute to our EBITDA growth, but also reinvest back into the business in a way that helps our clients become better at what they do. That's basically, we are the intermediary, right? We are the intermediary between the insurance carriers and the client. We've got to make sure that we help those customers become better at what they do and use the kind of resources and tools that we have at our disposal to do that. We're constantly looking for unique ways to add to the CORE360 model. Some of the ways we do that is through building out coverage platforms. I've talked about this in the past. We have what we call the Gallagher Advantage Suite of products. That's where we've used our experts in the field, whether it's in cyber or environmental. The newest one that we've just rolled out in the last month is a proprietary flood program, because flood is really a peril that a lot of folks are dealing with day in and day out right now. We just launched that over the last 30 days, and we're expecting that to not only contribute to our organic growth, but to solve our clients' problems. It's got bells and whistles in the coverage form that are unique, that are different. In many ways, we've partnered with our sister company, RPS, to go to market to deliver this product. The Gallagher Advantage Suite of products is one of the ways that we differentiate. In the past, I've talked about SmartMarket. SmartMarket is our way to connect our clients and their needs with the carrier's appetite. It generates to us about $20 million of income, it also creates an efficiency platform for our producers. You heard Pat say, our producers are the ones that are going out there and negotiating with the carriers to make sure that they got the best-in-class coverage. They do that on an individual basis. We don't have a placement facility. For our carriers to match their appetite properly with our clients' needs and our clients' wants is really, really important. It's a very inefficient part of our industry to have the carriers wondering and guessing what you have in your pipeline, what you have in your book of business. We've eliminated some of that efficiency through SmartMarket. That's why there is some compensation for us, but it's an efficiency play for the carriers, and it connects our producers with their appetite in a way that we won't ever miss an opportunity to place a client's piece of business with a carrier if it's in their appetite. It's a technology-based thing. We're rolling out 2.0 right now where it'll be a handheld device sort of mechanism where our underwriters and the underwriting reps can go out to our facilities and understand what's in our pipeline at a moment's notice and be ready to offer a quotation. Talk about product development. One of the things that we focus in on every single day is our niches, and we continue to build out resources and tools that are specific in our industry verticals. We have about 33 industries that we have very specific leadership around, and those folks, we call them managing directors, are responsible for driving content, driving information out to our customers, out to our producers to make sure that our producers are at the cusp of everything that's changing in that industry. Great example is construction. I would put us at the top of the list of construction brokers here in the United States. We've got some great leadership in our construction practice. They're constantly putting out things that our producers can use, whether they're actual tools and resources that they can use at the point of sale or content that they can use to educate their customers or educate their producers about what's changing in the construction industry from a risk management perspective. It helps us differentiate ourselves in the marketplace rather than being a generalist. The day of the generalist out there is over. A lot of those folks that are smaller firms built their businesses based upon relationships, but being a generalist. Our ability to take their market share or convince them to sell to Gallagher because we have this expertise is what helps us perpetuate that organic growth. Cross-selling, you're going to hear from Bill Zabel a little bit later today. It's a big emphasis for us to make sure that our clients are aware of all the great things that we can do from a benefits perspective to complement what we're doing from a P&C perspective. Talk about CORE360, Gallagher Better Works is the value proposition that Bill will talk about, I'm sure, a little bit later today. That sets us apart in figuring out what those common things are that a client needs that address both their benefits issues and their property and casualty issues. As the world gets more complex, those things are starting to merge. We're seeing it every single day. Things like the opioid crisis. The opioid crisis is a real thing that a lot of corporations and a lot of individuals are dealing with on an everyday basis. The opioid crisis has crossover effects between employee benefits and property casualty. Bill and I are working diligently with our teams to make sure that they understand how to connect those dots for our customer. Because if we can help solve that problem, if we can help a client deal with that crisis, it has a material effect, not only on their employee benefits cost, but it has a material effect potentially on their workers' compensation and other things related to employee absenteeism and things like that. I heard a little about the marketplace, a lot of questions about it. Yes, we have definite areas where there's rate pressure, and I would tell you property is definitely one of them, large property accounts. What we're seeing is there also is capacity challenges, right? We can't necessarily get the limits that we need when we need them. It doesn't necessarily reflect itself in compensation because, like Pat said, maybe people are buying less coverage, in certain cases, or taking on more risk, taking on a larger retention or a larger deductible. Of course, we're seeing it in auto. Don't think that's going to change for quite some time. With distracted driving and things of that nature, we are seeing a little bit of an uplift in auto. The complementary side of that, we're still seeing flatness to down in workers' compensation. Publicly traded companies and D&O is a big challenge, both from a capacity issue and a pricing issue. Remember, there were about 8,000 publicly traded companies in the U.S. just 10 years ago, now there's about 4,400. A lot of the plaintiff attorneys are focused in on those 4,400 and the event-driven basis of filing claims and derivative claims against them. The good news is, that is a niche that we have specific expertise in. We're able to help coach our clients through that process. Again, in this scenario, because of capacity challenges, they're taking on less limit and/or taking on more risk. It doesn't necessarily translate into, well, there's a 5% lift in rate, it's going to be a 5% lift in compensation. Doesn't necessarily work that way in a linear fashion. Again, the good news is we have a lot of firepower, both on the property side and on the D&O side, to help our clients through this process. Now I'll talk about M&A. In 2018, we did, in the U.S., about 21 acquisitions. As Pat said, when you break them apart in the different regions, we've got the team out there to help our future partners and new partners join Gallagher and integrate them without any bumps in the road. We're real proud of our team and proud of our track record from that standpoint. Like Pat said, our pipeline is really strong. There's a lot of interest out there. Yes, we do compete against a lot more competitors today than maybe we once did. I think, and we think, our value proposition and what we talk to our future merger partners about in terms of the resources and tools that they're going to get, the access to the niche resources. We talk about CORE360, we talk about the investments that we're making back into the business, both from a technology perspective and from a resource perspective, are a differentiator for them to want to join Gallagher. Failed to mention in organic growth, one of the big things that we're using, and I've talked about this in the past, is our own information to help our producers and ultimately our clients make better decisions. That platform is called Gallagher Drive. Gallagher Drive is a system that we built that helps our producers understand what others are buying just like them, what they're paying, how much limit they're taking, what risk they're taking. We use that information to help coach our clients on what the best decision is to make. Remember, our clients, for the most part, are in that middle to upper middle market. Pat said we can touch any client anywhere in the world, and he's exactly right. We have some of the largest Fortune 500 customers in our book of business. For the most part, a lot of the time, it's CFOs and maybe sometimes even CEOs who are buying the insurance. Our ability to use information to give them reasons to make good decisions when they have 17 other things that they have to do during the day is really, really crucial. When you're a merger partner and you're thinking about that, a lot of our merger partners are in that $5 million-$7 million of revenue range, their clients are just like ours. They're in that middle and upper middle market. Their customers are wondering in the whole Amazon generation of buying, which is now transcending into everything that we do, what are others just like me buying? How much are they buying? What are they paying? Who are they buying it from? Is really, really crucial information. We're continually rolling out by line of coverage, using the power of the information that we have about our own book of business to be able to go back to our customers and tell them exactly what others just like them are doing. That information, that platform under Gallagher Drive is a huge differentiator, not only from an organic growth perspective, but from an M&A perspective. It differentiates us as someone who is reinvesting back in the business, not someone who is simply just buying up revenues or buying up locations for the sake of getting bigger. We always say, we're not buying revenues, we're buying brains. You've heard Doug say that a million times. I also believe that when we buy locations, we actually get smaller as an organization because we can deliver our resources and tools closer to the point of attack. You think about, Pat used the reference Dubuque, Iowa. We could buy an operation in Dubuque, Iowa. We have one. We buy an operation in Dubuque, Iowa, it makes us smaller as an organization. We can now deploy these resources and tools on a more localized basis. The pipeline is very strong. Yes, we have some competitors, but we are getting our fair share, the ones that we really, really want, and if they're in it for the culture, if they're in it for the people, and if they're in it for the reinvestment back in their business, it's been an absolutely great situation. I'll share with you that whole one plus one equals three concept. We bought a firm in Visalia, California at the end of last year, and it was about an $18 million firm, and they specialize in Central Coast agricultural business. Within a month of closing, the principal of that firm had a relationship with a friend of his, actually, who owned an airline, a small regional airline. He never had the expertise to be able to provide aviation coverage, didn't have the capability or the access to the market, and was able to go to a meeting, brought out our aviation people, and within a week, they had BOR'd that account and took it over, and it was a significant size account. That's the kind of stuff that we talk about, bringing in the niche expertise, bringing in the capabilities. They were very focused on agriculture, and yet now they have a client in the aviation space. Productivity and quality. The U.S. was sort of the pilot for our presence in India, and that hasn't changed. We're continually looking for ways to refine and improve what we're doing in India and add to the list of things that we're doing. Pat mentioned certificates of insurance. I'll share with you our select business model, which we've now built out, and that's clients that pay us $5,000 in revenue on down. We've got a great platform for that, and we heavily use our partners and teammates in India to help service those accounts, make sure it's an efficient, effective model. Be able to make sure that we get not only efficiencies for us out of it, but make sure the client experience is very, very strong as well. We are now taking that model to our personal lines book of business for our small personal lines. We think that there's some efficiencies to be had there. Again, it's something that we're constantly focused in on, constantly looking for ways to utilize our team in India. The last thing is culture. Pat talked about it. It is the secret sauce. It is what separates us, we believe, from our competition. I'll share with you that, not only through the internship program, but Pat mentioned our HireRight program, where we bring in people from out of industry to come into the business to sell insurance, but maybe they don't have the background in insurance. They have a background in an industry vertical. That's been a huge success. We now have several hundred of those folks now in our business. We're expecting and hoping that they're going to produce great results. We also started a program called Achieve, which is sort of a similar type program that we've always had with the internship program, but for our service teammates. We have the same perpetuation challenges in the service model that we do with our production teams. We have got to get more young people interested in this business who maybe never even thought of it in the past. The Achieve Program is an entire curriculum built around bringing good young people into this business, into the service roles. It's now been in place for a couple of years and just doing absolutely great things for our service perpetuation. I'll share with you a story as far as culture is concerned. I measure culture by how well our teammates are working together and collaborating, and Pat said there's no way that he could ever send out an email saying, "Henceforth, you must all work together." We have evidence of it, and I've used this example before, if you've been here. We have an internal communication tool called Chatter. Chatter allows us to post a question about a client, a problem. Anyone can feed in an answer. When we monitor that and how quick people respond, usually it's within minutes that people are responding. Most of those people have no vested interest in helping their teammate out. They have no financial interest in doing it. They're there to help answer that question that that other producer across the entire country may have. We average about seven to eight responses within about 20 minutes. To me, that's a cultural thing that you can't teach. Someone who has no vested interest in helping out their colleague, responding quickly to their need, to their question, to solve a problem for their client. To me, that's a great symbol of our culture and something I'm real proud of. With that, Ray, maybe I'll take some questions. Any questions for Mike? Hi. Spencer Lewis with Taylor. Could you talk a little bit about what's happening with your producer growth if you exclude all the acquisitions? We hear a lot about the interns coming in. We also hear about people leaving. What's that rate for you, and has it changed of late? Yeah. That's a great question. We don't publish those results, but we monitor it every single day. Yes, we have an aging population of producers and perpetuations of those books of business. Part of the concept between HireRight is to sort of have those folks be their caddy as those books are moving out. As you bring in a couple of 100 of those HireRight people, and you're exiting those producers who are at the time of retirement, you may not have a net positive, but you don't have a net negative either. That's a good thing for us to perpetuate that book of business. Of course, you bring in a couple of 100 interns every year. It's always a positive. Again, we don't publicize those numbers in terms of the net difference. We have strategies to make sure that we're perpetuating those books of business, bringing in young people to do it. Of course, you mentioned the M&A activity. You're always going to pick up a handful or more producers when you do a deal. It sounds like it's kind of a slight modified. It's on a linear upward track as we grow. It's not something that we publicize. Thanks. Yaron Kinar with Goldman Sachs. Can you maybe talk about account retention levels? Sounds like maybe in some of the niches where you're starting to see a little bit more price pressure, maybe there is a little bit more pressure also on retentions. Yeah. Maybe you could talk about how you see that, what are the main reasons that an account actually decides to leave? Boy, I could be up here for another hour. Actually, our retention has improved over the last 12 months. It's always been in that low to mid-90s, we monitor it regularly. We also believe that the impact of CORE360 is that has now filtered through our production staff, they're using it as an active weapon to differentiate themselves from their competition, both from a new business perspective, from a renewal perspective, has helped that retention rate increase. You're always going to have that client that There's a change in buyer. That's usually the number 1 reason why we lose a piece of business is, this is always and still will be a relationship-based business. As much as we try to infiltrate technology and the use of technology, we still need to make sure that we have great relationships with our customers. Those change of buyer scenarios are always a red flag for anyone. I will tell you that our Net Promoter Score, which we just launched last year, in partnership with our benefits folks, it's a service that they provide, was off the charts. We were over 80, 83% of our customers would recommend us to a friend or colleague, which if you look at the insurance industry stats, it's less than half of that. Now, granted, that includes insurance companies and so forth, we're really proud of our Net Promoter Scores. I would not stand up here and tell you that lost business is something that keeps me up at night, because I think our team is doing a great job of making sure that our clients are getting what they need. I don't know that the market impacts that if there's proper communication. We do a lot of coaching about pre-renewal strategies, especially in a hardening market. About 12 months ago, we were a little early for it, but about 12 months ago, we did a whole training curriculum for all of our producers around hardening markets. Why did we do that? Because we hadn't really seen one in a while, and we had a lot of producers who have come into this business over the last 10 years who hadn't seen one, and by the way, neither had their underwriters. We built an entire curriculum. Every producer in the organization went through it. Of course, again, we predicted it was coming, but it was coming a little bit later. We feel like we're capable of handling any bad news and communicating that to the customer. When you started off your section, I think you mentioned a new proprietary flood program. Is it possible to give us a sense of the magnitude? You said it could help organic revenue growth. Can you kind of frame that for us? Are there any other programs like that it's a new source of revenue in the U.S. that's in the pipeline? Well, again, we don't do predictive analytics around how much revenue we could generate off of it, so I can't give you a percentage, Elyse, but what I can tell you is that flood, if you open the newspaper, you see that there's parts of our country that are experiencing floods that they've said now this is the 500-year flood. This is the 1,000-year flood. I don't know what the number's going to be anymore. Everyone seems to be at risk for that peril. We sensed that as not only an opportunity, but as a way to coach our clients who maybe were in a situation where they didn't feel like they needed to have a specific flood placement. Maybe they included it, maybe they had just the NFIP placement and that was all that they had. They weren't considering anything more than that because they didn't think that they had the exposure. We do think it'll certainly help our organic. It'll be a part of the organic number that Pat shared with you and that 5.5%, because we're solving a problem for our customer. Again, this all comes together with the tightening property market. You've got to make sure that you look at it in aggregate to say, "If I'm not buying the same aggregated limit for property, or if I'm taking on more risk, I can still add more coverage in there and have a net rate increase of far less than the market is." Again, it's not as simple as just saying we're going to now start to tack on flood coverage to every policy and it's going to create two to three points of organic. Doesn't necessarily work that way. We do anticipate it being a bit of a help in terms of our organic growth strategies. This was started in the second quarter? We just launched this program in May. Okay. Are there other programs in the pipeline? We're constantly thinking about it. I've mentioned it before in the Gallagher Advantage Suite of products. We have about 15 product lines that we have specific tailor-made coverage terms and conditions for our producers to gain access to. I think we're out of time. Thanks, Mike. All right. Appreciate it. Thank you. Next up we have Scott Hudson. He's the leader of Gallagher Bassett. He's going to spend the next 25 minutes talking about our claims business. Scott? Thanks, Ray. Everybody hear me all right? We're on? Good. Good morning. I will talk about Gallagher Bassett. Like everybody else, I'll first dimension the business. I'll get into how we're trying to drive organic growth, what we do around M&A, product quality, and culture. As you think about Gallagher Bassett, we finished last year at right around $800 million in net revenue. We represent just under 20% of the overall enterprise. We're running around 17-plus % margins. If you think about us in the context of what we pay out, we always describe paying out claims in the neighborhood of about $10 billion. We get roughly about 1 million new claims into the business every year. In terms of how we go to market, there's four different customer segments we organize our business around. One is the traditional large commercial enterprise, Costco, McDonald's and so forth, where they unbundle their claim handling from the carriers, and we work directly with them. Public sector clients, those vary a little bit depending upon where you're talking. In the U.S., there's states that we work for directly, the State of Minnesota, State of Nebraska, State of Oklahoma, State of Connecticut. We work for local municipalities. We work for school districts. Over in the U.K., it's local municipalities. Down in Australia, the way they organize down there, they actually have a lot of state-run insurance programs, and we work as an agent with them. We work directly with insurance carriers, where they're making a decision to outsource a part of their business. May be significant, may be individual states, it may be certain product lines. In some cases, it may be the bulk of their entire claim operation that we take over. There's the alternative market players, some MGAs. Captives is a significant, I've shared in the past, the captive book of business that we have, both with our techs here internally, as well as other players outside of Gallagher, is quite significant, and that's actually been a strong grower for us. Our core business is claim handling. The way we're adding value is going in and actually handling the claims on behalf of the ones that would come up related to interacting with their customers, liability type claims. Workers' compensation still represents a bulk of what we do, a majority of what we do, that number continues to dwindle, not from the standpoint that comp claims are going down, but from the vantage point that we are trying to diversify the book of business. How we generate revenue, always want to remind people that there's a couple of ways we can do it. A couple different types of contracts that we enter into with our clients. One would be on a per claim basis. The McDonald's of the world. A lot of our smaller commercial entities, it would be on a per claim basis. Sometimes that's for the life that we're working with them, sometime it's the life of the claim. Two different type of structures, two different type of fee arrangements. In other instances, the client's large enough, take a Costco, for example, we may have upwards towards 90 people working directly with them. Essentially that's a staffing model where we will charge for the cost of those people, plus a multiplier on top of that. There's some instances, primarily with our captives, but some of the insurance carriers where we work on a % of premium basis. They're looking for predictability, in their fee structure. We will work on a % of premium basis. We're around the world. Still, I would say the majority of our business is in the U.S., but we continue to grow outside, with our presence in the U.K. Throughout the world, we've got, you could round up to about 6,000 people. I think we're at 500 plus in the U.K., throughout the U.K. They do handle a little bit of European business there. Down in Australia, New Zealand, we've got north of 1,000 people, probably about 1,200 people down there in both of those countries. What's also important in terms of how we go to market is, through partnerships, we can actually handle claims in most countries throughout the world. There are clients of ours where they have a presence maybe in as many as 50, 60, 70 countries, and we'll be handling their claim activity throughout the world for them. If you look at just the basic numbers, our organic is mid to higher single digits over the last five years. Margin has been expanding a bit. It's in the 17 to 17.5 range. I'll talk in a minute about acquisitions. We've gotten a little bit more acquisitive. We're still not quite where the brokerage business is. I don't know that we ever will be, I'll talk about how we think about acquisitions as it relates to Gallagher Bassett. When we think about organic growth, the drivers of organic growth for us are a few things. With respect to the market segments that I described or the customer segments, we're focused intently on those where the, in a lot of respects, the tide's rising. The carrier market, I think is where there's a lot of upside for us. The risk management or kind of the traditional commercial space, it's a bit mature here in the U.S. There's still room to grow. It's extremely price competitive. That one where, in a lot of respects, you're kind of trying to hold your own. We've actually got a few wounded competitors here in the U.S., pricing can be a bit of a challenge, in some cases there. Our alternative market clients, the captive business, continues to actually grow quite significantly. There's nothing necessarily that we're doing, that's just volume going into the captive operations that we work directly with. Focusing on the fast-growing segments is one aspect of our organic growth. The next one is product expansion. I've mentioned this in the past. Historically, Gallagher Bassett was basically a work comp player, both here and in Australia. The fact if you look at the variety of claims that we handle now, we're getting more significantly into a variety of liability lines. More recently, I've mentioned our specialty liability business around product liability, medical malpractice. The thinking there is basically we want to be able to work with our clients on any and all risks and exposures that they may have within their respective businesses. There's also taking some of our individual service sets, where we do a lot of managed care activity, and provide services around that related to our comp product here in the U.S. If you go down to Australia, interestingly, not much of that is actually done. There's opportunities for us to export what we do here in the U.S. and push it down into the Australian marketplace. Product expansion will continue to be a significant opportunity for us. There's market and geographic expansion. There's still significant opportunity within the geographic areas that we operate. We're always keen and looking for opportunities to expand beyond that, our eyes are wide open, and I would expect, probably in the not-too-distant future, to see us working in a few more countries. The last thing that really, and it's kind of the cornerstone of how we think about our growth, is really our value proposition. We're not the low-cost provider. We're the guys that are bringing the best outcome to a claim. It's all about how we manage that overall loss experience, whether it be for a carrier, whether it be for a risk management client, whoever that might be. We are working each and every day to build within our own operation the wherewithal to be able to do that better on a day-to-day basis. Couple other statistics as it relates to growth. Retention. We've actually seen a little bit of an uptick in retention. In particular here in the U.S., that I would say it's been in the mid-90s plus. It's probably closer to the high-90s right now. I'd like to think that's primarily a reflection of the fact that our quality and service is extremely strong, and that's reflected. The challenge, as I mentioned in the U.S., it's about price in some cases, just because of the maturity of the marketplace and some of the stiff competition in terms of the willingness of some of our competitors to drop price quite significantly. Mergers and acquisitions. As I said, it hasn't been a significant component of our growth, but we've gotten a little bit more acquisitive in the more recent years. I actually see our pipeline growing a little bit. The way we think about it's not about geographic expansion necessarily, it's about adding capabilities that will drive superior outcomes. What you'll see us buy are things that are either going to expand our service set or make us stronger or better in what we do. If you go back to 2018, we bought a company by the name of WCD in the Northeast, environmental health and safety. That gets us a little bit out of the claim handling business, somewhat more into the loss prevention business. We're quite excited about what Chip D'Angelo and his team brings. In the U.K., an example is one in December. It's happening more this year. It's a company by the name of Hardiman in the U.K. They're in the property repair business, so it's a complement to when we're handling a property loss. We are actually involved in managing and assisting with that. We don't actually have the guys pounding the nails, but we are facilitating, getting people back to where they were from the beginning. If you go back to 2017, we bought a company by the name of NTA. That was all about building deeper specialization within the long-haul trucking space. As you see us move forward, I think it'll be specific examples like that that we're going to add to complement our capabilities and potentially product expansion. Productivity and quality. We've mentioned a couple of times here. Margins in the 17%-17.5% range is where we feel good right now. A lot of that is driven in a lot of respects because we're still making significant investments into the business when it comes to technology and other pieces that are critical for us to differentiate our product. There are scale efficiencies in the business. When you think about our IT operation, as an example, when you think about our HR operation, those are global operations. We do have IT professionals in the various locations, but we're running a single suite of systems that are used across every aspect of our operation. The training programs and so forth that we use to bring people on board into the organization, to help them develop throughout their careers, that's a single suite of training and development courses. The fact that we're thinking about the business on a global basis does give us some scale economies. In terms of productivity and quality, one of the things that's key is our leadership around technology. If you paid any attention to some of the announcements around our organization, there's been a number of good things recently in terms of innovations that we're putting forth. Probably the most prominent one here in the last month or two was once again, we have the best RMIS system out there. If you look at us compared to any of our competitors, that's something that the TPAs actually do offer to our clients. We actually offer it, and our carrier partners are using it. It's an integral part to how they want to run their businesses in terms of thinking about and managing their programs. We have by far and away the best tool, and it really gives us a leg up. It's another kind of aspect to the stickiness of the overall relationship. More recently, we announced a product that we're actually pursuing a patent on. It's the Treatment Quality Index. Fascinating thing here in the U.S. around how we're handling workers' compensation claims. There's care management guidelines, ODG, and other treatment pattern guidelines that are produced. What we're able to do now is we can actually look through the lens of the medical bill and the treatment patterns on a claim, compare that to the standards as to what should be happening for a claim of this type, this type of individual, how they're profiled, and actually be able to say something seems a little bit out of sync. We serve that up to our resolution manager, and it gives them guidance in terms of how they may want to influence the direction of that claim. Those are the sort of things that we're doing around predictive analytics, which actually makes our people a little bit more productive, but more importantly, it actually delivers a more superior outcome. Just in terms of productivity and quality, probably one of the things that, and this goes when I think about even where there's extra cost going into the business, the data that we handle, there's a lot of sensitivity around that. The effort that we're putting in place to build a fortress that makes darn sure that there's absolutely no leakage whatsoever with respect to that information is absolutely essential. I've probably said it in the past, that when we go through an RFP process with a client, one of the things they look at very intently is whether or not we have strong, solid security around the data, because if something were to happen to it, obviously it's a black eye for us, but probably more importantly, it's a black eye for our client. There's a fair amount of effort in making sure that's working well. In terms of culture, like Mike said, and I think everybody else, we believe in Gallagher Bassett that our culture makes a difference. It enables us to continue to attract some of the best and brightest in the industry. We're actually going outside of the industry. If you look at the complement of people, I've got a guy by the name of Joe Powell, he came out of Bain. We're bringing people out of the consulting industry. He leads our analytics team. He's one of the breakthrough leaders in the insurance industry. Phenomenal talent that we're able to bring into the business, and a lot of it is due to the fact that the Gallagher culture is something that is very attractive and appealing to people. Another, I'll share one other story in terms of how our business works and the culture and the teamwork we have with our clients. I'm actually getting on a plane headed to Las Vegas this afternoon. One of the things we do with a lot of our large clients is we have what we refer to as partnership meetings. This case, this evening, actually it's going on yesterday and today, it's with Manpower out of Milwaukee, a large client of ours. It's probably a $3 million to $4 million client for us. We'll go out to Las Vegas. They'll bring all of our people working on that program. A lot of the folks from Manpower. There's other vended services that'll show up. This will probably be a group in the neighborhood of about 75 people that will spend a day and a half, and we'll do a couple things. We'll take stock on performance over the past year. We'll look at what the plans are for the year coming, in terms of improving the performance of the program. Then we'll celebrate and recognize people that are doing a darn good job. The fact that we're able to do that with a number of our large clients, taking the time out to really assess performance, and reward and recognize people, that makes a big difference, both to our people and the way that we interact with our clients on a day-to-day basis. Just a quick reminder here, in terms of summarizing what I said, how we differentiate ourself in the marketplace. One is, right at the top of the list is superior outcomes. I say it time and time again, this is not about being low cost. We have to be competitive on price, but it's about delivering the best possible result. We are willing, and it's important to customize how we work with our individual clients. It's all about quality. Every single claim, every single transaction, we got to do it exceedingly well. The strength of our relationship with Gallagher makes a huge difference, not necessarily on the risk management side, but when it comes to working with these carriers, that is a big deal. The fact is, now we have an opportunity that distinguishes us from a lot of our competitors that we have a global presence, which in a lot of cases, there's a few that do, but some of the smaller ones don't, especially the ones operating in local communities. With that, Ray's got the microphone. I'll turn it over to you guys. Mike Zaremski, Credit Suisse. Last Investor Day, too, you mentioned wounded carriers, trying to understand, in terms of framing it sounds like you're saying it's more of a near term threat versus opportunity. Is it causing strain on organic growth in terms of- Wounded carriers? Sorry, wounded competitors. Wounded competitors. What it does is, there's a few of them in our space that I think it's notable that they are struggling. There's been changes in leadership and so forth. The problem it creates for us is I'll give you an example. We get a large client out there, and we're chasing it with them. We're competing with them on trying to get a big new client. One of the big questions for a client is always, do I take the existing open claims to the new TPA? There's usually a price to that. There's a whole bunch of work that needs to be done. We've got competitors that will say, "We'll do that for free." In other cases, they'll give certain aspects of their managed care services away for a very, very discounted price. That's where it's a challenge for us, because in some cases, our clients, they've got budgets. When somebody's kind of dangling 10 or 15 or 20% fee decrease, that's attractive to them. That's where it hurts us a little bit. It hasn't stopped us from winning business. I think our story still is quite compelling. When it's all said and done, I think we win our fair share. On occasion, it's a little bit of a hindrance. Lastly, in terms of the margin outlook for Gallagher Bassett, it's kind of similar to last year's- Yep margins. Is there any things you could point to on why margins aren't improving even though organic's at a fairly healthy level? Is it maybe the new investments in new business lines you're talking about or? That's what it is. That's largely what it is. What we just talked about a minute ago, there is price pressure here in the U.S. That is a factor. I would say the second thing are the investments that we're continuing to make into the business. We just launched a GB Specialty business. We're ramping that up in terms of talent, capability, there's technology and so forth. I mentioned Luminos. I mentioned our clinical guidance product and so forth. We are making investments into the business. I think for those reasons, a little bit of the maturity and the price pressure combined with the investments that we're still making, we're comfortable with our margins right now. Thanks. Can you give us an outline of what the M&A environment looks like, both domestically and internationally? For us? You know what? There's two pieces. There's our big competitors, which there's been a few that have changed hands over the last four to five years. Sedgwick has bought a couple of them. There's those guys, but that's a limited set. What we're finding, and to some extent you got to uncover this, there are these smallish specialized TPAs, loss control specialists that do exist in all the locations that we work. We've built an engine to go identify those, to go find them. In some cases, that's where we're starting to see strengthening in our pipeline. Right now, interestingly, if I were to compare ourselves to the broker, I would say they've got a healthy understanding of who those prospects are. We're starting to just learn about them. We're also, as we think about expanding our product line, what capabilities do we want to bring into it? Those are not as easily identifiable for us. I could see us over the coming years finding a lot of $5 million, $10 million, $15 million specialty type claim handling companies that we could bring in place. Other than kind of looking at multiples from other people, there isn't a well-established kind of pricing structure, I would say, for the type of business that we're out there trying to acquire. Doesn't mean that people don't want a lot of money for their businesses, and probably deserve it's not quite as well honed as it is on the brokerage side. The big differentiator is your ability to show outcomes, probably more than anything else in workers' comp. Yes versus peers. As an outsider, is there any way for us to look and say, "Okay, we can see there's a differentiation," or is it just all going to be sort of company kind of. It's can you see it? When I talk about our analytics group, when I talk about Jill Pahl, one of the things we'll do with every prospect is they'll send us their loss experience. We've got ways to basically, as if we would've been handling that, if we would've taken our capabilities and taken that same set of claims, you can't do this perfectly. Over the last four to five years, what would our result have been? That's what we're able to do on a client-by-client basis. The other thing that we can do is we have, I go back to this Manpower partnership meeting. On a quarterly basis, we're sitting down with our clients and going through a stewardship process, where we're evaluating and measuring the performance of what we're doing. We have ways to do it. We will maybe publish it in aggregate on occasion, like we are at the RIMS conference, we'll do things like that, most of it's individual client experience. We're not in a position to be able to share that sort of stuff. The result of it is whether we're growing sufficiently or not, and whether it's a compelling answer. All right. Thanks, John. Good. Thanks guys. Have a great day. Next up we have Bill Zabel. He leads our Employee Benefits and Consulting Brokerage Operations. Bill, the next 20, 25 minutes are yours. I'll take five. It'll be all right. Good morning, everyone. How are you? Again, I am Bill Zabel. I lead Gallagher Benefit Services. That's our HR and benefits division within Gallagher. I've been with the company for 19 years. In fact, when I joined in 2000, I think the divisional revenues were all in about $60 million. Last year, we finished $1.1 billion. We've obviously changed quite a bit over those years as well. We have 4,400 employees. We have operations and employees in four countries. We run mid to high margins of mid-20s. I'm sorry. We have organic growth in the mid-single digits as well. Let me talk about the same four pillars you've been hearing repeatedly this morning, and consistently. Start first with organic. How do we grow? Really, we look at several different things. We have our own value proposition. Mike Pesch talked to you about CORE360. We think we're better because of what we've been building as an organization, helping our clients attract talent at a sustainable cost structure. That's what Gallagher Better Works is all about. That's my lapel pin, really helping us remind ourselves of all of the value we can bring for our clients. If you really think about what's going on in the last year or two in terms of the economy, we have multigenerational workforce for really the first time in a very long time. Baby Boomers are still there. We now have Millennials as the largest workforce segment, and the next generation's coming in, and it's supposed to be even bigger in terms of a percentage of the workforce. One size no longer fits all. Our clients are competing for talent. We have literally low unemployment, record lows the last 50 years, people are fighting for talent like never before. We realize that their needs aren't just providing a competitive benefit package. What else do they need to attract talent? Think about why you work where you do. It may be your retirement plan, maybe your bonus, your compensation schemes. It's how well they communicate with you. Do they make you feel like you're an individual, and you have a career path? We're helping our clients do all those things, and that's what the value of Gallagher Better Works is for our clients as well. We also spend a lot of time working on thought leadership to differentiate ourselves, to give our clients data to make good decisions. To arm our folks with ideas. Our clients want to be able to keep up with what's new, what's exciting, what's working. We have three per year that we put out. The most recent one is called the Organizational Wellbeing & Talent Insights Report, and it's really put out by our practitioners. We co-publish it with some of the folks from Mike Pesch's team, trying to link the issues of risk with people. I'll get to that in just a second. The other two are more about data, getting surveys from our clients in terms of what they're doing, what they're intending to do, in terms of benefits and communications, things of that nature. This one goes out. We have 19 articles. We push it out to our field. They can use it with conversations with clients and so forth. Thought leadership is really something we think is important to us. It gets us press, publicity, but it gives us ideas and gives us data in which to give good advice to our clients as well. We also do something called CAR. It's a Client Annual Review. It's our opportunity to sit down with our most important clients and talk about them, their needs, what issues they're facing, and we bring the resources of Gallagher to help bear and help them compete for that talent we talked about. Today, we consult with over 43,000 employers with 23 million employees. What we do is very important to help them protect their families, give them the kinds of success in what they're trying to achieve in their personal goals and so forth. What's really important to me, I wanted to share with everybody, is just how much opportunity I think is still out there for us growing organically. I've had a couple of examples recently that really showcase this whole thing. Recently, I was invited to speak to a bunch of CFOs, part of a professional association. I went in there, their sizes of employers are different, going from 50 employees to 3,000. They have the wide range of sophistication of their needs that were going on in the room. As I was going through, I told them upfront, "I'm not here to sell you anything. I'm here to educate you, give you some information and so forth." What was very interesting was this association and their industry run on very slim margins. They have a lot of turnover. They're chasing the lowest price on anything they can do all the time. What I try to do is connect the dots with them on how these things link. If, for example, you're losing drivers and you have a turnover there, the replacement cost goes up. You also are more likely to have accidents in the first year that a driver is on the job, new route, new truck, whatever. Why would you want to keep the lowest price on the driver when in fact you do a little bit of incentive plans, keep them around, you can actually link the turnover to bigger costs. Started going down that path, started getting into some of the things that competitors of theirs were doing in terms of attracting talent, using our data from our national benchmarking survey and best-in-class reports. They started asking questions, it became very evident to me they are under-serviced by their current advisors. They didn't know what certain levers were available to them to keep costs down and bring best-in-class to their clients. This is a room full of sophisticated CFOs who know their business, whoever they're working with today are not doing the job. We had a line of people coming up to us with opportunities a go-go just because we were able to educate them a little bit on what they're not getting. To me, I think that's very important to highlight, this goes on and on, over and over again. Recently, we were hired by a major university famous for its business school. They had an incubator business they were developing. They hired us to help them on a viability study. This isn't something most benefit brokers are going to get into. We were able to show them that they could actually stand alone without the support of the university and compete and actually make profit and so forth. After we proved the viability of this entity, they ended up hiring us to do all their other recurring business in terms of benefits and so forth. Ended up becoming, on an ongoing basis, a $400,000 opportunity for us because we differentiate ourselves, because we have the value proposition of which I'm speaking. Recently, I was also out in the East Coast working with a consumer products company. I know you all know this company. I don't want to mention them, but they're very well known. They have about 800 employees here in the U.S., and we've worked with them over the years to help them do a better job connecting with their employee population. We helped them to look at the demographics, why it was changing, how it was different. We were able to survey their employees, identify what was important to them, and they made some dramatic changes because they knew, for example, what they were doing traditionally wasn't sustainable from a cost perspective. By customizing it, doing a better job of engaging the employees and communicating with them, we saved them over $5 million, and they didn't just pocket it. They put it back into their rewards program, further improving their engagement levels with their employees. They're thrilled with the relationship we have with them. They have folks well on their way to retiring on time. They have a very engaged workforce, and it's really exciting when you get those kinds of wins. What I'm trying to share with you all is what we do is our bread and butter is benefits and core, and we're great at that. We're trying to do more for our clients to help compete for talent and keep their costs at a sustainable level. That's our value proposition to our clients. Moving on to mergers. We did 11 last year, five so far this year, including a couple of tuck-ins that were a little bit smaller. The pipeline's very strong. Continue to do very well on the merger side of things. We're very interested in mergers. I mentioned at the beginning that when I joined, we were around $60 million, $1.1 billion. A lot of that is obviously because of our acquisition strategy. Not only do we expand the map, but we're also bringing in new ideas, new solutions for our clients to be able to compete for that talent. We love doing that. We love finding people that want to help join us and build a business together globally. Why do they join us? We have a lot of resources, a lot of good ideas for their clients, helping them grow their businesses as well, right? We get into these conversations about Gallagher Better Works. They go, "Wow, that's really something I hadn't thought of. That's something my clients would really want from it." They are also very interested in cross-selling with our property casualty division because they're always getting knocks on the door by somebody that's got both sides, and they always feel that they're at risk of losing those folks. That's one of the reasons they join us. I have one story where the merger partner joined us. One of the reasons they decided was because they wanted to cross-sell with property casualty. Pretty soon, the property casualty folks are talking to one of the principals, and she said, "Yeah, come on in, I'll set up the meeting." When they walk in the room, she's sitting on the side of the table with the client. She wasn't part of that team, if you will. The property casualty folks at GGB were like, "What's going on here?" She was grilling them on all these questions. They're like, "What's up with that?" They actually won the business. They actually impressed everybody in the room, the client, as well as our producer on the benefits side. The GBS producer ran out and said, "Hey, are you aware of this other company I've got over here? Because you guys were fantastic. I wanted to bring you in. This is exciting." She's not sitting on the wrong side of the table anymore. She actually is a believer, and that was one of those endorsement stories that I want to share with you all. What we do with CORE360 and what we do with Gallagher Better Works are differentiating value propositions that we think makes a big difference. Productivity and quality. We continue to always do a better job for our clients. That never ends. We have our professional operating standards, which have been around for quite a while. We audit to those. We have very good retention. You heard Mike mention about mid-90s%. We're mid-90s% ourselves. I think we have excellent retention. We also do Net Promoter Score surveys. Ours are also in the 80s%. Our clients like our strategic thinking. They like our service levels, and we do a great job for them, and that's why we do so well with that. When you have a problem with a client, it's because you had a mess up or because you have a change in the relationship. I heard the question earlier before. It's really important to us we have high quality on what we're doing. We've been doing a lot in terms of small group centers of excellence for our under 50 employee groups. We've done a great job of improving profitability and quality there. We measure that all the time. We're in the middle of doing our client service organization rollout domestically in the U.S. for our health and welfare. We are 90% through our phase 1. We're 50% through phase 2. We're already seeing benefits in terms of savings and quality going forward. This will continue through the next 2 years as we go to all of our operations in the U.S. A lot of good things we're doing with that, and we're using those freed up funds to invest back in our business, new producers, things of that nature. I'm going to move on to culture. I know that's something that we always talk about here at Gallagher. I don't know how much it resonates with everybody in this room, but I will tell you it's real. Mike earlier talked about the internship program. When I became the branch manager here locally in Chicago, I think we had one intern, and it was somebody's friend's daughter or son or whatever it was, and we didn't really keep that person around. The thinking at that time was, "Well, go to group school and come back, and you'll learn the business. We're not going to here to teach you." We've changed that. We flipped that on its head completely. I saw what the P&C division was doing, and we went big into the internship program. Collectively, the company has 450 interns this year. GBS has 150 of those. We just keep pushing our folks to bring in this young talent and so forth. What's really exciting is when you see the sponsorship, the pride of their mentors of these young people. Some are, in fact, family. Some are, in fact, friends of friends. The bottom line is they want them to be successful, and they're putting that effort in. It's so fun. I was just doing a presentation yesterday with the group, and you've got people taking pictures with these interns with me, and they're so proud of them. Their tails are wagging so hard that they'll knock themselves over. It's just exciting to have that infusion of talent and energy, and you know the future is bright for Gallagher when you see those folks getting onboarded and so forth. I can't emphasize that enough. You can't have a successful internship program turned into professional producers if you don't have people willing to help, to share their knowledge, to coach and mentor these folks. That's really important to emphasize. It doesn't just happen in a schoolroom. It has to happen in front of clients. With that wraps up my opening remarks. I will say we compete very well because of our value proposition, our resources, as well as partnering with our property casualty folks and the things we're doing in thought leadership. Lori, open up for some questions. Mike, Credit Suisse. Can you help flesh out what your sales distribution, how much comes from cross-selling with Mike Pesch's team and partnering with them versus your sales folks finding the leads and doing the sale themselves? It's funny you ask. We just looked at that number recently. It's actually less than 10% today that's coming in from the property casualty side. We have huge opportunity to get better at these things. That's why, for example, Mike and I are spending so much time in the U.S. on linking the solutions, not the products. In other words, I can sell to my client, say, "Hey, can I bring the property casualty folks in to talk to you?" I don't need another meeting, right? But if you actually talk about their issues that's going on with them, "Hey, I saw you've got some pretty high workers' comp expenses. Your mod rate is 1.2 or whatever. Do you know what's going on with that?" "Yeah, we had some turnover, some accidents, whatever." "Okay. We got some solutions that can help you do some safety training, some loss prevention, link it in with some of our communications we're doing on the benefits side. Would that be of interest to you?" And they say, "Yes." What we're doing more and more because of our value propositions is linking solutions and connecting the dots for the client. We see a lot of opportunity in the future for cross-selling. I also wanted to focus on cross-selling because from our seat, people have been talking about this for a long time, and it never has really materialized maybe the way expectations did 10 years ago, 5 years ago. I was hoping you could talk about the specific advances in technology that make it more feasible now. Well, one of the things we use, our CRM is Salesforce. We use that quite a bit. We have access to where the clients are and so forth. Mike and I launched an initiative recently called Take the Gloves Off. It's like we don't get to protect clients. We're not waiting for the producer to invite somebody from the other side. We're saying, "Go get them." If it's a Gallagher client, it's a Gallagher client. Let's go after them. No fences, no protection, that kind of a thing. We would encourage and would prefer collaboration going in together and so forth. We're trying to create this energy because it isn't about what we can sell. I really want to drive this home. What's in it for the client? If we put them first, why are we letting them work with an inferior broker on the Property Casualty side? Why are we letting them work with an inferior advisor on the Benefit side? This is craziness. If you care about your client, drag your counterparts in, and let's do the best job we can for them. We're spending a lot of energy on that. We think there's a lot of upside. On the client receptivity side? Client receptivity, it goes back to what I was saying earlier to Mike, and that is, tell them the story. Why do you want to have this meeting? Everybody has enough meetings, but what do you want? Do you want a solution, or do you want another meeting? That's what we're asking our folks to do better at. Anything else for Bill? Thank you. Have a great day. Thanks, Bill. I guess we're about five or seven minutes ahead of schedule. We'll take a quick break and be back right around 9:40. Thanks. All right. We're going to go ahead and move on to the next speaker. Next up, we have Joel Cavaness. He's the leader of our domestic wholesale operations, RPS. Joel, the next 25 minutes are yours. Great. Thanks. Thanks for being here. Thanks for making the trip to Rolling Meadows. I'm going to give you, again, the overview of RPS, what we do as a business, where we're going, what we're working on, how we dimension, and how we are trying to drive the business forward. Again, RPS is our domestic U.S. wholesale operation. We operate in about five different sectors. Our largest business is our MGA business, the business in which we operate as an outsourced portion of an insurance company. That's our largest business. The transactions are typically a little bit on the smaller side. That particular business is we operate everything for an insurance company with the exception of two areas. We don't place their reinsurance, and we don't do their claims. That's a little bit of a distinction between an MGA and an MGU. We are in the MGU business as well. We'll talk about that in a second. Those typical transactions are retailers bring us business that they can't typically get placed with their standard insurance companies. They send it to us. We actually underwrite it on behalf of the insurance company. We quote it on behalf of the insurance company. We bind it on behalf of the insurance company. We issue the policy on behalf of the insurance company, and we collect the premium. We do all of those activities pretty much across all 50 states. We don't have a whole lot in Alaska, but there's just not a lot of people up there to really for us to transact a lot of business up there of that type. We love that business. We get paid typically in three different ways in the MGA business. We share in the commission. A typical insurance company will pay us somewhere between 20% and 25% on the front end for us to operate in those transactions. We pass a certain amount of that to our retail customers, of course. We typically, on many of those policies, because of the nature of the transaction, we issue or we charge fees, policy fees to make up any differences. I'll be on the final end of getting paid. If we do a good job and do good risk selection for our insurance companies and they make profit off of the underwriting activities that we do, then we get paid a profit share in the next year based on our historical loss results. That's what we consider to be the icing on the cake. It's a big number for RPS. We operate very carefully in our underwriting activities to make sure that we're making good risk selection so that we can get the bonus payment, so to speak, in the next year. That's the MGA space. It's our largest space. We like that space. It's typically a little stickier business, so you're not getting a lot of competition on an individual risk. Any individual risk doesn't make or break a day, that's for sure, because your typical transaction's $5,000, $10,000. We do it in general liability. We do it in property. We have a big sector in transportation, which many of you have heard. That's a big growing sector for us. We like that business. We have all five major carriers that we underwrite on behalf of in that space. It's growing. More trucks on the road, more people looking for things for haul. It's a market that is typically driving a little bit higher than average rate increases. That's our binding space. Happy to answer any questions if you have them along the way in any of these different types of businesses that we operate in. Our second largest business is our brokerage business. That's the business that we do an awful lot with Mike Pesch's team where we operate basically as a placer of insurance for difficult to place or specialized types of accounts. If you have a tough account, tough property account, an account located on the coast in Florida, it's a condominium, or if it's a tough risk because it has catastrophic exposure, that's basically what we specialize in. Large schedules of difficult to place coverages. We do that, again, a lot of property. We do a lot of casualties, so a lot of excess truck business, a lot of new product manufacturers, a lot of difficult products, things that most insurance companies, typical insurance companies don't want. That's what we do. We do it in healthcare, so a lot of assisted living business, tough doctors all kinds of, again, more difficult, less plain vanilla. Plain vanilla is not what we do. We do complex. We do difficult to place in that sector. We do a lot of executive lines business, a lot of cyber business, a lot of that type of emerging risk business. You all have read about the tough, bless you, tough D&O marketplace. A lot of people with difficult either past claims or companies that are placing their D&O that have some emerging problems. That's what we specialize in. Because our ability, what we do is we have the ability to go to insurance companies that can specifically tailor coverages and price around a difficult account. Those are the sectors that typically, and we do a whole lot under each one of those. We specialize in environmental. We specialize in a lot of different niches. The two things that I would tell you in the brokerage business why people come to us. One is because the account can't get placed in the standard market. Two, it needs a specialist, somebody who only does a particular niche-y type of business. It could be wrap-ups. It could be different things that are, again, very, very specialized. They come to us for our expertise in that particular line because not every insurance broker has every specialty that's needed in the marketplace today. We again, somebody asked about cross-sells or cross-selling that business within to our sister companies or sister divisions, has been what I would tell you probably best in class, best in industry, best in our sector. We transact a lot of business with our sister company. It's been highly successful for them. They have options other than RPS. Fortunately, because of what we bring in the expertise area and our ability to get transactions done, we've been selected more than not as a trading partner with GGB. The third business that we have that many of you are aware of. About six months ago, we did a merger with Pronto into the non-standard auto space. That's a great space for us. The non-standard auto for Pronto is very specific. They specialize in the growing Hispanic communities. We have stores, fronts, franchises, captives, and independent agents where we typically would live in a two-mile area around a community that has the demographic that we're searching for. Our demographic in the Hispanic community is typically married, more than one car, multiple car family, who buy physical damage, that have a household income between $35,000 and $65,000. That's our demographic. That's where we specialize. We operate Pronto really in many different areas. We operate in California. We operate all through Texas. We operate through South Florida and Mid-Florida, and we just did a small merger this past year into the suburbs of Chicago. Actually, the edges of the city, that again, have that demographic that we're looking for. It's a great business. We actually operate as an MGU in that space, which is a little bit different than an MGA because we actually, on behalf of four different fronting carriers, we actually place the reinsurance. We do the underwriting and pricing, and we also do the claims in the business. It's a little bit different from an MGA, where we're actually a full-service provider, and of course, our fronting carriers through the reinsurance arrangements, we get paid for each piece of that part of the transaction. Our next space is our program space. It's a growing space for us. Many of you that follow, obviously, the industry, you see the program space, which is really developing. It's getting bigger and bigger and bigger. More program managers out there who have a specialized niche in a particular area, a specialty. A lot more program managers out there. Similar to the industry, we're growing in that sector where we have specific programs that, again, we underwrite on behalf of the insurance company for a particular box that they want. It could be golf clubs, could be bicycle manufacturers, could be public entities or schools. It could be religious. A lot of different areas that we operate in the program space. Great space. It's our most profitable space, and we really like that. We watch our underwriting because, again, we get paid based on the underwriting activities that we serve our carriers with, and then we also get, of course, profit sharing on the back end. We're very careful because the last thing you want to do is have a burning program because burning programs typically don't do very well at the end. We're very careful with our underwriting. We're very risk selective there. Really our last business, which is again, emerging business that we continue to invest in, is kind of our version of InsurTech. It's our e-commerce offering, where we're posting simple products into our portal for our retailers to come in 24/7 and be able to transact business. We do a lot of cyber on that business. We do contractors on that site. We do active shooter business. We do all kinds of, again, very simple products. It's a very small set of questions that you can fill in and get a bindable quote and a policy within minutes. Truly minutes. You can go in and transact. Our customers can go in and do a cyber policy in a matter of 5 minutes with a simple set of questions. What we've done in that particular space is try to crunch down the application process to a small number, and either using third party AI to fill out the rest or actually be able to give a valuable quote with a small subset of questions. That's really the spaces that we operate in within RPS. We are specialty driven, so we do much more into the specialty nature of the industry. Kind of dimension our size. This past year, we did about $400 million of revenue. We are working on all the same pillars that everyone else operates in within the Gallagher umbrella. Organically, we grow roughly into the mid-single digits as an organic growth. We focus on organic growth every day. Our organic growth strategies kind of are very parallel to many of the other divisions within Arthur J. Gallagher. We focus on doing more business with the same retailers that we transact business with. We do business with 25,000 independent agents across the country. That gives us access to about 250,000 insurance agents and brokers for access to sell our products. We are a distribution machine, so we have a focus on doing more with the same customers. Focus on our client relations teams that are spread across the country that go in and work with our national clients from the top, and then we have local client relations people that call on those national clients at the bottom and work our way to the middle. That's our fastest-growing segment are the people like AssuredPartners, people like Gallagher, people like the SIAA, which is a big association group all the way through. Our customer base is big. What that does for us as a distributor is we can get product into the marketplace very quickly. If we have a partner insurance company that wants to do X, Y, or Z, they use us for our distribution to be able to get to the marketplace very quickly because that's what we do. We do things. We operate typically on a faster pace. We don't get the luxury of 60 days to do anything. We typically operate on hours. Our organic growth, again, is doing more with the same customer base and growing our customer base. We love having the relationship with GGB because every time they do a merger, I get a new customer. Doesn't get any better than that because all major insurance brokers, the type of firms that they merge with, typically will have a fair amount of wholesale business in there. When they do that merger, we get a new customer. It's great. It's wonderful. Again, our organic growth strategy in brokerage is typically hire more people. In the MGA space, it's really rounding out territories. We've done a great job in mergers in the MGA space, and really what it is in that particular space is then adding the specialties that we have in other businesses. We have a space, an office in one place, and we think it's a great opportunity to expand in transportation. We will either move one of our transportation people there or hire a local specialist for us to be able to expand. We've got the footprint, we've got the customers, all we've got to do is fill in the product. It's a great organic story for us to be able to, again, expand in that area. Mergers and acquisitions, we're very acquisitive, just like the rest of the company. There's been a lot of activity, as you all read. Consolidation is pretty rampant right now. We talk to a lot of people. We get at least our fair share of those mergers. We are a good place to be. We've had it in our history all the way back. RPS is 22 years old. We started with four employees 22 years ago, and today we have 2,700 people domestically and 400 associates in our service centers in India. We've been able to have a great track record of successful merger integration, and long-term is really what we look for. We look for people who want to sell their business who continue to operate, because I'm sure Pat or Doug mentioned, we don't really buy businesses, we buy a lot of brains. Right? More brains are able to be then that much more productive and successful for us in the long term. We do spend a lot of time on M&A. I used to say I'd spend about 25%. We have a full-time M&A person in RPS that goes out and looks for merger opportunities for us, and works with the broker markets as well. I used to say I spent about 25% of my time doing mergers. Lately, it's about 40% because the activity level has obviously increased. I think that we'll continue to have very successful merger years going forward. Lot of opportunity in our space. I really look at a great long-term runway for us in mergers and acquisitions. Talking about moving into productivity and quality, our productivity is strong. It's better than it ever has. Give a lot of credit to our service center. We had all these offices, they were issuing policies, different ways, different speeds, different qualities. By us being able to centralize that in our service centers in Pune and Bangalore, we've been able to improve our quality, decrease our cost, and be able to measure everything that we do by centralizing these 11 different services that we do in our service center. Before it was all handled, somebody spent 50% of their time doing this, or 25% of their time doing this. We have people that are dedicated only to doing certain tasks. By doing that, we improve our quality. We're able to get our policies out now under two days, and we can measure our quality. We can tell you that we issue our policies 99% correct every day, and we're able to measure that, watch it, and make sure that it's being done properly. That's part of the service that we provide. We provide policy issuance, all those things. Being able to put everything in a back room in a centralized basis, it just brings a high level of quality, consistency, and cost. We like that. Talking about our organic growth, again, we're focused on organic growth every single day, trying to do more with less. We talk about our competitors. We are vastly diversified, probably more than any of our competitors because of the different spaces, the different platforms that we're able to do all the activities that we do as growth strategies. We can do M&A and wholesale brokerage. We can do mergers in our MGA space. We can do mergers in our program space, and we can do mergers in our non-standard auto space. That gives us a broad platform to operate under for all of our different strategies, and we like that. That's the value that we bring to our customers. Send it to us, we can get it placed. If you think about it, a lot of our competitors only want to do big stuff. We want to do big stuff, too. We can do big stuff just as well as they can. We can also do the little stuff, and we can also do the specialty business in a program space. That gives our customers a one-stop shop to be able to access us for all the various needs that they might have. We have an RPS as one philosophy. Just send it to us. We'll make sure that it gets to the right place. You can send it anywhere, and we'll make sure that we get it to the right person in the right office to be able to provide you that. We do that in transportation. We have specialists. It's what they do. Somebody gets a transportation risk, they automatically send it to one of our transportation specialists, and that's the way we operate, very seamlessly on behalf of our retailers. I'm not sure where I am, but I think I probably hit it close to the nose. Questions? You mentioned mid single-digit organic growth. Are you seeing any tailwinds, maybe due to the E&S marketplace? We're hearing firming comments and transportation, et cetera. Yeah, sure. Try to comment a little bit. The market's a little bit different right now. The good news is stuff's not going down 30%, for us. It's a little bit specialized again in what people are looking for. If you have a tough property account, and it was placed in London's going through their, I don't want to call it issues, because it's not issues, it's just a different underwriting philosophy. A lot of things are coming out of there. There still maintains an awful lot of capacity in the domestic marketplace. You can still get deals done. It takes a little bit longer, and it might cost a little bit more. You also obviously have to remember that most of our customers or their customers, the ultimate policyholder, typically has a budget. While rates are going up, there is a counter to that in increasing deductibles or maybe they buy less limits, and all those kind of things. There is some pressure release on rates in what also is in terms. In our particular side of the business, terms are important because we typically, in the E&S space, we have a lot of freedom. We have freedom of rate and form, so we can do a lot of things that kind of bring prices down. We can raise the attachment point. They might lop off the top layer. Instead of a trucking company buying $200 million of limit, they might buy a $150 million limit because that's where their budget sits. There are some, yes, in answer to your question, we are seeing rate lift. We're also seeing term changes that does have an effect on the overall cost of insurance. I don't know who was next. Thanks. The conventional wisdom is that when insurance companies are seeing profitability strains, that's particularly true in programs where they've given away the pen, and maybe in some of the other units as well. Can you talk about what you're seeing in that context? Yeah. They really seem to like the program space. Now, I'll preface that by saying, like an AIG who got out of all of their tougher auto space, where their experience was not good, they move away from those fairly quickly. That's why it's so important on our side to make sure that we're delivering the proper underwriting, and the proper pricing, to deliver a better loss ratio result. We watch that every day in our program space. In our program space, we watch our loss ratios monthly. We're always working with our insurance company, making sure that we're staying in the profitable level that they want to stay in. That behooves us as well, of course, because we get to share in that. Yeah, program managers, we're very careful, on mergers. We do our due diligence. Depending on the transaction, we go out, and we hire outside actuaries to go and do an independent review of the loss ratios and the activities. The last thing you want to do, I call them one-trick ponies. Anytime you have a one-trick pony, and the pony breaks his leg and you shoot the pony, the show's over. That's not good for us. We do heavy due diligence into the program space. It may not be always our fastest or greatest growing because there is a time to grow, and there's a time to pull back in the underwriting, and you need to be focused on that. Elyse? Thanks. Yeah. My question, you highlighted the Pronto acquisition that you guys completed, I believe just about a year ago. Sure. Can you just give us an update on the size of that business, and as you annualize that deal, is it potentially growing faster than your other business, so it would be a tailwind to organic growth in the next few quarters of the year? Yeah. It's about $100 million business, just maybe a smidgen more than that. Pronto right now is actually growing not as fast as our other business. We had to take rate increases in the state of Texas again because auto was running hot in Texas. We set our rates on behalf of the insurance company in that business. We actually file the rates on behalf of our insurance companies, the core different insurance companies that we provide the reinsurance for. In that particular space, we have seen a little bit of a slowing because we did raise our rates. It will take a little bit of time, probably the course of another three or four months for our competitors to catch up with us in our rate. We wanted it, again, to stay ahead of that because we view this, you got to view all of these programs and MGAs and MGUs over a longer-term view, right? Because you got to do what's right to have a viable business going forward. What we do in Pronto, when we're not selling as much non-standard auto, we put the juice into other products because we already have the distribution, and the distribution has natural cross-sell available. If you're selling them auto, then you also want to sell them low-value dwelling, and you also want to sell them manufactured homes, and you want to also sell them artisan contractor products because that's part of that space typically is in the artisan contractor space as far as occupation goes. There are levers that we're able to pull in that space to be able to supplement non-standard auto with other products. We're happy with Pronto. It's a great opportunity to do mergers around that space. We really believe in that demographic long term and our ability to sell that emerging demographic even more insurance. All right. Thanks, Joel. Thank you. Thanks for your time. Have a great afternoon. Next up, we have Jim Gault. He's the Chairman of our Global Retail Property/Casualty Operations. Jim, the next 20, 25 minutes are yours. He's going to be covering our international Property/Casualty operations. Jim? Thanks. Thank you, Ray. Good morning, everybody. I will do my best to give you a 35,000-foot overview of what we do internationally. Normally, Tom Gallagher gives this speech. Tom's on a plane right now to London. Again, as we get closer to the ground, hopefully, I'll be able to answer your questions. I may have to take a pass on one or two. Let me tell you about international. If I was giving this talk a couple of years ago, four, five, six years ago, I would say that we were a U.S. broker with a handful of good international locations, and that's how we were viewed as a domestic broker. We are truly an international broker now. In the last four years, we have grown the international side significantly. It is now 50% of what we do in the retail Property/Casualty space worldwide. In many cases, growing just as fast, if not faster, in some of the locations we're at. The opportunity to continue to grow organically and do acquisitions is just as significant, if not more so, since it's a wider canvas than just the U.S. We are in what I would call seven areas of the world. Now, this is my description. We're in the U.K., we're in Northern Europe, we're in Asia-Pacific, we're in Australia and New Zealand, we're in Canada, we're in the Caribbean, and Latin America. If you look at the business that we have, you could segment it however you want. Let's say size, in terms of size. 90% of the business is driven by three areas of the world. It's driven by the U.K., by Australia, New Zealand, and Canada. If you want to look at the businesses that we're in, we're basically in five businesses throughout the world, and it mirrors what we do in the U.S., which is retail property and casualty, wholesale property and casualty, reinsurance, underwriting, and we have a very small premium finance operation in Australia. Again, just like the three major areas that are 90% plus of what we do internationally, if you take retail, wholesale, and reinsurance, at least through the first quarter, that was 90% some odd percent of what we do in terms of the business mix. We run the business very similar to the way we do in the U.S. In fact, we're kind of using the U.S. blueprint in many ways, the playbook that we've developed here over the years to help generate organic growth. I'm sure Pat touched on this. I didn't sit through his session, he always talks about the four things we're trying to do every day, which is grow organically, grow through acquisition, get more productive, and make it a great place to work, support the culture of the company. We do the same types of things internationally that we're doing in the U.S. and using the U.S. P&C playbook for the most part. When you talk about trying to grow organically, we've got niche practice groups that we formalized. We're pushing the brand. We're doing things like pursuing white space and better data and understanding of what our book looks like. White space, for those of you who are not familiar with it, is if you look at a list of accounts and you look at what those accounts should be buying, in many cases, we're not selling all of those things that a client should be buying. There might be a competitor or the client might not even buy it. There's opportunity within our own book of business, and the same thing holds true internationally. We've got 8,000 employees outside the U.S. and growing very nicely. The acquisition opportunities are just as great outside the U.S., internationally as they are in the U.S., if not even greater. It really is the same thing. We're looking for a cultural fit. We're looking for operations that can grow organically, and it will match with our culture. The only difference is, it's a difference, is that when we do an acquisition outside the U.S., unless it's in one of those three major areas, we tend to take a position in the acquisition. We don't buy the whole thing. We want to get comfortable. We want to make sure that they fit with our culture. What we do is over time, as we find that they do, and they tend to come through connections where we're already placing business, by the way. It's not like we're running around planting flags. We're not about planting flags throughout the world. We're about taking advantage of opportunities that we have, and brokers outside the U.S. have the same issues that they do in the U.S. in terms of organic growth and succession, and they want to protect their large accounts. We'll take a position with one, and over time, if it continues to work the way we expect, we'll wind up purchasing the whole operation. Oh, pardon me. I also want to talk about productivity. In terms of productivity, we're doing the same sort of things which is we do in the U.S., which is we want to get standardization, want to get on single agency platforms, we want to mine our data better. We want to use our Gallagher Center of Excellence. We're in varying degrees of doing all of those things throughout the world. Some are further ahead than others, depending upon how long they've been around and the types of things we've had to do to bring some of the franchises together. If you take a look, I'll take you around the world starting in the U.K. In the U.K., we're in four businesses. We're in retail, wholesale, reinsurance, and underwriting. The preponderance of the business is driven by the retail business and the wholesale business, although the reinsurance is pretty strong, too, through our relationship with Capsicum Re. The retail business, you've got to think back three or four years ago, we were really not a factor at all in the retail business in the U.K., then we did three large acquisitions, Heath, Oval, and Giles. We spent the last several years connecting those dots, trying to develop the Gallagher culture, getting the Gallagher brand, and we're making a lot of great progress. In the U.K., we had nice organic growth in the first quarter. It was in the mid-single digits. At the same time, we're Gallagherizing, if you may, those offices in the U.K. We did a really nice acquisition in the first quarter, Stackhouse Poland. It's a sizable operation. It's about $80 million in revenue, and it gives us another 20 some odd locations throughout the U.K. A very strong, great franchise that's going to fit in very well and integrate quite well, so we're very excited about that. In the wholesale space, the brand that we use is called Alesco. Again, it's a really good brand, and it's growing nicely. They're in the mid to high single digits. In that business, they tend to have more turnover, and so their retention is not quite as strong as it is in the retail space. It all averages out to a strong organic growth in the U.K. when you add that to the retail side. Again, the wholesale is doing well. We just closed, which was announced, the merger with JLT's aviation division. That was announced a couple of weeks ago, a week or so ago. We went from being a really strong aviation broker to now being one of the biggest in the business, and we are very excited about that. There are 15 locations throughout the world, although the preponderance is, again, in the U.K. The team, I am told, is really excited about being part of us, and we are very excited about having them being part of us. That is going to fit very well for us. In terms of margin, if there are two areas in the world, actually, there are three areas in the world where we could improve margin a little bit, and I am not talking leaps and bounds. I am talking a couple of points here or there. It is retail in the U.K., and it is wholesale in the U.K., and the third is Australia, and I will touch on that in a minute. We are working very hard on all three, and in particular, as we continue to connect the dots with the mergers that we did in the retail space in the U.K., and we get standardized, we can then utilize our India service center, the Gallagher Center of Excellence, more so than we could in the past. Once you get down to standardization, the transactions become much easier to do, and the quality improves. You get the natural pushback no matter whether in the U.S. or outside the U.S. when you are not used to something like this. Well, I am told that our retail people, in particular now, are completely aligned, and they are looking for more things to do. They are taking the initiative to do that. We believe that we are going to see that improvement. Again, it is not leaps and bounds, but it is an area where we know we can do a little bit better. The same thing with Alesco. The reinsurance business with Capsicum is doing well. That is a company that was set up by Grahame Chilton, who ran our business over there till Simon Matson took over earlier this year or beginning of this year. Then the underwriting business is another great story. We were struggling in the underwriting side, and what we do in the underwriting side is we do about 60 programs. It is about $650 million in premium, with about 40 to 50 insurance carriers. It is very similar to what Joel does in terms of program underwriting. But for several years ago, that business was not doing well. We brought in a new leader, and he has done, not a good job, but a terrific job. That business is now healthy. It is doing well. It is growing well. It has been fixed from where it was several years ago, so we are very happy about that. Going east, we really do not have much of a presence in Northern Europe, but we are in Switzerland, Norway, and Sweden. It is less than 3% of the business. Those offices do business with our offices in London. That is how we got to know them. We know they are good operations, predominantly some marine business, and I think some construction as well. They are just good partners, and we are going to continue to look in those areas to see if we can add another acquisition now that we have a foothold in those areas. If you go further east to the Asia-Pacific rim, we have an office in Indonesia and one in Singapore, very small, less than 1%. Again, we've got a place now where we can look to add some acquisitions and expand our presence there. If you go south to Australia, New Zealand, that goes back to the deal we did with Wesfarmers some 4 or 5 years ago. New Zealand has always been a star. New Zealand was always run well. New Zealand has one of the best, if not the best margin of any of the retail operations throughout the world. That is a terrific franchise. Australia was a different story. Australia was about 26 operations that were strung together by the Wesfarmers group, they really didn't pay any attention to culture or sales culture. It was a struggling group going backwards when we took it over. It was negative organic growth of probably 5% or 6%. It was partly because the market there was incredibly soft, also because it just wasn't run very well. In the last 2 years, we brought in a new management team, headed by a lady by the name of Sarah Lyons. She's awesome. She's done a great job. She's retooled the team. They're in positive territory already in terms of organic growth. We're not talking significant, they've crossed over into positive organic growth. There's a lot more work to be done. Again, taking the U.S. playbook and driving the things that we do to grow organically. We're doing some acquisitions there, small acquisitions. Most of them are roll-ins, because with 26 offices throughout the country, we've got most of the major metropolitan areas covered, we're talking about roll-ins. That doesn't mean we wouldn't do a larger one if there was one. Again, we're working on margin improvement utilizing India. They're going to 1 agency system, they're headed for some margin improvement as well. Again, we're not talking significant double-digit improvement. We're talking just a couple of points here or there, it's, again, a very well-run operation with the new leadership team. We're excited about that. If you go up to Canada's having a really strong year. Mid-single digits organic growth in the 1st quarter. We did a nice acquisition up there, Jones Brown, which is a broker that's located in Toronto and throughout Ontario. That's about $30 million in revenue, it's a significant acquisition for us. It's a nice add to our franchise up there. Canada, again, following the U.S. playbook. They're using the same techniques to drive organic growth, niche practice groups, enhancing commissions, pushing the brand, whatever it takes that we do here, white space, whatever. Also looking for more and more acquisitions that we can roll in. In terms of margin, the margin has been improved there. They're doing well in Canada. I would've said probably 1 year ago there was room for improvement. We're doing well there. You go down to the Caribbean, again, less than 1% of what we do. We're in 6 or 7 of the islands down there, Jamaica, Barbados, Dominica, 3 of the Saints, St. Thomas, St. Lucia. I don't know. I've never been down. I've been down to the Bahamas once, that's the best I can do for you. I don't want my geography wrong. Then you go to Latin America. That's probably a couple % of what we do overall. We've got a real strong foothold. We believe that that market's going to grow over time. By the way, I don't think I mentioned this. We do know where we want to encourage our field to see if we can get some opportunities to grow in foreign markets. We want to make sure it's an economy that we think, or economies we think that have some real potential to grow. There's some that do, we believe, and there's some that we don't think are going to do quite as strong as others. So we're being very careful about that. When it comes to Latin America, we think there's real potential for some expansion and growth. We've got offices in Chile, Peru, and Colombia, and a good little franchise down there. Again, if you take the four areas of Northern Europe, Asia Pacific, the Caribbean, and Latin America, they could all knock the ball out of the park and it really isn't going to move the needle that much one way or another. It's great to have a foothold there, and we think you're going to see a lot more from us in the future. As kind of a 35,000-foot overview, any questions? You're all smiling. Yeah. Yeah, Meyer. Thanks. You mentioned that you're not interested in flag planting for flag planting's sake, there's a significant insurance marketplace in Western Europe, I'm wondering what the medium-term plans are, if any, to penetrate that market. Well, again, that market is going to be opportunistic if the right opportunity comes along. We're not out there like in the U.S. or in the U.K. where we actually are shaking the trees to go find acquisitions. It's a much different view of it. It's let's see if something comes along that makes sense, and we'll talk about it. If it fits in with the plan and it's an area that we think will grow, we'll probably take a minority position and then see how that works. Within Canada, we've heard some discussion of market conditions changing there. Any thoughts or updates on what you're seeing in terms of pricing? Yeah. The pricing in Canada, I think is kind of paralleling the rest of the U.S. and the world. You're going to see some pricing increases in property and in D&O and some of the others. Joel said it, I'll say it a different way. This is a great time for us to show our value. We get paid no matter where we are in the world to help clients deal with a market that's changing. You could have rates go up. Those of us are old enough to remember the old days in 1977, when the casualty market collapsed, and prices were going up 300%, or post-9/11, right? Those days, I don't believe we'll ever come back anywhere because I think there's just too much information out there, and carriers seem to be able to withdraw sooner rather than waiting until they're in a really bad position, right? We get paid to navigate that. I'll give you a good example. There's a large account. This is a domestic account, but I think it holds true no matter where you are. Large account that we have, billion-dollar schedule plus in property. I saw this last night. They increased their value 7%. With the property market, which has gone kind of hard overnight, right? Their overall price increase was 6.7%. Actually, pound for pound is really no increase. That's because we moved deductibles around. We changed some carriers that were willing to do a little bit more competitively. That's what we do. I think, will we get a little lift? Yeah, we'll get a little lift, but we're not going to get any kind of leaps and bounds lift from market change no matter where we are in the world. That's where we really show our value. Going back to the JLT aerospace business, do you see that as a top-line opportunity? Is there a margin expansion opportunity there? How are you seeing the opportunity set? I think we're seeing the opportunity as now we are recognized as a leader in brokerage and for aviation, where before we were good, but now we're one of the top brokers in aviation. We think that there's going to be good opportunity to continue to grow that. The margin, I can't speak to that because honestly, I don't know. I don't know how strong, but we don't do deals where you have a bad margin because we're not into really fixing things. We can look at a deal no matter where it is, and if the margin isn't good, we have a discussion with the principals, and they'll agree we're going to make some changes. If there's something that doesn't have a good margin, we're not interested in getting into that because we're not going to fix something that's single digits and think we're going to get it overnight to the 20s. Australia is not a great margin region? No, Australia wasn't bad. By the way, we tended to look at Australia and New Zealand as kind of a package deal. New Zealand has, by far, the strongest margins in the world for all U.S., whatever. That ship is the most well-run ship we've got. We looked at that package deal and said, "We can fix Australia because it's not that bad, and we got an operation that knows how to grow." I mean, we have a third of the market in New Zealand, and that damn thing grows in high single digits every year. It's amazing what that team does down there. Steve Lockwood and that team, they're the best. One last one? Yes. A couple of questions. My first one, going back to the JLT question. Aerospace, obviously a very saturated market and a handful of players. Have you guys looked at the relationships you're now getting on the aviation side and thought how that could potentially be opportunities where you didn't necessarily have relationships before to cross-sell other businesses? Absolutely. That's the point with that. That's where we see the opportunity to expand that because I don't think we've pursued it that well on the retail side because we had the facilities. Now we have a world-class team. It's not just in the U.K. There are 15 locations throughout the world. We're going to get the word out to our branches that we're a big player now, I think that will change. Can you give us a number on, I guess, how many relationships come from JLT and the amount of other cross-sells you guys think you could see? No, I can't give you that. Sorry. Told you. If we get 35,000 feet, I'm good. You get down to five, on that one, I can't help you. Figured. Yeah. My other question, on M&A, I think you answered this partially in one of the earlier questions. When you went across the world in your businesses, you mentioned we could look for a deal kind of virtually everywhere. It sounds like in those four areas that you're not that big in, if it was anything, it would be like a smaller minority stake. Do you envision anywhere where you guys are internationally still needing something above what you would consider kind of a bolt-on digestible deal for Gallagher? I don't think so. I think we are where we need to be now, where we think the economies have the staying power and where we think there'll be expansion. Now it's just a matter of finding the right partners. Thank you. Thanks, Jim. Okay. Thanks, Ray. Next up we have Douglas Howell, who's going to talk about our CFO Commentary and give some other financial comments. Doug? Hi. Next three minutes are yours. Good morning, everyone, thanks for making it to what looks like Scotland outside today, a beautiful summer day in Scotland. Anyway, I appreciate you coming. I'm going to spend a little time with you today. Just real quick follow-up, Yaron, you asked a question about how do we view margins on the JLT transaction. I think that those will be accretive to margins in a year or so, but we do have some transition costs that have to move that business. Right now, I think it'll perform pretty close to what our specialty business is doing in London. We also want to invest in that business because it's an important grade. If we're going to be a market leader in that, let's make sure that we don't drop off investment on it. What is your specialty business running at margin? High 20s. I think on a pure incremental basis, maybe they're somewhere in the mid-30s, by the time we put in our infrastructure costs with it'll be down in that specialty range business. It can go back up? Yeah, I think so. I think that's a business that shows people are going to spend a lot of time flying over the next 50 years, we like being in that space. Second of all is talking about moving around the world in terms of expansion. When Jim talked, there's no particular place that I feel like. I think that our network right now, our ability to trade through our 150 members of the Gallagher Global Network, that actually delivers a really good value proposition to our customers, because when we go into a country, a small broker in a big country can't provide all the services and needs that maybe a larger independent would be. We align with that larger independent in order to provide a better value proposition to our customers versus having to trade with our own flag. I don't know if we were just talking about it, I stepped out for a minute, Eastern Europe is kind of interesting to me right now. I think of what's happening in some of the Eastern European countries. Taking a partnership position there is something that we'd want to do. Again, these are small, $10 million, $20 million-type revenue shops. If we buy 35% of them, get to know the family, get to know the areas, I think that's our strategy. In almost all of our international deals, we want local families to continue to run the businesses there, we probably won't buy 100%. If we do buy 100%, they would still have a large participation in the success of the franchise. We've got six or seven interns in the back of the room today. I don't know if we can drop any of those into Colombia and have them assimilate into the economy and run a branch there, these happen to be finance guys, you get my point illustratively. On the other hand, we have a bunch of young kids from international locations, from our affiliate partners and from our partially owned entities over there that are in our internship program this year. We are building another generation of leaders that can do that. Those are two things just to wrap up. Can I pause on that for a second, hit the CFO Commentary, and come back for questions? Is there something gnawing on those two points that, Elyse? I don't know. I assume you're going to address this, I did notice on the- Hold on. Let me get a mic. In your CFO Commentary that you guys included JLT within the intangibles, not within your acquired revenue build. Yeah. Let's talk about that a little bit. All right. Let's go through the CFO Commentary, I'll hit on it. All right. We've got good readers out there, sometimes a reminder doesn't hurt. Put on my glasses here a second. All right, fine. We changed the amortization a little bit from where we were in April. FX, there's probably a little bit more headwind in the third quarter as the Dow has strengthened a little bit. Pay particularly close attention to the earnings from non-controlling interests. That tip has historically been a first quarter. The big chunk is usually in the first quarter. As we add more partially owned entities around the world, that number is growing a little bit. Please take a look at it's halfway through the page, adjust your models for those. Gallagher Bassett, Scott talked about that our margins in the 17%-17.5%. A reminder on Gallagher Bassett, really strong second quarter last year. Tough comp this quarter. We're probably talking below 5% in the risk management, somewhere between 2% to 3% to 4 to 5% in the risk management segment for the second quarter. But still mid-single digits for the full year. Pat talked about organic on the brokerage side. Somewhere around 5% seems like the sweet spot. There is a lot of work that happens as rates go up. Our brokers do a darn good job of helping our customers maybe reduce their limits or increase their exposure a little bit to stem the tide of increase on that. Somewhere around 5% feels right. Let's move to page three, to the corporate segment. Oh, no, I'm sorry. Elyse, you had the question about yeah, on the rollover revenues. Let's do that first. Let's go to page five and hit the rollover revenues. Here's the reason why we have not included the rollover revenues from the JLT acquisition in this table on the bottom of page five. We're still not exactly sure when revenues flow in. We understand the annual revenues, but as we convert it to U.S. new GAAP, I just wasn't comfortable putting an estimate in at this point. I'll be able to give that to you by the time we get to July for a month. And we only owned JLT for one month, so it's not going to be a meaningful amount here in the second quarter, and then here in four weeks, I'll give you the answer to the test for the rest of the year on that. Do you not close any deals between earnings and now? I noticed the acquired revenue table is the same. We have, but it's pretty small for what we've done at this point. FX also. FX does have a little bit. As FX dropped or as the dollar strengthened, some of the increased revenues were mitigated by the stronger dollar. Also in there, one of the things we were hoping to close the JLT transaction maybe 30 days earlier. We didn't get that done. We had hedged the pound on that, and we lost $3 million on that bet. You'll see that coming through in the corporate segment on page three. We put it in the acquisition cost line. You'll see it's footnote number three. The other thing we've done is we've tightened up our range a little bit on the clean energy investments. Weather was pretty moderate in the second quarter, where a lot of our plants are. We brought that down a little bit. If mother nature comes in with a barn burner summer, we'll probably have to adjust the estimate back up. Very difficult for us to do that. Remember, this is the GAAP earnings. We're still generating substantial tax credits that are on our balance sheet. We're probably pushing close to $1 billion at this point of tax credits on our balance sheet that we'll be able to reduce our cash taxes paid for a decade at this point. Not necessarily in the CFO Commentary document, but in the spirit of taking a look at models and helping you with that, one of the things that we talk about is margin expansion. I've said before that we think that we're going to probably have 50 basis points of margin expansion for the year. I think in the second quarter, there might be some optimisms in some of the models on where margin expansion might be. I see us more in the 50 basis point. I think some of the models have 90 or 100 basis point. That's consistent with what we told you at the end of the first quarter. Just take a look at your models. I don't know if it's just the way the math's working out or you've got a bullish expectation of substantially more margin increase in the second quarter than we guided at the end of the earnings release. It's not that big of a deal, it's just something to make sure you tighten up your model on. Let's see. We talked about margin, we talked about organic by segment. We talked about the hedge item in there. We talked about the organic growth in both the segments. You also see that we've changed our interest because we closed on another $175 million of debt, that impacts our interest expense on that. I think that's it with respect to the CFO Commentary document. Questions on modeling or the document before I go back into the CFO Commentary, or if I go back into just the business discussion. If you added $175 million of debt, remember at the start of the year, you tell us how much cash and debt capacity you have? Yeah. That number should go up by $175? No, I think that was contemplated that we'd do this borrowing at this time. The answer would be is we still believe we can spend about $1.5 billion on acquisitions for the full year without having to use any meaningful amount of stock. When I say meaningful, if we end up using $50 million on a tax-free exchange of stock, we'll try to buy it back, but if we don't get it bought back in exactly the same quarter, it might cause a little share creep. By and large, we think that cash and debt, we can do $1.5 billion worth of deals this year. Meyer? I just wanted to clarify on the JLT Aerospace, because I think the pro formas from Marsh said that there was, I'm going to get the numbers wrong, $36 million of income off of $88 million of revenues. Yep, that's right. It sounds more accretive than I think what we're hearing this morning. I think the reason why is I can't speak to their numbers, but I'm guessing that's the variable contribution to their numbers. That business, I'm sure, was being allocated for central IT cost and for that. What's going away for them is the variable cost, right? They lose that. We pick that up in ours, but we also have to support it with our IT operations, our human resource departments, and those things that are not in that. I think the reason why the two would not be the same is because they're giving up revenue, but they're not getting rid of those expenses, right? Okay. They have to allocate it back into their businesses. We're going to get that business and actually have to build some of that infrastructure that won't go away from them. That's the reason why there's a difference there. Can we go on to broader topics? Yeah, sure. I just want to make sure we're okay with modeling, okay with kind of the update of some of the forward-looking items that we give you in the past. I just want to make sure that's in the transcript. If you miss something, you can read it and take a look at it. Everybody else? All right, let's move on then. We were discussing. Oh, go ahead, John. Sorry. Sorry. Just want to make sure I'm looking at the updated numbers for the, I guess it's like $0.10 of reduced earnings quarter-over-quarter or from the previous time. For the second quarter? Yeah. Yeah, it's a hedge loss. It's not $0.10. It's probably $10 million, right? Is that what? Amortization going up like $6 million. What's that? Amortization. Oh, okay. I thought you were talking about in the corporate segment. No, I'm talking about overall. Yeah. $6 million. Earnings attributable to non-controlling interest, that was $6 million. Well, I think, yeah. Amortization is only going up 88 When did we get it on? Yeah, on the- That's one question I have. One question at a time. The question is this. I just want to make sure. Your amortization, I don't know what's in your models, but it should be growing with acquisitions. We always say that amortization should go up by about 1% of the purchase price for every deal that we do. That, relative to what we showed before, that would naturally grow, and I think we increase that every time we do this CFO Commentary. In terms of the minority interest, it's $6 million worth, which of minority interest might be a penny or $0.02, or $0.02, something like that. By the time you tax affect it and or actually it'd be $0.03, right? $2 million and $6 million is $8 million. What else are you seeing? Are you seeing- In the corporate. In the corporate, yeah. I don't know if the corporate's moved all that much because I think our earnings for in the second quarter are increasing on the clean energy, for a full year, we brought them down just a little bit. Actually, we'll have more increased earnings in the second quarter because of the seasonality of our business- Sure from before. Then we have the hedge loss of $3 million. I would say non-cash items, $3 million-$8 million of it, if you want. Minority interest really isn't a cash item. Second of all, on the hedge loss, that's a corporate item that we just hedged the JLT transaction, we didn't get it done in the short period of time that we were promised by the EU. Why can't you pull the hedge out of adjusted earnings? I could, the corporate segment itself is almost a big adjustment. I can, if that's something that's It's pretty small to do. One other, I guess this is more financials. Stackhouse Poland. You went through the JLT margins versus what you guys sold onto. Can you give us a little bit of a feel for Stackhouse? Yeah. Stackhouse is running margins slightly better than our retail operation in the U.S. I'd call it mid to upper 20%. That's going really well. They've been in our books now for two or three months now, two months. We're getting some good signs that the teams are coming together pretty well. I'm actually going to London in a week, so I'll be over there, and I'll have a better update at the time. Early returns on that's worked out pretty well for us. The advantage we have, they're on the same system as us, I would say that the integration efforts that will be required for that will be pretty small. My bigger picture topic. You guys, I believe, are in a time period when you can make an offer for Capsicum, the portion you don't own. Can you update us? I think you own about 30%, correct me if I'm wrong. Can you just walk us through, when does that time period go to? Anything that you're able to disclose on, like, the negotiations and how that kind of works. I would say there is not much going on in negotiations right now because we have until the end of the year in order to trigger our rights under that contract. We have till the end of 2019. I am going to be over there next week, we will give an update on where we are, we will probably start thinking about it harder over the next late summer, early fall. In terms of what do we own, we own 20% of it, we also have a revenue participation agreement with them that kind of effectively takes our economic interest in that organization to 30%, the technical legal ownership is 20%. They are doing really well too. They are having some great results. Mike? Thanks. Any update on the potential for extending the clean coal plants, the life of them? The update on clean coal is this, is that I think that there are some that are interested in trying to get another couple of years out of the program to help with continued research and development to pay for that. I think there are some activities that are afoot in D.C. on this point. When will we have an answer on that? I do not know. There is an article that came out that said that somebody is pushing for 10 years. I am unaware of somebody pushing for a 10-year extension on it. That might have been something that was postulated a year ago or something like that. If it is happening, I am unaware of it, I would think that our advisors in D.C. would be letting me know that there is some type of proposal for 10 years. If there is any extension, it is going to be a modest extension of a couple of years that might make it through. How do I feel about that? That would be terrific if it happened, because I think that our plants deliver value. As you know, today, we are positive cash flow with our clean energy investments, we are generating credits to be used in the future, we already have $1 billion of them to carry forward to the future. If it gets extended, great. We will create $1 billion and three to carry forward or $1 billion and two to carry forward. If it does not, we will get into a situation, I warn you about this all the time, the GAAP earnings are in excess of the cash earnings, it has been that way for 10 years now. When the law stops, all of a sudden cash earnings become substantially more than what the GAAP earnings will be. We're talking about the entire GAAP earnings could go away at the end of 2021, but the cash earnings could be somewhere around $150 million or more a year because we start to use what's in the balance sheet for the next seven years. Hopefully that makes sense to you that if it goes away, all of a sudden our cash earnings will be dramatically more than they are today. If we get the extension, that just pushes that down the line by a year or two. I'd like to have it happen. If it does, but if it doesn't, we get into the cash harvesting era a lot faster or two years sooner. Dan? I ask this a lot. It's okay It's not a new question. We've had a lot of commentary today about how the impact of rates and exposure units doesn't necessarily translate 100% into additional revenues because of limitations and the increased effort. Doesn't that just mean that commissions are probably the wrong way for you guys to get paid? Well, no, I think that I wouldn't jump to that commissions are not the right way to be paid. By and large, our customers know exactly how much are made, and they assign. Whether it's a fee or whether it's a commission, they know how much we're getting paid. It's kind of semantics. Remember also, just to tailor your comment, it's easier for our brokers to help a customer limit the amount of rate increase by changing deductibles or limits. It's hard for a broker to remove exposure growth. If you have 20 trucks and the rate goes up 5%, our brokers can come up with ways to, instead of having a $1,000 deductible per truck, take it up to $1,200. Instead of having a $5 million limit, take it down to $4.5 million of limit on it. 5% rate increase on 20 trucks, our brokers can be creative to help the owner or the company manage their budget. If he adds 5% more trucks, all of a sudden, he's got I guess in this case it'd be one truck, but let's say five trucks to make it easier. He's still got to insure that extra 5% of trucks. That's a harder thing for a broker to help their customer control their cost on or come up with creative ways. Truthfully, that owner isn't going to quibble about it. If he's putting another truck on, odds are his business is getting better, and therefore, the insurance that goes on the truck, by extension, is actually almost a good thing. He's got to come up with insurance because he's going to make money off of that truck. In the first part of your question, it's really the rate that our brokers can do more to offset versus exposure. That's why periods of stable economic activity or growing economic activity really is good for a broker because more trucks are coming online that have to be put into service. More shifts are happening. Economic activity is good for brokers. Rate increase, a flat market that we have, it's good for the carriers right now, it's good for the brokers right now, and it's good for the customers because by and large, it's pretty stable. Going back to, I guess a little bit on the tax conversation. I believe in the past you've mentioned assuming that these laws do expire by end of this year, end of 2021, that you guys would also be looking into other avenues to potentially benefit you guys on the tax side. Should we assume that maybe that's on hold until you figure out what's going on with the legislative front? Yeah simultaneously you're evaluating kind of new tax methods? We're looking at new tax opportunities every day. This group of, we're talking about a dozen people. They're actively looking at carbon solutions. They're actively looking at biowaste solutions. The real question is, I'm not so excited about bringing something up online to generate tax credits between now and 2025, because we wouldn't be able to use those credits until 2030, 2032, 2034 anyway. For us, more of a slow and steady developmental exercise is what we're doing than it is trying to run out and be able to build a carbon remediation plant and spending money on that today, where we're not going to get the cash benefits for 10 years. Right now we're in the perfect spot because these things take a long time to develop, and we're in that perfect spot that we don't need any more tax credits generated until starting in about 2025, 2026, or 2027. The answer is a lot of work being done by this group of folks on new technologies, and we'll see where it gets. I'm not going to turn around and spend $20 million tomorrow on experimentations if I can wait to do that until 2022 or 2023. That brings something up online in 2025 or 2026. Okay, great. Does that make sense? Yes, that's helpful. In terms of on the debt side. You guys issued some debt in the first quarter, and then also you just told us about some additional today. Yep. As you think about the acquisition pipeline, I know now we're going into next year, but would you assume that you wouldn't be issuing any additional debt until next Q1 at the earliest? Yeah, I think that's probably about right. I think that we're probably pretty good because our strongest cash quarters are the third and the fourth quarter, just because of the seasonality of our bonus payments, et cetera, that get paid in March and April. Our first and second quarter is always seasonally smallest in terms of our cash flows, until we generate substantial cash flows in the third and fourth quarters. That should get us into the first quarter next year or a November type or December type raise for the next round. This is a broader question. Valuation multiples for brokers have been rising for years now, which is a great thing. I'm curious, do you feel structurally that AJ Gallagher or the brokerage industry's earnings volatility or maybe earnings growth profile is different, thinking like the next 10 years versus the past 10 years? Yeah. I actually think that they're more stable than they were when I joined Gallagher 16 years ago, and I think that the stability of our revenue base is more diverse and stronger today. Just the industry in general, the cycle is coming out of the big, huge spikes and valleys of the cycle that really most of you haven't really experienced unless you were watching the industry in 2000 and 2001. Nearly 15 to 18 years ago, I guess already now. That cycle, I don't see that coming back because of the insights into loss costs and inflation. I think that the carriers are pricing more rational. It's not a knee-jerk reaction. There'll be many cycles by line of business. You might see workers' comp get hard, you might see it get soft. Again, hard and soft might be defined by 5% up, 5% down. Property, you could have a knee-jerk reaction to hurricanes. If we get six or seven blowers that come in, you'd see property rates go up 10% or 15%. The days of just portfolio rate increases, where a CEO comes in and says, "Take everybody up 20%," I think are gone. Take it down 20%. What that means is that the earnings volatility of a broker should be substantially less than they were before. Because in big spikes, good things happen. In big troughs, bad things happen. We're just not seeing that. I think your question is the brokerage space better today than it was before in terms of predictability of earned cash flows and stability of cash flows? I think the answer is absolutely yes. The new accounting would maybe minorly tweak that a little bit in terms of adding a little variability, but not. Yeah, the new accounting where you have to defer some of the revenues. Really most of our service. Remember, unlike a carrier where they basically recognize 1/12th each month, right? In the unearned premium reserve. Our unearned revenue reserve, for lack of a better way, is really to fulfill the service that goes along with placing that contract. In our case, most of that service happens in the 60 or 90 days after we place the contract. We place your business, Mike, we close it on June 1st. We issue you a bunch of certificates of insurance, maybe in the next two weeks. Then 30 days later, the policy shows up and we review it, and we tailor it, and we make sure everything's right. Then we provide maybe some additional service right after that fact. By and large, within 60 days, the revenue is fully earned, right? In answer to your question, new GAAP shouldn't have a big impact on that unless somehow the service offering changed dramatically or our mix changed dramatically. If we ended up being in highly specialized businesses that it took 180 days to fulfill the contract originally, of course, you'd have to defer revenue over a longer period of time. I don't know if that answers your question, but I would say the answer to that is not much, if any, in terms of that. I guess going back to the modeling question. In the first quarter, you guys had seen, like 60 basis points positive from stronger contingents, and it was offset by some kind of deal-related headwinds. How does, when you're thinking about saying kind of like staying in this 5% world, is that assuming kind of 5% growth ex and including contingents? Do you see any kind of contingent related benefit to margins or against in the Q2 or any other quarter? We had a pretty strong contingent quarter, first quarter and last year also. I'm talking all in, Elyse, the 5%, whether it's commission, whether it's base, whether it's contingent, whether it's supplemental, I'm talking all in when we're talking 5%. Also to tailor your question just a little bit, the preamble was, is what happened. Acquisitions are inherently dilutive to margin in the first quarter because we post 36 points of margin in the first quarter because of the way the seasonality of our businesses. We're not buying many shops that have the same seasonality. Basically, that's because of our benefit business. So much of the revenue is recognized in the first quarter. It drives our margins way up. I think in the second quarter, margins are somewhere in the mid 25%-26% range. Most of the acquisitions we're looking at are running 25 points of margin. They're kind of a push in the second quarter. They're dilutive in the first, maybe you pick up 10 basis points a quarter in the second, third, and fourth. That's really why the acquisitions offset the good contingents in the first quarter. Oh, Richard. I saw one of the recent acquisitions was done in a wealth planning business. Can you talk a little bit about the opportunity that you see for growth in that line of business? Yeah, I think that on the benefit side, wealth planning that's kind of fostered and shepherded by employers. For instance, Gallagher has a relationship with a firm where executives can help me with my tax returns and wealth planning, et cetera. I think that's a good business where I think that's something that's more of a voluntary benefit, so to speak. I've got to pay a certain amount, but I've got a relationship with one particular organization. The big issue for the benefits business is what are we going to do to attract and retain a smart workforce or the appropriate workforce? In some businesses, I think you got to provide a lot of voluntary benefits that executives or employees can have comfort that there's been just a little bit of due diligence around the credibility of those organizations. If I wanted a wealth planner, where would I look? Let's look to my employer first if they have a relationship with someone. I think it's a good business for us to be in. I don't think it'll be overly meaningful. It doesn't signal that we're going to be doing this, that we're going to all of a sudden pop up a bunch of financial stores around the country to do wealth planning. That's not really what this is. This is more employer-sponsored endorsement of somebody that can provide value to their employees. Maybe I want to talk about a couple of things. Just let me walk around the world a little bit because I want to talk about the health of the franchise. Right now, as CFO, I couldn't be more pleased in the fact that almost every one of our operations around the world have margins that are at optimal levels. Doesn't mean they can't go higher with some creativity and some more productivity and quality initiatives, we're pretty good. The places that we've talked about in the past have been Australia Retail, they're almost at optimal margins right now. U.K. Retail, when we put together the four big shops over there, they're almost to where they're going to be. I'm expecting good things when I go over next week, too, to confirm that outlook. Our small little underwriting businesses in a couple pockets around the world, we really had to bring in some more management information and retool our pricing on that, they're still pushing margins towards 20%, they've really done a nice job of improvement. As CFO, looking around the world, we don't have any real weaknesses when it comes to the health of the business that we have. Truthfully, all of them are growing organically nicely too and contributing. That's a good spot to be in. I do want to go back. The health of the franchise, I think is in the best position it's ever been in my career here, to be honest. I think the market is ripe for opportunity for us to continue to grow. I think that we get stronger and stronger every day. Somebody recognized early on that we're growing both through acquisition and organic, that's kind of a nice one-two punch. We open up new stores, our existing stores continue to grow. There is some noise, I apologize because it tends to bog these meetings down a little bit by our clean energy and maybe some of our treasury functions. If you step back and look at it, these are cash flow generation activities. They're not core businesses to us. We have a strategic investment strategy of clean investing and we have to move money around the globe, every once in a while you hedge it, sometimes you win, sometimes you lose on it, that's it. If you take out the noise of clean energy, that isn't a business. If you take out the noise of a hedge, the business is doing really well right now. I think that's an important maybe leave behind as you walk away from today's meeting. That's how I would characterize the business. I think we're in really terrific shape, and I think we're set up to have a great 2019 in total. I think that we're going to get even better in 2020. I can feel it. Other questions? That wasn't necessarily meant to be a summation, but if there's something before we wrap up. All right. I guess there's a consensus to adjourn. Thanks everybody for coming. Thanks for listening and hopefully I made some sense in being able to explain where we think we are at this point. Thanks, everybody. Talk to you in six weeks.

Data Source: Quartr Last updated: Jun 13, 2019

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