Good morning. Welcome to Arthur J. Gallagher & Co. first quarter 2013 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings of the securities laws. These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call, which are also described in the company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today. It is now my pleasure to introduce J. Patrick Gallagher Jr., Chairman, President, and CEO of Arthur J. Gallagher & Co.. Mr. Gallagher, you may begin.
Thank you, Melissa. Good morning, everyone. Welcome to our first quarter call. We appreciate you being with us this morning. Today, I'm joined by Doug Howell, Chief Financial Officer, as well as the division heads that run our businesses across the world. 2013, as you saw last night's press release, is off to a good start. Last quarter, I mentioned that a number of our actions and efforts undertaken in 2012 should carry over nicely for us in 2013, we're in fact seeing exactly that. Brokerage adjusted revenue up 19%, adjusted EBITDAC up 28%, EPS up 22%, margins up 130 basis points, 4.8% organic growth. Really good start on the brokerage side. Risk management as well, adjusted revenue up 11%, adjusted EBITDAC up 13%, earnings per share up 11%, margins up 30 basis points with 11% organic growth in the quarter.
All of our divisions are contributing across all geographies. All in all, a great start to the year. Let me add some color to these numbers, then I'll start with mergers and acquisitions. We did four transactions in the quarter, a little bit of a slowdown from the fourth quarter, which of course, is to be expected after the surge that we had in the fourth quarter of 2012. I'll say the reasons people join Gallagher have not changed one bit. We offer our partners a deep expertise across all disciplines and the ability to operate in a culture that is team-based, focused on servicing clients and selling. Just the type of environment that allows us to have a one plus one equal three, four, five opportunity for our merger partners.
Our partners all have choices. As I do every quarter, I want to personally thank those who have joined us. We're honored to have you as part of our expanding team. Our pipeline is very robust, we do expect to have a solid merger and acquisition year. Let me turn to retail property casualty. The Council of Insurance Agents & Brokers survey reported that property casualty rates continue to climb. Average increases in the first quarter for all accounts were reported to be about 5.2%, we are seeing carriers asking for similar levels of increases and even more in workers' compensation, which in many states is going to need substantially more rate to get back into a profitable position.
I'd remind you again, this is not a traditional hard market, but rather a continuation of carriers recognizing that in this environment with no investment returns, they have to make money on underwriting. This is not a balance sheet driven change. Carriers are very aware of loss cost inflation and know that increases in their rates are necessary. We're not seeing discipline weaken here. We continue to believe this is actually a better environment for our customers. All of us would rather help them work through 5%-10% increases than have a huge leap in prices with significant cuts in coverage. On the international side, our business had a strong quarter with organic growth approaching double digits. Our acquisitions are coming on board as expected, and as I've said before, the Heath platform is doing exactly what we hoped it would do.
This has given us a great platform to continue to do acquisitions. Our international expansion is very exciting. It's a bright spot for the company. Our wholesale business was very strong in the first quarter. Submissions are increasing as the rate environment continues to firm. Our submissions are strong. We are binding many of our quoted opportunities. On the benefits front, we are running hard. The Affordable Care Act is keeping us busy with clients, prospects, and mergers. In my opinion, many businesses in America are just waking up to the reality that this act is going in place in 2014. Frankly, they failed to prepare. Regulations are being issued. We expect thousands of pages of regulations. Clients need to react, and they need help.
Our benefit merger and acquisition pipeline is particularly strong and growing as smaller brokers and consultants realize they need our expertise to help their clients deal with this new law. Simply put, the smaller broker consultant cannot keep up. We have invested in software that helps our clients calculate the cost of changes and in training to help our professionals stay up to date and on a private exchange in partnership with Liazon. This will help all of our clients with choice. We know we'll see continued growth through 2013. Our risk management segment, Gallagher Bassett Services, had a fantastic quarter. We had adjusted organic revenue growth of 11%. Growth was strong in the U.S., U.K., and Australia. Adjusted EBITDAC was up 13%. We are fully ramped up in South Australia. New business is off to a good start globally.
We just returned from the RIMS conference where Gallagher Bassett rolled out our most updated version of our analytics workbench. This product allows our clients to use our RiskVerX system to spot trends and analyze data in almost an unlimited array of reports customized at the click of a button, all focused on helping our clients get better and better at managing their cost of risk. We believe these upgrades put GB clearly at the forefront of data analytics in the property casualty risk management world. Pulling it all together, our combined brokerage and risk management segments Adjusted revenue up 16%, coming in at $606 million. Adjusted EBITDAC up 24%, coming in at $108 million. EPS up 19% to $0.32. Margins improved over 100 basis points.
If the economy holds up, if rates continue to trend up, I expect the rest of 2013 to be another outstanding year. Doug?
Thanks, Pat, good morning, everyone. It's nice to be off to a good start, especially given that our first quarter is seasonally our smallest. Let's start on the first page with the Brokerage segment. First is the Heath Lambert integration cost. We are still on track to wrap up the integration in the third quarter, so you'll see $0.02 of integration cost in the second quarter, $0.03-$0.04 in the third quarter, most of which relates to the consolidation cost when we consolidate our London operations into new office space near Lloyd's. By the end of the third quarter, we'll be done with integrating Heath. Moving slightly down to Risk Management. Recall last quarter, we broke out the startup costs related to our new Australian client.
This quarter, the team hit their startup targets, you'll see we received one-time fees to partially compensate for our ramp-up cost. That was good work by the team. Moving to page two, our Brokerage segment in their organic growth table, they had an excellent organic growth quarter, up 4.8%. We saw around 4% domestically and over 9% internationally. On the lower half of page two, you'll see tables for our comp and operating expenses. Please make sure you read the footnotes to those tables because there is some noise between the two. The punchline is some of our 2012 U.K. acquisitions were on lower comp ratios and higher expense ratios. That said, regardless of the geography, when you turn to the top of page three, you'll see that we expanded EBITDAC margins by 130 basis points. We're really pleased with that expansion here in our first quarter.
Moving down to the middle of page three to the Risk Management organic table. Gallagher Bassett, you heard Pat say, had a terrific quarter, up 11%. Even without our new Australian client coming online, to be up nearly 7% organically shows acceleration in that business, even in an economy that isn't seeing much employment growth. Turning to the middle of page four, you'll see that we also expanded margins in our Risk Management segment. Recall that we are targeting about 16 points of margin, to be above that is really good work by the team while they continue to make investments into product enhancements and client service improvements. All right, let's move to the bottom of page four to the shortcut table for the Corporate segment. In our last earnings call, in the investor supplement, we forecasted a $0.04-$0.07 loss for the first quarter.
We actually posted $0.02 of earnings. Two reasons explain the difference. First, we were able to recognize about $0.02 more of tax credits than we had previously anticipated. Second, in late March, we closed a transaction that resulted in a one-time gain of about $0.05. We had not contemplated closing that transaction until later in the year. This gain arises because a co-investor lost their appetite for tax-advantaged investments, and we were opportunistic in repurchasing their share of the plans. Next, when turning to page five, you'll see that we've evolved our disclosure to make it tabular rather than a page of words. We hope this provides a more succinct way for you to quickly track the status as we roll out the plans.
That table also provides annual after-tax earnings estimates. Realize those are ultimate estimates, and there are many reasons a plant might not run at ultimate levels. Accordingly, as you build your corporate segment models, please be sure to use page 14 of our investor supplement that we post on our website. That page provides our range of estimates for the rest of the year. When you compare this quarter's page 14 to what we posted last quarter, you'll note that there is movement between quarters and we have narrowed our full year range. This results partly because of the earlier recognition of the gain that I just discussed, and partly because we have received updated production estimates from our utility partners. The biggest difference in production estimates from last quarter relates to one utility that is using a few of our plants.
They unintentionally purchased some lower-grade coal that causes some inefficiencies in their boilers. Their production estimates have come down. The silver lining is they have decoded the issue, and they believe they could be back burning the better coal later in the year. That said, when you really look closely at that table, we remain optimistic that here in 2013, we can generate more than double the amount of cash we made in 2012, which we will in turn use to help fund our M&A program. As for capital management, you'll see at the bottom of page four of our earnings release that we have committed to another $200 million of debt. We expect to close that here in June. We are well-positioned to favor cash and debt to fund future acquisitions.
Don't forget, if M&A activity is near last year's levels or if some transactions are structured as a tax-free exchange, we will be back to using some shares. Those are my comments. It's nice to kick off the year with a really good quarter. Back to you, Pat.
Thank you, Doug. Melissa, we're ready for questions if you want to open it up.
Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star one on your telephone at this time. If you are on a speakerphone, please disable that function prior to pressing star one to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star two. Again, it is star one for questions. Our first question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your question.
Hi, thanks. It's actually Eric Fraser for Mike. First question is just on the debt and the M&A pipeline. Do you have extra deals lined up? Are you targeting more deals in the U.S. versus the U.K.? Do you have a preference for benefits brokers or kind of straight P&C retail commercial brokers?
Well, Mike, the answer to that is all the above. We have an appetite for benefits brokers, not a greater appetite than property casualty, but there's more opportunity there. As I mentioned in my prepared remarks, we're seeing that the smaller consultant and broker in the U.S. is recognizing that they really do need some help with this new act. If they've got clients, literally over 150 life cases, they're going to need help from someone like ourselves. So that pipeline remains very robust. As you know, of the 60 acquisitions we did last year, 30 of them were in the benefits space. Not all of them are very sizable. We're very happy to pick up $2 million, $3 million, $4 million agencies as we go along. That remains very robust. We have a very strong appetite for good partners in the U.S.
If you look at our investor slides at our website, you'll see two slides that we use frequently, one that shows where we are located in the U.S. and another that shows population centers over 100,000 where we're not, and we covet those locations across the U.S. Globally, we're very active. We've been active, as you know, in the U.K. We've got good activity there. We've been active in Australia. We've been active in Latin America and in the Caribbean, and those pipelines remain very strong. All in all, we think we're in a pretty unique position as an acquirer. We're most interested in the people that'll join us. It's not geographically driven. We like to be able to add to some of the services and niches that we know that we're strong in, and it really comes down to the culture and the people.
It's hard to predict when they're going to hit. They are individual transactions that occur along the way, we think we're going to have a very good year.
You're confident you're going to be able to put that cash to work?
Yes.
Got you. One follow-up on the risk management section. Organic growth a bit higher than it's been in a while. Curious if you can also talk about, you mentioned the impact of a lost client last quarter. What's the outlook for being able to continue to run at a margin that's above your target?
Well, Gallagher Bassett, yes, last quarter, we mentioned that we did lose one client, and that was why we were a little bit lower on our organic, and that's why we said we thought that 2013 would look a little bit more like 2012. It's turning out to be that way, to be at 7% organically. The new client is the Australian, one of the work cover schemes there that we picked up. That's a sizable client. I've said that we think that'll add about $5 million of revenue per quarter above whatever you pick for an organic number. We think that they're very well positioned for growth this year.
Just in terms of the margin, just being above, can you run sustainably at above a 16% for the rest of the year?
We'll have to take a look at that. We've asked the team to hit at least 16% for the year, and I think they'll be able to do that easily. How much above 16%? It all comes down to how much more we want to invest in product enhancements and client service improvements. This is a very well-organized process, if it looks like our margins are moving up, we'll make some more investments.
Eric, this is Pat. This is a different business than the brokerage business. Claims show up every day. You better have people there to handle them. This is not a business that's going to show great margin expansion. As we grow top line, that means there's big time claims coming in behind.
Right. That's all for me. Thanks so much.
Thanks.
Thank you. Our next question comes from the line of Gregory Locraft with Morgan Stanley. Please proceed with your question.
Thanks. Good morning.
Morning, Greg.
Great quarter in the core, so congratulations on the start to the year.
Thank you very much.
Just wanted to get a couple of clarifying items. One is on the coal division. Doug, I think you mentioned that there was one person that opted out. Can you give us some color? What's their view of the world versus your view of the world for the outlook in coal? Maybe a bit about how the accounting works, so that you guys got the $5 million gain.
Yeah. One of our co-investors for internal reasons, decided that they no longer had an appetite for tax credits. They decided it had nothing to do with our plants or what we're doing. It's just they don't want tax credits anymore. They chose to exit their investment. We were opportunistic in buying that back, when you buy that back, there's a step up in basis with respect to our ownership interest piece. What you do is you just run some of a fair valuation going forward, you present value that back at a steep discount, you look at how the enterprise looks as a total fair value, you step up your old historical basis to that's what created the gain.
Just to clarify, their appetite for tax credits, what was precipitating there? I assume at one point they went into this and said, "This is a great thing," and then now it is not. You obviously were able to get a good price out of them because of the gain.
I am speculating here, but usually when somebody loses their appetite for tax credits, it is two reasons. The internal sponsor is no longer with the company. That happens, or they are no longer in a position tax wise, where they need the tax credits.
Okay. Last, are there any other kind of partners out there? What is your visibility with regards to others that might go this way? It sounds like you guys basically have a right to call or whatnot. How does it?
No, we actually do not have a right to call. Our other partners actually would love to buy these portions of our plants from us.
Okay. You guys stepped into the breach and just took them out of it. Okay.
Yeah. There was no breach. They just chose to exit. Listen, they just lost their appetite. That's what it is.
Yep. Perfect. Great. Okay. Just totally shifting gears, and this is a small thing, but the share count, for some reason, I seem to recall that you guys are obviously issuing debt. You actually did well on the free cash line relative to historical seasonality in the first quarter. Is share count going to still be going up from here? I seem to thought that maybe share creep wasn't going to be occurring anymore just because you were going to use all your cash to buy businesses.
Yeah. We did not use shares and acquisitions, but just the natural increase that happens when the stock price moves from in the 30s to the 40s, you get more dilution on outstanding shares. When you look at the treasury stock method of accounting for outstanding shares, and then you have option exercises, you will have some creep in the shares that go up. That's what you're seeing this quarter. It's really purely related to options. Then we also have a small employee stock purchase plan that we issue shares to, but that's not the lion's share of it.
Okay, great. That's it for me. The core results were excellent. Congratulations again.
Thank you.
Yeah, we're very happy with the quarter. Thank you.
Thank you. Our next question comes from the line of Raymond Iardella with Macquarie. Please proceed with your question.
Thanks. Good morning.
Good morning.
Maybe touching on the M&A topic a little bit differently. Maybe Pat, could you talk about sort of the appetite of Gallagher sort of reentering the reinsurance brokerage business in any material way?
No, we don't really have much of an appetite for that, Ray. You're not going to see us go back into big-time competition with Guy Carpenter, Aon, Willis Re. We do reinsurance and always have, even when we exited the heavy treaty stuff. We've always been supportive of our captives with reinsurance, the pools that we do, and the programs that we run in London. We have reinsurance expertise, but you won't see us reformulating Gallagher Re.
Okay. That's helpful. Maybe Doug, numbers question. Just thinking about or setting the bar in terms of acquired revenue for the rest of the year, is there any way you can quantify sort of no acquisitions were to happen the rest of the year, what the impact might be on the rest of the year's revenues?
We have such a great carryover from last year from the acquisitions that we did on 2013. I don't think there would be much difference in our growth in revenues for this year, because just that we closed so many deals in the fourth quarter of last year. This year is pretty good. The impact of next year is easy to quantify. We just pick how much you think we're going to do for the year, most of that will hit the second half of this year or into next year. The actual impact of acquisition rollover, I think that it will still put us into double-digit growth easily for the rest of this year.
Okay. Last one, I'll re-queue. Maybe just talk about strategy and how the state exchanges will work on the retail side. More specifically, I guess, how can Gallagher generate revenue for potential business that might go into the state exchange? I know it's not a big piece of your employee benefits business, any thought there could help us out a lot.
Sure. I'll touch on it, we have Jim Durkin in the room if I want to throw you the ball maybe here, Jim, as well. The exchanges are still up in the air. Some states are forming them on their own. Some are relying on the federal government. There are private exchanges, as we've done, being created. Rules are being promulgated. It was originally going to be a matter of choice. Now the feds are saying that it looks like it'll be one set of choices. You're going to have clients that take a look at what we refer to as total rewards. When you get over 100-150 lives in a group, it's not just about health insurance. You've got to take a look at everything you're doing to compensate and maintain the relationship you have with your employee base.
Let's face it, all of us in most businesses talk about the fact that there's a war for talent. Every single day, we get paid for the people we put on the playing field. We have to make sure that we do a good job of compensating them, rewarding them, and covering them with health insurance, and our clients have the same problems. The exchanges, I think, will probably suck most of the business from the smaller end of the group business. We think the 40, 50 life case tends to go that direction, maybe all the way up to 100 lives. When you get over that, we do see the employer maintaining a very active involvement in making sure that the healthcare cover for the clients are maintained in a way that reflects their total view of compensation.
Jim, you want to add anything to that?
Only thing I would add is that there's been a strong indication by many of the state exchanges of willingness to pay commissions to brokers. They see the value. They understand the brokers will help them. Those brokers that for their customers that might be using a state exchange, there is an opportunity to get a commission. I guess lastly, remember our model is to provide advice, consulting services, and we're going to get paid for the work we do. If we help a customer who makes a decision to move to a state exchange, that's not a one-time decision. They have to look at that each year, and we're going to be there to help them do that. Plus, there are ancillary products that we'll continue to be involved in, the life, the disability, retirement. There are opportunities to continue the revenue stream.
Okay. Thanks so much for the color.
Good.
Thank you. Ladies and gentlemen, as a reminder, it is star one to ask a question at this time. Our next question comes from the line of Brian DiRubio with Yield Capital. Please proceed with your question.
Good morning, gentlemen.
Good morning, Brian.
I got three questions. The first one, Pat, could you give us any color on what the organic growth of the acquired revenue would have been if it was sort of there for the full year? Because you're acquiring the revenue, so to give a number of what it did in the last 12 months, but that revenue is obviously doing better also. Can you give a sense how well that's growing?
About the same as our general book, Brian.
Okay. For risk management, two questions there. Can you give us a breakdown of the organic growth rate versus change in claim counts?
I'll throw that to Scott.
On the rate itself, you're talking about the fee increase.
That's correct
We're still seeing a little bit of growth. It's probably just around 2%. The claim count growth would account for the remainder of it. It's very competitive pricing wise, it's not much above 2%. It changes a little bit too for our larger clients, where it's even more competitive, that may drop as low as 1%-1.5%.
You are seeing claim counts increasing?
Claim counts are increasing. A combination of, if you were to break the claim count growth down in two ways too, it's from our existing book of business, it's around probably 1.5%-2%. The remainder of the growth on claim counts comes from new business.
Great. Just the final question on there. Are you seeing any signs of customers moving to self-insurance given the rate increases we've been seeing over the last 12 months?
Yes, that's a really strong point, Brian. Thank you for bringing that up. This is our core expertise. What built our company is our ability to take clients that are in the traditional market and help them mitigate rate increases by assuming certain portions of risk themselves, by bringing Gallagher Bassett in with high retentions and having them pay the claims in various forms of self-funding. As a public entity, that might be a risk-sharing pool in a state, that may be a group captive funded and founded in our Artex operation. It may be just a state workers' compensation program going to self-insurance. That is always a big driver. Now, that also, Brian, mitigates our commission growth to a degree. You'd be looking at these 5% and 6% rate increases across the board and wondering why Gallagher is benefiting to the tune of only one percentage point.
Our job is to mitigate that for our clients. One key way that we do that is help them enter what we refer to as the alternative market.
Great. Thanks a lot, guys.
Thanks, Brian.
Thank you. Our next question comes from the line of Brett Huff with Stephens Inc. Please proceed with your question.
Good morning. Thanks for taking my call.
Good morning.
Two questions. One on margin. Doug, you had sort of given us a rule of thumb about margin growth relative to organic growth. Any changes to that based on what we've seen again this quarter? It seems margin expansion, at least relative for what we expected, is better than we thought.
I think that the old rule of thumb was, is we needed 3% organic growth in the brokerage segment to show any margin. We did 4.8% this quarter, and we dropped 130 basis points out of that into the margin. I would say that growth above 3%, you could see kind of a third of that going to the margin line. I think if you get down to 1% or 2%, we are seeing some inflationary pressures in certain lines. We talked a lot about at the last call that we had salary inflation. We've had a little bit of pension inflation. We've had some medical inflation. The control of our headcount has helped control some of that. There are other inflationary pressures in our expense line.
By and large, we think we're well positioned this year that even with the organic growth above 1% or 2%, we should see some margin expansion.
Okay. Pat, I think this is more of a question for you. Can you just comment a little bit on particular verticals in the U.S. that were good or bad? Maybe also client sizes, if you see any changes in the organic growth in those, maybe also geography. Is there anything notable maybe among those three parameters in the U.S. business organic growth?
Brett, we continue to be very strong in a number of the verticals that we talk about. Higher education, religious and not-for-profit, construction, real estate and hospitality all had very good starts to the year. We follow that across other lines, such as directors and officers and professional liability lines. That was a good start for us for the year. The verticals are doing well for us, and those are our primary ones. I mean, public entity, we are very strong, as I said, higher ed, construction, real estate, hospitality, and what have you. All of those are off to a very good start. I don't have any of the verticals that we report on that I would say are lagging. We're not seeing a decrease in rate across any of those. We're not seeing a lack of appetite by underwriters in any of those.
We continue to be very focused on that and get stronger in those verticals every single quarter. In terms of geography, I think the Midwest seems to be probably strongest in rate. The West Coast seems to probably be weakest, but when I say weakest, you're probably seeing 90%+ of your accounts in the Midwest and in the East receive some form of rate increase. It's probably closer to 70% on the West Coast. I really don't know why that is. That doesn't tend to break much by size. We're seeing pretty good discipline in the underwriting community across most sizes. Yes, if you're a real large account taking a good portion of the risk yourself, you're probably going to be able to mitigate these increases a little better than that commercial middle market account in the Midwest.
By and large, the increases are kind of across the board, with one exception being the strongest, which is workers' compensation. The carriers really do recognize that they've got significant problems in that line, and they are taking remedial action. We're seeing rate increases there approaching 10% pretty much across the country. I want to make sure, Brett, did I answer your question?
That's great. It's exactly what I need. I appreciate the detail and congrats again on a nice quarter.
Thank you very much.
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.
Hi, good morning. Thanks.
Good morning, Chris.
Just two quick questions for you guys. Doug, I just wanted to touch on contingents and supplementals quickly. It looked like they were up modestly for the quarter, but on an organic basis, we are pretty flat. Any guidance for the rest of the year? Do you expect that trend to continue?
Yeah, I think that organically, flat to maybe a touch up for the rest of the year. When it comes to our acquisitions, we generally get most of that in the first quarter because they are more contingent based and supplemental. I would say flat to slightly up from last year.
Okay, great. Just wanted to dig into the brokerage segment a little bit on the organic side. I know from the spring meeting that you guys highlighted wholesale and benefits divisions were doing pretty well, and I might imagine maybe mid to upper single digit organic. Is there anything going on in sort of the core domestic P&C brokerage business that might be a little bit less, or are they all sort of running around that 5% range?
No, PC U.S. domestic business is running a little less than that.
Okay.
It's a little tough to judge in our first quarter. I know it's comparatively the same size, but in our first quarter, you can get one person moving from, or one client moving from the traditional market into the alternative market can have an impact on our organic, just because it's so small.
Okay, that's helpful.
Benefits are really solid. Benefits are solid, and then our domestic wholesaling is solid also. We're seeing nice growth from those also.
Great. Just one number. Do you have the end of period share count, by any chance?
Yeah, I think it's on the very last page of the press release. Let me pull that out for you. I think it's outstanding shares are 127 or 126.2.
Okay.
I think I have that right.
Perfect. Thanks a lot.
Thanks, Chris.
Thank you. Ladies and gentlemen, as a reminder, it is star one to ask a question at this time. Our next question comes from the line of Arash Soleimani with KBW. Please proceed with your question.
Just a quick question on coal. Once we're at fast-forward to 2019, 2021, when the tax credits expire, obviously Gallagher then has the interest in these plants. Are you kind of on the hook for the disposal costs at that point, or what's the process there?
Yeah. The answer to that is twofold. If they convert, which we hope they do, to pure mercury control at that time, which is the reason why they're doing it in the first place, is because of environmental control, but those plants would continue to be used. If they decide that they no longer want to use it, at that point, there would be a demolition and disposal. These are pretty small. You need to realize that if you recall from any of our presentations, most of these plants are about the size of a semi tractor trailer. There's not a ton of machinery to dispose of at that time. It's not a big cost at all for us.
When you say they, you just mean the utility partners, or?
Say your question again.
When you said if they're still interested in running, did you mean the utility partners?
Yeah. The host utility at that point, if you believe that the MACT standards, mercury control standards, come in in 2016, they will have to replace our system with some other type of mercury control system or continue to use our system. If they continue to use our system, there would be no disposal with respect to these plants. We would work on a royalty at that time and without the benefit of the tax credit, but that's the objective, is to commercialize as many of these locations using the ChemMod solution so that there is an after-tax credit life that continues to generate royalty income for us.
Okay. That's helpful. Thanks for your time.
Thanks, Arash.
Thank you. Our next question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.
Yeah, thank you. Good morning.
Good morning, Mark.
The better growth in the international, how much of that is a function of the strength in those operations? Are the markets stronger, or now that you've had them in hand for some time, you've been able to improve, and so it's more of an internal improvement? I don't know if you can make that distinction.
No, I think I can make that distinction. I think in Australia, you have a very strong economy, and that's helping with economic growth and with just the increase in premium income in the environment. Plus, we are doing a fantastic job in Australia on new business. Our team is very strong in Perth, Sydney. I'm talking on the PC side now. That's been a very strong, bright spot for us. I can't say enough about what the acquisitions have done for us in the U.K. in terms of positioning us for great organic growth there. The Heath acquisition in particular, but as you know, we did four additional mergers in that space over the past year. We look to have another one probably done soon in the U.K. as well. Those are all very additive to the effort.
The economy in the U.K., when you get outside of London, is not very good. It's probably better than the European continent, which we have virtually no exposure to. What's happening is the folks who we've brought on are just doing an outstanding job of generating new business and new opportunities.
Do you have a particular focus on expanding into other countries? Is that a priority, or is it going to be just as the opportunities emerge?
It's both. I think as you saw with the move we made in the fourth quarter with our partners in Latin America, we're excited to now have a platform on Mexico with the Casanueva family, that we own 21% of that business and will continue to expand through Latin America. We have a very good appetite for continued acquisition activity in the U.K. and in Australia. As you know, we completed the 80% purchase of CGM in the Caribbean, so we feel pretty good about that. If there were places in the Caribbean that we could do bolt-ons and roll-ins, we'd do that. It's both. It's geographically focused. We like Canada, we like the U.K., but it is also opportunistic in that the fact we're trading in over 100 countries with independent brokers in our Gallagher Global Network.
As those families and partners decide that they'd like to take some equity off the table, we're opportunistically looking at that.
One final question. In the risk management business, the underlying claims increases of 1.5% to 2%. Could you give us a little context for how does that look now versus what you were seeing a year ago versus three or four years ago? Any cyclical commentary on that number?
Yeah, that number is a direct proxy for the economy. You go back to 2008, we were humming with that number, clients were doing three shifts and things were wonderful. Crash in 2009 comes, claim counts fell off the table, and they're making their way back slowly. 1.5% to 1% is going to be a bit of a proxy for what you're seeing in the U.S. economy.
Right. That's not necessarily some separate frequency cycle in workers' comp. That's more influenced by the economic activity.
Correct.
Yeah, not yet.
Okay, great. Thank you very much.
Great. I think that's our last question, Melissa. Anybody else on the line?
Nope. That was our final question, sir.
Just make a closing couple remarks here. Thanks again, everyone, for being with us this morning. We appreciate it. Obviously, we're excited about our franchise. We just have had a great quarter. There's no doubt that every single quarter and every single month, we're adding to the tools that we provide for our clients to help them deal with their areas of risk. Just as importantly, it's abundantly clear to the people at this table that our commitment to our culture and to selling is as strong as ever. In addition, you might have noticed that on March 6th, the Ethisphere Institute announced that Arthur J. Gallagher & Company for the second year in a row, was recognized as one of the world's most ethical companies. We're very proud of that. We're excited about the start of the year, and we're looking forward to the rest of 2013.
We really do believe we're just getting started. Thanks for being with us.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you.