Arthur J. Gallagher & Co. (AJG) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to Arthur J. Gallagher & Co.'s Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect your lines at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call and which are 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, Brenda. And welcome, everyone, to our second quarter call. We appreciate you being with us this morning. Today, I'm joined by Doug Howell, our Chief Financial Officer, as well as the division heads that run our businesses around the world. I'm very pleased with our second quarter and our first 6 months. For our Brokerage segment, on an adjusted basis, revenue in the quarter, up 16%, 17% for 6 months; EBITDAC up 20%, up 23% for 6 months; EPS up 13% in the quarter, up 16% year-to-date. Margins improved in the quarter by 90 basis points, and we did just short of 6% organic growth, a really great quarter for Brokerage. And for Risk Management as well. On an adjusted basis, revenue was up 10%, 11% year-to-date. EBITDAC is up 14% in the quarter, 13% year-to-date. Earnings-per-share, up 11% and 11% year-to-date. Our margins improved by 50 basis points, and we had 10.4% organic growth in the quarter. When you look at our Brokerage and Risk Management units together, we produced 7% organic growth for the quarter. All in all, a great quarter and a terrific first half of the year. Mergers continue to be an important part of our growth story. For the quarter, we completed 5 transactions for about $36 million in annualized total revenue. Through June 30, we've completed 9 transactions for about $41 million of annualized revenue. As I mentioned last quarter, the first half of 2013 is a little slower in the M&A front than we were in 2012. But the pipeline is very robust and we expect to have a number of mergers closed in the second half of 2013. I want to welcome and thank all of our new partners. We're honored to have you join Gallagher. I know you had choices and I'm proud you chose to join our growing family. Usually in these calls, I like to hit some high points on the 4 things we work on every single day, which is organic growth, mergers and acquisitions, productivity and margin improvement and culture. I can tell you that in all 4 areas, we're firing on all cylinders. So rather than going into detail there, I think our time is better spent drilling into what we're seeing in the rate environment. First, I mentioned earlier that our Brokerage segment reported 5.9% organic growth in base commissions and fees in the second quarter. Of that, slightly less than 1% came from rate. The remainder was simply better new business and better retention of existing business. Our professionals continue to help our clients find ways to mitigate the carriers' requests for rate increases by finding creative solutions in the structure of their insurance programs. Less than 1% from rate is consistent with what we've seen for the last 6 quarters. Second, let me give you some flavor from our July renewals in our domestic PC units compared to last year, renewals on the same accounts, these are July 1 renewals. Property compared to July 2012, 55% of our renewals are showing rate increases. 22% renewed about flat and 22% had slight decreases. In workers compensation, this is a line that's troubled. No matter how we look at it, carriers are looking for rates to repair the line. Greater than 95% are showing rate increases over the last year on July 1. Casually, other than work comp, compared to July 2012, 60% are showing rate increases; 30% are about flat; and less than 10% are showing any decrease in rate. And let me give you some flavor as to how we see the momentum of rate through 2013 compared to other renewals in the first half. So take for instance, April 1 renewals versus what we're seeing in July. Obviously, these are not the exact same accounts but similar accounts. Property, compared to the first half, 60%, we are seeing July rates being comparable to earlier in the year. 15% saw further increases and 25% were slightly down. Workers comp, compared to renewals in the first half, 40% of the July renewals saw further increases, 50% were about comparable and only 10% are showing any kind of lower increase. But there's still increases in work comp across-the-board. Any one that was flat with work comp had great loss experience. In casualty, other than work comp, 20% of the accounts renewed in July had further increases, 60% were comparable and 17% lower. So we are seeing carriers ask for rate increases on most lines of coverage and in most geographies. This is really a great environment for us. And while we're seeing a bit of slowdown in the property area, the rest of the lines continue to have strong momentum. Moving on to our international Brokerage front. We continue to see strong organic growth especially in our London wholesale business and continued merger opportunities throughout the world. Our wholesale business, Risk Placement Services, continues to see increasing submissions, emanating from rate increase requests and new business startups, and we're getting more orders as the standard markets withdraw from some lines that typically would be in the ENS market. On the benefit side, the Affordable Care Act continues to keep our consultants very busy. Having the employer mandate move back to 2015 has not really slowed the amount of help our clients need. Businesses are realizing that a host of new regulations are going into effect in 2014, and they need our help. We've invested substantially in tools our clients need to comply with the new law and we know that this business will continue to be a growth business for us throughout all of 2014. On the risk management side, as I said earlier, a great quarter. Our team in Australia continues their strong performance. We've ramped up our business on the work comp program for South Australia, which is providing very nice organic growth. Also, Gallagher Bassett hired a number of experts and analytics in workers compensation in the quarter, which has bolstered our client service capabilities. So our growth story continues. Across all geographies in every business unit, we continue to see growth and lots and lots of new business opportunities in the future. Doug?

Thanks, Pat, and good morning, everyone. Let's start on the first page with the Brokerage segment, which you heard Pat say they had another excellent quarter. First is the Heath Lambert integration cost of $0.02, which is in line with what we guided last quarter. Please recall that we expect about $0.03 to $0.04 of integration cost in the third quarter, which relates to consolidating much of our combined London operations into new office space. Then the integration will be done. Second, you'll see a couple pennies of earnout-related adjustments. Recall these adjustments arise when we change our estimates for the ultimate amount of earnouts and those will always be a little bit volatile. Moving down to Risk Management, a nice clean quarter also with excellent results. So let's flip to the Brokerage segment organic growth tables on the lower half of Page 2. Another very strong quarter, up 5.9%. We saw about 5.7% domestically and about 6.5% internationally. And as Pat said, a little less than 1% from rate, not much from exposure growth. So it was really a nice new business and retention performance in the quarter. Moving next to the bottom of Page 3. You'll see our Brokerage segment expanded adjusted EBITDAC margins another 90 basis points. This marks our seventh straight quarter of margin expansion. In fact, I look back, we've expanded margins 14 out of the last 18 quarters. Let me spend a minute more on margin expansion relative to organic growth. Stay on Page 3 but go to the top. It's to the Brokerage compensation table. You'll read in the note that incentive compensation is up 210 basis points in the second quarter. On a year-to-date basis, that equates to incentive comp being up 130 basis points. Our incentive comp is up through June 30 because our field folks are further along in achieving their objectives and therefore, they are more likely to reach their bonus targets than they were at this time, last year. In fact, last year, many didn't look like they would hit their bogeys until we were well into the fourth quarter. In other words, there's an element of timing here. So if you levelized for this timing, we would have posted margin expansion for the quarter and year-to-date of well over 200 basis points. Relative to organic growth in the 5-plus percent range, we think that expansion is tremendous work by the team. Let's move to the top of Page 4 to the risk management organic table. Gallagher Bassett had another terrific quarter, up organically over 10%. Even without our new Australian client, to be up over 7% organically shows nice continued improvement in that business, even in an economy that isn't seeing much employment growth. Also on Page 4, our Risk Management segment continues to improve its compensation and operating ratios, resulting in EBITDAC margins 30 basis points above our full year target of 16%. Looking towards the third and the fourth quarters, we might ramp up some of our investments in product and service enhancements, which have caused us to give a little of that back, so don't model more than 15.8% of margin in those quarters. All right, let's turn to Page 5 to the shortcut table for our Corporate segment. Our clean energy investments also had a good quarter. And accordingly, the Corporate segment posted $0.10 of earnings, which was towards the upper end of the range we provided last quarter. But please note that $0.01 or so of that is timing pulled in to the second quarter from the third quarter. Looking forward, we've again provided a range of estimates for the third and fourth quarter on Page 14 of the investor supplement that we post on our website. When compared to our last supplement, not much change related to the third quarter after you consider the timing I just discussed. But if we look further out to the fourth quarter, we are getting revised production estimates from our utility partners, which are lower than we provided before. We are told these reductions are mostly due to possible routine maintenance outages. Like we've seen before, we are subject to a utilities change in production estimates that can cause a swing in our earnings estimates. For example, even a few weeks of difference in forecast and production can swing our results by a couple of pennies either way. That said, stepping back, we are really pleased that we're still on track to more than double our clean energy earnings here in 2013. The team is making great progress rolling out and ramping up our remaining plants. This bodes well for even better results in 2014. All right, those were my comments. It's great to have a strong quarter on all fronts. Back to you, Pat.

Thanks. Brenda, I think we're ready for questions and answers. Hopefully, some answers.

[Operator Instructions] And our first question comes from the line of Mark Hughes with SunTrust.

You talked about the -- your producers are more likely to be hitting their objectives earlier in the year. It sounds like the rate impact is steady. I think you described in your release that the customers were kind of slowly getting better. What accounts for the better productivity in the part of the broker force?

This is Pat. We just had a very solid new business retention and retention first half of the year. The team just did very, very well.

We're not seeing much in the way of exposure growth. But when we did our polling here for the July 1 renewals, our customers are saying that more of them than not are saying their business has started -- is growing. And very few of them said that there's much contraction in the business, not necessarily in the unemployment front but just in general, they're starting to grow. We don't see it yet in our numbers but exposure units look like they're not decreasing at this point.

Right. Was there any new incentive program in place that counterspent?

No.

No. And by the way, the targets we're talking about, it's not just for the production folks, it's for the field management folks also, which -- so when you said that it was for producers, it's for all of the field, which would include the management layer also.

Right. How about claims frequency on the Risk Management side, what's going on in terms of underlying claims in workers’ comp?

They're up about 2% or 3%.

Our next question is coming from the line of Arash Soleimani with KBW. Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division: Just wanted to continue on the organic growth, you mentioned most of that is coming from new business. I just wanted to, I guess, dig into that a bit more, is that market share gains or -- what is that exactly stemming from?

Well, Arash, we'll write about 12% to 13% new business depending on the unit against trailing revenues. And we typically then will lose somewhere between 4% and 6%, depending again on the unit. As long as rate is neutral to up slightly, we will show solid organic growth as long as we continue to have that kind of new business growth. And we're a new business machine. I mean, all of us are involved in production every single day, that's what we do. So we're involved in helping clients solve problems, we're involved in bringing new clients on, and as long as I said, that the rate environment stays beneficial to us, we should continue to post solid organic growth. Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And you had mentioned that again exposure unit -- exposure unit growth wasn't really causing much in the way of organic growth this quarter. So I guess my question there is once that picks up, let's assume new business wins and everything stays pretty consistent, should we expect the level of organic then to even expand further at that point, or...

There's a number of things that could impact that, Arash. And yes, I think you could. If we start to get some really solid economic growth that then comes through in exposure units both in audits for our clients as well as having to increase their exposure units going forward on renewals. Our team will work very hard to mitigate any increase in cost to our clients, that's what we do. That's why although we are in a rate environment that's up 4% or 5%, you see less than 1% impact in our numbers. And by the way, that less that 1% includes exposure units. So its exposures and rate are producing less than 1% of our organic. But if that starts to move nicely, yes, I think you'd see organic expand as well. Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And in terms of the margin expansion, is that something -- I think you mentioned it's 6 or 7 quarters in a row, where they've been expanding. Is that something we should expect also to continue into 2014, or would you say most of the margin gains have already been realized?

No. Let's go back. I think that this year, if you go back to my commentary in the past, it's generally, we feel that anything below 3% organic growth, it's difficult to expand margin. When you get above 3%, you can start taking some of that to the bottom line. This year, because of the actions that we took at the end of last year, more of that is hitting the bottom line than would be normal going forward. So I think that if you model organic growth greater than 3% out in 2014 and beyond, there would be some margin expansion to that. But clearly, not 250 basis points of that. Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division: And then just final question. You had mentioned that 2 half -- or the second half of 2013 should be a bit stronger on the M&A front. Is there any, I guess, guidance you can provide there, or?

No.

Our next question is coming from the line of Greg Locraft with Morgan Stanley.

I wanted to just understand why you think exposures aren't moving up. I mean, it seems like, I mean, obviously the team is killing it. If we get some rate and we get some exposure, I mean, everything is going to continue to accelerate. And I'm sort of wondering, what's holding back exposure in your opinion and what would cause that to go higher?

I think the world is afraid to hire people, Greg. I just think that our customers out there are -- they're very cautious. The 2008, 2009 downturn was incredibly painful. And we had clients in the construction world that were doing $100 million, $200 million of construction a year and that dropped to $25 million and $50 million. Their company survived. But I think that is -- I also think the Affordable Health Care Act is going to keep employers doing every -- you're not going to have 51 employees. That's not going to happen. You'll stop at 48. And so I think there's a ton of that going on as well. I think people are -- the idea that this Affordable Health Care Act is somehow going to save us all money. Well, I'm looking at my budget for next year and I can tell you, we're not going to save any money. It's going to be frightfully expensive. And so I just think there's a lot of it going on. People have long memories, they're not going to add folks.

Okay. And has exposure been roughly flat for a while?

I'd say yes. And, Greg, actually, maybe up [indiscernible]. I mean, we've said in the past, we've seen clients maybe up 1%, 1.5%, 2%. But yes, I'd say it's relatively flattish over the last couple of years.

Okay, okay. So I guess, and a lot of people were all asking about organic and organic was great in the quarter, but it doesn't seem like you'll get the tailwinds of price and exposure anytime soon. At least, that's not in your base case, it sounds like. It sounds like you're just going to continue to do very well on the new business front.

Well, let me be clear. If we could have a property/casualty rate environment that is flat to up 3% or 4% for the rest of my career, I'd sign up for that right now. I mean, that is a -- this is a great environment for Gallagher. We've got tremendous depth of capabilities. Those capabilities we are very good at teaming on accounts and bringing the best resources to the point-of-sale. And we're not competing with just the larger competitors every day, day in and day out, we're competing across an entire spectrum of competitors. And we are going to win more than they are when we compete with them head to head.

Okay, okay. Great. And then one for Doug. If there's one negative -- and again, an excellent quarter, it would just be the slippage on the clean energy side. I guess the reason is the production schedule's out of utilities. I'm just wondering, as CFO, you put out ranges and guidance and whatnot, how do you bracket this? How do you think about it, as you put out numbers and -- to us and whatnot? I'm sort of wondering the range of outcomes and possibilities, as we think about this line and into next year and beyond?

Well, listen, I can tell you. It's with mixed emotion, if you asked me how I feel about it. I think that I'm ecstatic that -- and extremely happy that we're going to double what we did last year. Am I a little disappointed that the estimates, the guesses of the future that are highly dependent on what's going on in the utility, especially putting in an experimental new technology. Sure, I would love to have the precision of forecasting that we have in other areas in our business. On the other hand, during this rollup and ramp-out -- rollout and ramp-up period of all these plants, because we don't have all of them and running at ultimate levels yet, I don't have some of the shock absorbers that I'll have in the future when we have 29 plants that we own less than 50% of. So any one change in one plant shouldn't alter our estimates significantly. So during this ramp-up period, I can understand why it's a little frustrating for you trying to take a guess on what we're going to make in the future. I think you should look back to say, gee, they're well ahead of where they were last year There's more plants that could come online. And eventually, when we get to a portfolio of 29 of them, the volatility on that should go away or at least be substantially less. So I have mixed emotions about it. I'm ecstatic that we're nearly on track to double. But giving some guidance, I'd love to be able to pick it to within $0.01 every time, but I don't think that's going to be possible.

Yes, okay. Great. And it seems like -- you just track kind of how the guidance has come in. Like for the third quarter, you've been able to, with one quarter forward, have an excellent rate of precision on this and then it gets more fuzzy as you move out. Is that the right read?

Yes.

So we should feel real good about the third quarter, a little worse about the fourth, and then who knows what will happen from there?

Yes, but I think that's right. I think, but I think when you look out for 2014, I think that the progress we're making should be better than what we're doing here in '13.

So that's -- on a quarterly basis, I have -- your assessment is right. It's a little bit difficult. But if you just step back and look at it, we'll get the rest of our plants in and we get to the -- get the operational tweaking done, we should have a much better '14 than we do '13 even.

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

I'm looking at the -- obviously, the acquisition pipeline. It hasn't been as robust this year as last year. And I'm not asking you guys to apply [ph] it on your stock price, but I'd also like to hear about what you think about the pipeline and the percentage of cash you'd like to be allocating versus stock, given where your stock trades today.

Well, I'll let Doug handle the financial side of that question, Josh. I'll take the pipeline. We all knew that last year was an extraordinary year for acquisitions. We did 60-plus of them, that's 1 every 4 working days last year. And so we knew we were clearing the shelf a bit. And I think that was driven by 2 things. The Affordable Health Care Act again, as well as the tax law changes. So we had cleaned the cupboard a bit as we came into this year. But we filled it up again and we've got a very, very solid pipeline. But as you know, acquisitions are -- they're a sale. They come at their own pace. You can't really -- you can't say, I start one in March, I finish it in June. Each one is different. Each one has its own personality. And we've got a great pipeline, we've got a number of people that are out talking to folks every single day. And we think we'll have a very good second half. And Doug, you want to talk about the stock price?

Yes, in terms of stock price, generally, the stock price isn't an indicator of whether we use stock in an acquisition. It usually is -- in fact, it is always the outcome of how much free cash do we have, how much borrowing capacity, and then we use the rest with stock. Generally, the way you should think about it is that our free cash is first used to pay the dividends, second, in order to buy brokers and risk managers, then we'll -- then we try to run somewhere around 2x EBITDA in debt. So we'd borrow up to that and the rest we'd use in stock in the deals. There are exceptions to that. If a seller wants to do a tax reexchange, there are requirements of how much of stock that you have to give in order for them to protect their tax-free reorg status. So if they want stock, we'll give them stock. And then there are some sellers that really, really have a strong desire just to hold our stock. And of course, we'd be happy to have them be in the same boat with us when we're rowing together. So the answer to your question is that we have $115 million to $125 million of free cash sitting in our balance sheet right now. We -- the first and second quarters are our smallest cash flow quarters. We generate substantially more cash. In fact, I think we generate about 75% to 80% of our cash in the last 2 quarters. So we'll have strong cash flows coming to the second half and we still have some borrowing capacity to keep us at less than 2x EBITDA and the rest we'd use in stock.

So if I'm understanding you correctly, if the acquisition pace were to taper, obviously compared to last year, but in general, you would be an all-cash acquirer. You would not use stock if you didn't have to in order to top things off?

That's correct. And we really haven't used any stock since about the third quarter of last year.

Our next question comes from the line of Michael Nannizzi with Goldman Sachs.

Just a quick question, Doug, just following up on your comment about Risk Management margins in the back half of the year. You talked about the investments you're making. How should we think about the offset of those investments in terms of margin expansion opportunities in '14?

Listen, I think that if you go back and if you look at the history for Risk Management, the team has just done a remarkable job with targeting investments that are delivering value to customers. If you go back last year at this time, they launched into the analytic workbench toolbox that our clients are raving about, the prospects are looking at as being best in class. And they did these projects. These are $1 million to $2 million type projects where they go in and they reshape the product and service offering they do for their customers. They have a list of those things that they would like to do and when they start hitting it at the beginning of the year when we sit down and we say, "Listen, 16 points of margin is where you need to be for the year. Let's see how we do in the first couple of quarters." And now they're at the period, at the point of saying, we'd like to launch these continuous -- these other improvement projects. And so if they can do it without margins dropping below 15.8%, they should be able to bring the year in at 16%. So that's the way we sit down and do it. It's a continuous cycle and looking for opportunities to invest in, but also making sure that we hit our target margin expectations.

Remember, Mike, this is Pat. There's not the same leverage in the claims businesses as there is in the Brokerage business. When they get revenue, they get claims. And they better have the people on board, on deck to handle those claims when they start coming in. And there's a lag in time, but it's not a great deal of time. You got to get the bodies onboard, trained and ready to go. And as you saw in some of our previous quarters, we had a substantial ramp-up in South Australia. So 16 points of margin has been a consistent direction that we've given to the street for literally a decade. And that's our target margin.

Got it. Are there any trends that you see in the market that you think will lead to more outsourcing in terms of claims management, or maybe as companies look to try and move down policy size spectrum ahead of building the infrastructure themselves?

Yes, I think you're hitting on something that we see as a huge opportunity. Both from new capital, places like Bermuda coming on to shore and needing outsourcing help, as well as from standard mainline carriers that may want to open in different states, that may want to open with different lines. And they are outsourcing that work to Gallagher Bassett. And when you start to take a look at the size of Gallagher Bassett versus some of our -- the insurance companies we trade with, we are actually paying in some instances, thousands and thousands more claims than they are. So we've invested in that -- and that's we've invested in systems, in people and expertise that is probably better outsourced by many insurance companies than it is being handled in-house.

Okay. And when would we expect or could we expect to start to see that inflection point in terms of the top line? I mean, is that something that's just a gradual process? Or just given the -- how much alternative capital is permeated and the movement of carriers from one part of the market to the other, do you -- should we start to see some of that really flow through this year? Or are you expecting that to happen kind of more than you thought, maybe 6 months ago?

Well, no. It is happening that's why we're up 10.4% organically. That's included in the mix.

I've got you. And that's a big part of that change then?

Yes.

Our next question comes from the line of Robert Glasspiegel with Janney Capital Markets.

I'm on Josh's wavelength on acquisitions. On the Heath, you said you're -- you've got your -- all the hard work behind you, no more integration costs. Where do you stand in your overall U.K. integration, is there a desire to be bigger in that specific region?

Yes, we're going to be very active in that region. If you -- as you recall, one of the reasons we were excited about the Heath transaction, which did take us a good 18 months to integrate. There was an awful lot of work there. The team did great, great, great work. But part of that reason for doing that was to give us good retail presence in the U.K. that we can now go bolt on other acquisitions. And we did, we did 4 acquisitions last year and bolted those in. Those were mostly affinity acquisitions. But we bolted them into the Heath platform and they are going extremely well for us.

How big could U.K. be, or Europe as a region? I mean, how much bigger than your current state? And what sort of platform do you need that you don't have as far as product or...

I'd say right now, Bob, where we are probably weak in the U.K. is -- what we would do in the United States is as a standard, commercial middle-market business, that the local contractor, the local auto dealer, the grocery firm, that type of thing. We're very good in the London wholesale specialty business, that's grown extremely nicely for us. We're very, very good in energy and natural resources, that's a global play. We're very good at affinity in the U.K. and MGA and MGU business. But we're probably a little light when it comes to just your standard middle-market fare.

Our next question comes from the line of Brett Huff with Stephens, Inc.

It's John Campbell in for Brett Huff. Back on the Brokerage segment, I mean, continued nice margin growth there. It sounds like rate is providing some benefit to some degree, as well as just a general uptick in the exposure units. But Doug, I mean, if you could just maybe give a little more color on the various pieces of that margin expansion? Or just maybe more specifically, just to what degree is cost take out above and beyond the actions taken last year, a piece of that?

Yes. I think the margin expansion, you'd have, let's say a 5% organic growth, then you would have a point of natural expansion just because of a larger -- more organic growth. When you look at where we're seeing savings opportunities right now, obviously, as we get more productive, we've shifted more work to our offshore centers of excellence. So that's helped us control our headcount here in the U.S. and in the U.K. When it comes to operational savings in the op expense line, we're seeing some savings from rent. That's probably being offset a little more by the travel costs that are going up. Airlines and hotels are going up. We do have some nice projects that we're working on now that will make us more productive in what we call the middle office and the back office layer. But we're really not seeing the results of that yet and we wouldn't see that until 2014 or 2015. But those are efforts that would help us control inflation in our other operating expense line. They're not going to be projects that drop a ton of money to the bottom line but they could help us with the control on inflation. We're not seeing wage pressures right now except for maybe in some of the IT areas where that -- there's more demand for certain resources there, so we are seeing some comp pressure there. But that's not a huge part of our payroll. So that's the flavor of where we're seeing margin expansion coming from.

Okay, great. Thanks for that additional color. And then just as a follow-up. I mean, I'm seeing a common theme that we've been seeing in just 2Q earnings just across the market in general, it's just kind of sluggish international results, I mean, particularly out of U.K. So if you guys could just maybe talk a little bit about U.K. results in 2Q and then if those results were relatively sluggish, then to what degree is that [indiscernible]?

Well, actually we had 6.5% growth in our international operations on the Brokerage side. Our U.K. operations is, in our view, is performing at a level of expectation and -- or higher than expectation, which is a high expectation.

And that includes Australia, as well.

Yes, and Australia is doing well, too. But the transformative Heath acquisition that we did over there has provided us some energy in the U.K. It has provided new opportunities for us. And our organic growth is 6.5%. So we're not seeing sluggish operations coming out of the U.K. We don't have a lot of exposure to mainland Europe, so we see tremendous results coming from those folks right now.

Our next question comes from the line of Adam Klauber with William Blair. Adam Klauber - William Blair & Company L.L.C., Research Division: A couple of different questions. How did RPS do with their growth above or below with what the average was for the Brokerage?

It was above. Adam Klauber - William Blair & Company L.L.C., Research Division: Okay, so another good quarter.

Very, very solid quarter. Adam Klauber - William Blair & Company L.L.C., Research Division: What's the rate outlook in surplus lines, property versus casualty for the rest of the year?

If you take a look -- the property market, Adam, is squishy. The cat-exposed stuff in Florida is flat to down. Oklahoma and that region is in a full-on hard market. Regular middle-market commercial property is probably flattish to up a bit. Adam Klauber - William Blair & Company L.L.C., Research Division: Okay, okay. That's helpful. On the benefit side -- yes, I know you've been doing more and more business there. Has the mix been shifting more towards consulting, or is it still predominately the traditional placement business?

No. I'd say, Adam, over the last decade, that switched almost 100% to consulting. While we get paid on commission because clients are comfortable with that, we've been completely transparent in that business since ERISA and it's a consulting play. Adam Klauber - William Blair & Company L.L.C., Research Division: Okay, okay. And then on the health care exchange, and I know it's a very, very early, early stage, but are you seeing any traction for enrollment for next year, and any way you could quantify, that would be great.

We don't have any traction at this point. And we've seen there's interest but we don't really have any orders to speak of at this point. We got a good partner in Liazon, and we think we've got a good product offering. It is going to be an important part of the product offering. We will not have one exchange. We'll trade with a lot of exchanges across the country whether they're run by the state or whether they're private. And it will be part of the mix. But at this point in time, it hasn't really -- it hasn't grabbed a lot of traction.

[Operator Instructions] Our next question comes from the line of Alison Jacobowitz with Bank of America.

I didn't hear -- I don't think I heard it and I don't know if I ever heard it, I'm just curious and I don't know if you can answer it. But do you have a range or something, an outlook of what the clean air facilities could produce if everything was up and running and everything was working perfectly? What kind of earnings that would produce?

Yes, Alison, I think that if you were to look at Page 5 of the earnings release, over there, we try to provide the ultimate after-tax earnings estimates for the plants that we currently have up and running or on the drawing board. And if you add that up, the number gets somewhere around $100 million of after-tax annual profits. We did $33 million last year, we're on target to $67 million to $71 million this year. So if -- now granted, those plans won't all run at ultimate levels, that's what the footnote says there, but that gives you a size indicator of how much Gallagher could earn off of those plants. There are other plants that we haven't put in place yet, there's another 6 of them. And I couldn't tell you whether those are going to go into big locations or small locations at this point, that's why we put not estimable on there. But that's probably a good guide post. Will we be at that level starting 1/1/14? I don't know. We'll see. We have a little bit of low that happens generally in the summers as utilities are producing a substantial amount of electricity, they're not so willing to put in new technologies during the summer. And we saw this last year and then we had a nice uptick of activity in September and October. So hopefully by October, I'll be able to start giving you some more feel for next year. But as of now, I would guess that we're going to be better than the $67 million to $70 million that we did this year.

Any more questions, Brenda?

It seems there are no further questions at this time. I'd like to turn the floor back over to Pat Gallagher for closing comments.

Thank you very much. Thanks, everyone, for being with us this morning. We appreciate it. We're very pleased with the 2 great quarters that we've had this year. The team is very turned on. We're helping our clients. We're selling a lot of new business and we think we're on track for a very strong finish to 2013. So thank you for being with us this morning. We appreciate it. Thank you, Brenda.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time.