Good morning and welcome to the Arthur J Gallagher & Company’s Fourth Quarter 2016 Earnings Conference Call. Participants have been have 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 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 and 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. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding the use of these measures, please refer to the most recent earnings release and the other materials in the Investor Relations section of the Company’s website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J Gallagher & Co. Mr. Gallagher, you may begin.

Thank you, Donna. Good morning, everyone, and thank you for joining us for our fourth quarter 2016 earnings call. With me this morning is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. As we do each quarter, today Doug and I going to touch on the four key components of our strategy to drive shareholder value. Those are: number one, organic growth; number two, growing the business through mergers and acquisitions; number three, improving our productivity and quality; and fourth, maintaining our unique Gallagher culture. The team executed on all for this quarter and for the entire year and I believe we are well-positioned to build upon 2016’s success. I am very pleased with how the year turned out. Let me talk first about brokerage organic growth. Fourth quarter organic growth was 3.6% all in, right in line with our full year result. Domestically we saw about 3.5% organic growth in the fourth quarter with retail property casualty up a little more than 3.5% and wholesale and benefits up a little less. Property casualty rates continue to be a slight headwind offset somewhat by exposure growth. Combined rate and exposure reduced our domestic PC brokerage organic by about a point. Internationally brokerage organic growth was 3.7%. Australia and New Zealand were up over 4%, Canada up 2% and our UK and Bermuda operations up around 4%, and this is in spite of rates that were softer internationally. This is great work by our domestic and international teams and highlights our outstanding sales and service culture that does make Gallagher so unique. Our global PC brokerage businesses are working well together and our niche focus continues to provide clients with the highest quality advice, insights and solutions. Combine that with our outstanding post-sale service…

Thanks, Pat, and good morning, everyone. Like Pat said, what an excellent way to close out a terrific year. Today I’m going to provide my typical commentary on modeling, margins, clean energy, cash capital management and I will close with some comments on tax reform. First to the CFO commentary document which is posted on our Investors website. Let me point out a few items as you model 2017. First, we’ve provided our guess on the impact from foreign currency exchange rates on both revenue and EPS. Based on current FX rates we expect some brokerage segment revenue headwinds in the first half of 2017 but not much in the second half, which translates into a couple pennies a quarter of EPS impact in the first and second quarter, but again not much in the second half. Also when modeling 2017 brokerage revenues you should first adjust prior-year revenues for the impact of FX and then apply your pick for organic growth. Next you should then add your estimate for rollover M&A revenues that we have completed in 2016 and thus far in 2017. We give you our estimate on Page 5 of the CFO commentary. Finally you should then make a pick for new M&A revenue that might come from future mergers in 2017, but also remember to assume a mid-to-late quarter closing pattern. If you model revenues in this order is to get you pretty close. Also when doing your quarterly models please don’t forget that we have significant quarterly seasonality in our brokerage segment. The best place to see that is on Page 5 of the supplemental quarterly financial document we also post on our Investor website. You’ll see that we historically earn about 20% of our brokerage segment annual earnings in the first quarter, then about…

Thank you, Doug. Before we go to questions and answers I would like to make just one comment. Marsha Akin of our Investor Relations department retired after 36 years with Gallagher and we will miss Marsha and wish her well in her retirement. I know many of you on this call are familiar with and have worked with Marsha for years. Donna, would you go ahead and open it up for questions, please?

Thank you. The call is now open for question. [Operator Instructions] Our first question is coming from Kai Pan of Morgan Stanley. Please proceed with your question.

Thank you and good morning.

Good morning, Kai.

Good morning. We will miss Marsha too. So my first question on the organic growth. Clearly for the full-year 3.6% is above your original sort of guidance between 2.5% and 3.5%. If you look beneath it, you look at your supplement and contingents, it’s actually growing very fast, like 15%, 16% year-over-year. I just wonder what’s behind that and should we expect it going forward?

Well, in terms of the supplementals and contingents, I think that’s indicative of the kind of work were doing for our clients, frankly. I mean, it’s indicative of the fact that we are growing nicely with carriers and that’s profitable growth with very good customers. And we work very hard to make sure that the carriers compensate us for the work that we are doing and I think it shows in those numbers. Also, remember when we do acquisitions, Kai, we bring in people that don’t necessarily have the same arrangements with carriers that we have and that improves those results once they are part of Gallagher.

To add onto that – it’s a good question. I think that we are doing a lot of work on product development, product enhancement, analytics that really develop a better product for the customers and the carriers are recognizing that. And also I think that there is something that’s important I have said before. It’s a little bit of a blurred line at times between a supplemental and a base commission. If you look at – if we get an enhanced commission in the field that would be considered base commission. If that comes in over the top directly from the carrier let’s say to the region or to the corporate offices, that would be referred to as supplemental. But it’s basically arriving from the same behavior, delivering a better product to the customer and the carrier is recognizing that that service has additional value.

I think the contingents and supplementals, Kai, will grow as we continue to do acquisitions, not at the pace they have in the last couple years.

Okay. Then back on that, how much of the 43 basis points of margin improvement in 2016 do you think is coming from the contribution from the contingents?

I think a big piece of that. If you look at where we are having nice margin expansion – the U.S., we are getting a lot of margin expansion from our units there. Those have done a lot of work already to improve margins kind of to the upper range. And we are getting margin expansion from our international operations too as we integrate the larger deals.

Great. My last question is on the deal side. You have a strong start for 2017 and also in the marketplace you have recently saw some pretty decent-sized deals, including some potential deals. I just wonder, given that the large deal you had done in 2014 is fully integrated, does that change your, like, outlook or appetite for acquisitions going forward?

Well, first of all, Kai, what we are seeing in the pricing environment, for larger transactions that would either be considered a platform transaction or the selling out of a rollup, those multiples are at levels we don’t like. And so we would certainly not shy away from a large deal if we thought we could price it and if we thought the culture fit, but we are very happy with the deals in our pipeline now which are very much in line with what you saw in 2016.

There is nothing in our pipeline right now that I would view as a larger deal.

Correct.

Great. Thank you so much for all the answers. Good luck.

Thanks, Kai.

Thank you. Our next question is coming from Elyse Greenspan of Wells Fargo Securities. Please proceed with your question.

Hi, good morning.

Good morning.

I was hoping to spend a little bit more time – just some color on the organic. The pickup that you guys saw in Australia and New Zealand this quarter really just about – you said that was above 4%. Was there anything there, I guess, that would cause you to think that that might not continue when we think about 2017? And then just in your outlook for 2017, I guess, how do you see the organic components domestic versus internationally? Do you think that they will both maintain at about 3.5% growth?

I think, as you saw in my formal comments, we think 2017 all in will look like 2016. So I’m hoping that we can maintain greater than 3% as you roll it all together. Australia and New Zealand just had a terrific year. I think we shared with you that Australia, when we did the large deal in 2014, had a base commission and fee that was actually declining. It was declining a small amount but was in fact in negative territory. New Zealand has always been in very positive territory. Our team in Australia is done a terrific job over the last two years and we are now in positive territory in Australia and New Zealand continues to kill it. So I think again, when you average that back into what’s happening domestically, I’m pretty comfortable hoping that we stay in the 3.5% area.

Okay, thank you. And then in terms of the margin outlook, I know you guys said today what you historically say about 3% or so organic and you can expand your margins. So you are pointing to about 3.5% organic or so for 2017. And then I know you guys have spoken about your efforts to improve some of your international margins just away from the organic as you integrate some of those larger deals. So as we think about the potential for margin expansion can we think about it coming from, A, just exceeding the 3% organic level and then, B, some of the improvements to the international operations? And how do you just kind of see that all coming together in 2017?

Right. Good question. I think the margin expansion, it’s going to be both. I think organic over 3% will contribute some. And I think as we do some of our improvement efforts, we’ve talked about improving efforts in Australia. There’s a little bit in Canada and in our UK retail space. If you look at those businesses they are all still in the lower- to mid-20%s when it comes to margins, so we have maybe 3, 4 points on each of those businesses. Australia remember is a $100 million business; Canada is a $100 million business; and our UK retail space is a $350 million business. So you add 3 points on that on maybe $500 million of revenue there might be $15 million more margin lift opportunities there. And then if you have organic over 3% you might be able to harvest maybe 40% of that, 35% of that of the incremental amount, but that’s really the nature of the margin expansion that we are seeing here. Again, we’ve got some nice continuous improvement efforts that we are doing that might bear some fruit in 2018, but that’s the dimension of margin expansion that we are seeing in this environment right now.

Okay, great. And then just one last question. You did point to the pickup in deal activity in the first quarter and multiples seem about in line with what you saw in 2016. Are you seeing I guess some sellers potentially either looking for higher multiples, or waiting just given the uncertainty around the U.S. corporate tax reform?

Yes, there’s two things. There’s an interesting dynamic there. I think that the sellers that really are interested in staying in the business want to do the right thing for their employees, continue to work hard and sell insurance and really recognize our capabilities. They are really looking at – they are willing to sell for fair multiples. And what I mean by fair is somewhere between 7 times and 9 times. When you’re looking for someone that’s really interested in taking the money and running there’s multiples out there they can get a lot higher than that. So what we are doing is we are looking for folks that have good agencies, good brokerages; they know how to make money already; they’ve got nice margin; they are interested in staying in the business. And they understand – and Pat uses this all the time – that 1 plus 1 can equal 3, 4 and 5. And that’s the folks we are looking for. But there is pressure on pushing multiples up out there. But there’s – we are trying to do 60 deals, nice tuck-in deals a year. There’s 60 folks out there that we are better together than what they are independent. So that’s the folks we are looking for and the pipeline is full of them.

And I think Doug hit on it. The pipeline, it never ceases to amaze me just how incredible this business is. One source estimates there’s 30,000 agents and brokers in America. And if you think about that, in business insurances number 100 last year did $25 million in revenue. So somehow there’s possibly 29,900 firms that are smaller than $25 million. And most of these firms have baby boomers at the helm. So there is no shortage of opportunities for us to find great people. I call every one of these merger partners and, I will tell you, they are all excited to come aboard because I call it the candy store. Once we let them in the candy store they know they’ve got a lot more to sell.

Great. Thank you very much.

Thank you. Our next question is coming from Josh Shanker of Deutsche Bank. Please proceed with your question.

Yes. Good morning, Doug, Pat, Ray. And I’m really sad that Marsha is not on the call, but...

She’s listening – I know she’s listening.

All right, all right.

Give her a shout out, she’ll love it.

We love her. But – so three questions; they are all kind of interrelated. One, how does strong dollar affect your ability to make acquisitions in the newer regions that you are in? Is that a positive? Do people want dollars or Gallagher shares? Two, I noticed the acquisitions so far done in 2017 appear to have been done for cash, not stock with you going back and buying back the stock later. I’m wondering if the appetites are changing. And three, there’s a lot of news out there about USI coming up for sale. Just wondering how USI’s appetite differs from the type of stuff that you write and whether or not USI in the hands of a different owner is a different threat to the Gallagher model?

Let me talk about the strong dollar – well let me hit cash versus stock.

You take one and two; I will take three.

It’s great. Cash and stock, we didn’t use any net stock in deals in 2016 and we don’t expect to do that in 2017. And that would allow us to do about $750 million of acquisitions in 2017 without using shares. Now if a person wants shares because – for tax planning or they want shares, we will give them the shares and we will buy them back in the marketplace. And we have and 8 million share authorization buyback that’s on the shelf, so we have plenty of room there. How do we feel about the strong dollar? One of the things to realize is…

Well, wait, wait. Can I ask one question on that, Doug? I thought the point was that if you use the stock it’s a like-for-like transaction that doesn’t result in a tax charge. Why would a seller prefer cash to stock if they basically cannot roll over the tax loss I guess – or the tax gain?

There are some structures that just – they just are not positioned in order to take that stock, so they really don’t have that tax planning strategy in that. So you would have to look at the nature of the seller’s tax position to understand that more than our [indiscernible]. We will give anybody stock as long as we can buy it back in the marketplace.

Well. And those people that want stock, that is an indication of a real partner, we are happy to do that. And if we can arrange it with them to be a tax-free transaction, God bless them. But most of these people come to us with advisers that are telling them when you get the stock sell a good chunk of it anyway and so they are happy to take cash.

Yes, most of the international folks, really they prefer cash just the way they are structured and just also owning – in some jurisdictions they just don’t want to own a U.S.-listed company. As for the strong dollar, yes, it does mean that we can buy international franchises at a discount so to speak just because of the strong dollar. But that’s not fueling our appetite for deals. We are not going to rush out to go do a bad deal just because the dollar is stronger. The other thing that’s great about our capital management is as we generate cash internationally we don’t have to bring it home; we have reinvestment opportunities internationally. So if we are generating pounds or Aussie dollars we have reinvestment opportunities there. It might be opportunities to repatriate it cheaper in the future with tax reform. But also if we do bring it back to the U.S., we have to pay an elevated tax, we can use some of our $480 million balance sheet of tax credits to shelter that income from taxation in the U.S. So I think that we’re well-positioned. We have the opportunity to use dollars around the world. That’s easy to move over there. We can use local currency if we want. If the seller wants stock we are happy to give that because we can buy it back in the market. So we have a lot of levers that we can pull in our M&A strategy that allow us to capitalize on the environment right now. As for USI, I will let Pat talk about that.

Yes. So USI is a solid franchise, great history. But as for them becoming a greater threat, remember Josh, we have about 32 areas that we have vertical strength. We call them our niches. And in those stitches, whether it be construction, religious and not-for-profit, higher education, et cetera, et cetera, and I can run down all 30 of them. We believe in every single one of those we are stronger than anybody in the marketplace and we don’t fear anyone.

And in terms of are they similar. And remind me, at Brown & Brown we’ve always argued everybody goes after smaller business than you. Is USI in your wheelhouse in the United States?

USI is in our wheelhouse in some cities. They are a little bit more disparate group than we are. I think we are a little bit more focused on our niches and working together across profit centers and across the globe in those niches. But, no, they are good competition.

Also remember, I think that we know that of the publicly traded brokerages we are probably competing against the bigger ones less than 5% of the time when we are out there proposing. It’s this other 29,000 brokers out there that we are competing with day in and day out. USI in one city might be strong against us but in another city it might be Willis or it might be the XYZ Agency in another city. So this is a local business and I don’t worry about any one particular – we don’t have a systemic competition against one person anywhere, or one broker anywhere.

Doug is right. We know that over 90% of the time when we compete we are competing with the local, smaller agent.

Excellent. Thank you very much. I appreciate all the detail.

Thanks, Josh.

Thanks, Josh.

Thank you. Our next question is coming from Quentin McMillan of KBW. Please proceed with your question.

Thanks very much guys. If I could just ask a couple of the Trump-related questions. I assume the organic growth outlook for 2017 is not predicated on any of the policies which may affect you probably either positively or negatively. But one of the things he talked about was infrastructure spending and if we talk about the niches that you guys have, construction is a very strong one. Can you give us a sense of what size that business is within your overall brokerage and potentially what effect it could have if some of this infrastructure spending does take place?

First of all, yes. Construction is probably our single-largest niche in the United States. And in 2016 that niche crushed it. I won’t give you the actual organic but it was way better than what you are seeing us with the rest of the Company. Anything the new President does in regards to infrastructure spending will fall into the construction area and will be incredibly beneficial to us. Anything that the new administration does relative to healthcare and the ACA, clients will really, really need our – they will need our support and our consulting capabilities. So when I look at what could be coming out of Washington in the next few years, I think it is incredibly positive for us.

Right. But your outlook for 2017 did not include any of that positivity? It is just what you are seeing today, correct?

Correct.

Okay. And then just a follow-up on the Trump stuff is – there is a thought that the interest income deductibility could go away and a two-part question for that. One, you guys have some leverage on the balance sheet. What could that mean in terms of an EPS hit? And then secondly, in the M&A arena, PE funds obviously use a ton of leverage to do these deals, so it could have a pretty negative impact in terms of their business model. What do you see the impact of that playing out in terms of the multiples in the space and the competition for M&A longer term?

I think the competition would become less fierce when it comes to using leverage to borrow and buy brokers, so I think that would be helpful for us. What’s the impact of a lost interest deduction to us? Basically you can compute that if you go to page 6 of the CFO commentary – is we are getting an income tax benefit of $45 million right now. If that one away we would just use more of our tax credits. So the cash taxes paid wouldn’t change that much for us. So it wouldn’t cause a big negative. It might have a GAAP impact but we would use that warehouse of credits that we have on the balance sheet to pay those taxes.

And Doug hit on the PE model, Quentin, you are absolutely right. That model absolutely needs the interest deduction to work. The PE firms have driven multiples up. I lived through this once before in my career and that was when the banks decided that the brokerage business was flavor of the month. And every time we would compete, a bank would be 3 to 5 multiple points higher than us and so they drove prices up. We basically did fewer deals. And when the banks got their belly ache going and decided it wasn’t flavor of the month anymore, multiples came down and we did great.

Perfect. If I could sneak one more in just about Chem-Mod. The midpoint of the guidance is, Doug or Pat, I forgot who mentioned, it’s about 10% up for next year versus 10% to 15% this year. Just wondering, now that mostly all the plants are online, should we continue to expect sort of a similar type growth rate? Or is the business sort of in steady-state at this point and we are not likely to see earnings growing much past this into 2018 and beyond?

Good question. We do have a couple plants that we can put in place in 2017 that could start generating in 2018 that could cause a step up. You would also have to look at utilization of coal for 2018 and beyond, would influence that. If the Trump policies to favor coal are successful you could have coal plants actually producing more, so that would cause a step up again in 2018 but it would be modest. So new plants could cause a step up. It’s a small plant wouldn’t have a big impact, but for a large plant it could have another step up. But wouldn’t expect much more after the step up here in 2017.

Okay. Great. Thank you so much, guys.

Thanks, Quentin.

Thank you. Our next question is coming from Adam Klauber of William Blair. Please proceed with your question.

Good morning guys.

Good morning, Adam.

A couple different questions. Number one on exposures, are exposures running better say now in the last six months than the first six months of the year? And any thoughts on exposures coming into 2017?

Exposures are up a little bit stronger in the second half than they were in the first half and by that I’m talking basis points; I’m not talking percentage points. And I think that 2017 will see a continuation of that. I had a customer in just last night – I spent a good bit of time with the customer yesterday afternoon. And he is a midsize manufacturer locally here – very locally; I can look at the window and see his plant – and he had 22% growth last year organic. So that’s stronger than our base customer but that was pretty positive.

Right. That’s good news. Similar question on the wholesale submissions. How are they running today versus a year ago?

Stronger. I think as we have expanded RPS; as you know RPS, the largest MGA in the country, plus it’s one of the largest open-market brokers and one of the largest program managers. The program side was a little slower but open-market broking and MGA stuff was very strong.

Is that in part driven by the construction? Does that the economy doing better? What’s driving that?

I think, I wouldn’t give it – I wouldn’t say it’s in any one specific area. A place where we’ve gotten more activity but had a little bit more difficulty is of course transportation. But it hasn’t been just focused on construction, it’s really been across the board. Probably, Adam, driving as much of that is new business startups.

Okay. That’s helpful. And then on the deal front, there was a company, Aleera, I’m sure you saw it snapped up 25 brokers at once. Does that put a dent in the near-term supply?

No. Not even close.

Okay, okay. And then finally on the clean energy, when do the benefits from that actually stop? Is that 2021? And what happens to that business when it does stop?

First defined benefits. The cash flows that are generated today should go well into the mid-2020. The ability to generate credits for our 2009-era plants, they will be done generating credits at the end of 2019, which is about a third of the production. Our 2011 plants would run to the end of 2011. But again we are producing excess credits today that would provide a glide path well into the mid-2020s at current rates and perhaps even longer if we get a tax rate drop to about – if you drop down to 20% our credits might go a little bit longer than that.

Okay. So…

Let me interrupt just a second, Adam. I think also, this is a law that applies to solar, to wind, to other clean energy-type tax credits. And maybe there’s movement afoot that could extend those to in some way shape or form past 2021. So you might – you’ll see a step back in GAAP earnings but cash earnings will actually exceed GAAP earnings when you get out to that point.

Okay. That’s helpful. Thank you very much.

Thanks, Adam.

[Operator Instructions] Our next question is coming from Mark Hughes of SunTrust Robinson Humphrey. Please proceed with your question.

Yes, thank you. Good morning.

Good morning, Mark.

I would also like to give my best to Marsha.

I know she’ll appreciate it.

Yes. In the risk management business could you talk about the claims frequency, particularly in the worker’s comp area?

Claims frequency is growing but along around about 1%.

Yes. Pat, it’s – a little bit of a difference between the indemnity and medical-only claims, but the indemnity is up about 1.5% with the existing client base, so not new growth but thinking of it as these same-store sales. Indemnity is a little bit higher than that. But when you bring in the medical-only claims it’s right around 1% overall.

How does the trend look compared to say three or six months ago?

Three to six months ago it’s probably about the same. If you remember, Mark, if you go back two years ago it’s probably down a point to a point half.

Got you. And then in the wholesale business, why is the program under a little bit of pressure? Is that competition that is slowing that down?

Yes, a soft market. And we lost one program underwriter.

Thank you very much.

Thanks, Mark.

Thanks, Mark.

Thank you. Our next question is coming from Charles Sebaski of BMO Capital Markets. Please proceed with your question.

Good morning.

Good morning.

A follow-up on that program, can you tell us what the size is currently of the program business and whether or not there’s been any change on the underwriter side on appetites for you guys or any expected turnover there?

Go ahead.

I think the program business is about $75 million in total revenues, but when you break down to the area we are talking about a $40 million business that – of the piece that we are really talking about here. Truthfully what happened is we got a transportation program that we moved to a different underwriter and that slowed us down a little bit here in 2016. But we’ve got – the program is back in place. We’ve got it working and we think that we could have some nice uplift in transportation in 2017 if the economy starts humming. You’ve got to move all goods and services with transportation so that could be better than that, but it’s a $40 million business for us.

And in that business, Charles, we are the underwriter, right, so soft markets in very specific programs hurt us

Okay. You mentioned earlier about the performance bonuses internationally and I think you said you thought they were going to pick up in 2017 after some changeover of a state program. What were the level of performance bonuses in 2016? And kind of when you think of pick up what the general guidepost would be for that would be helpful.

You can go into the risk management segment historical financial information and you can take a look at the performance revenues in the past, but basically they had been running $10 million to $15 million a year. We think there could be a rebound in that. I think this year the total year-to-date number is – it looks like the performance bonuses were down from $15.6 million in 2015 down to $3.6 million this year, so there is a possibility of a $10 million recovery on that over time. I don’t think we will pick it all up next year but I think over the next couple of years we will do that. One of the reasons why it’s down I think it’s important to understand is those performance bonuses that we lost this year were predicated on a contract that was written five years ago. And as the client stepped up their expectation of our service over the last five years, we hit it four out of the five years. It’s just the stretch goal for the fifth year was larger. So our quality actually improved and our service actually improved, but we didn’t hit the stretch milestone that was set five years ago. That’s been recalibrated. I think that as we look out we have renewed that program. We’ve got a three or four year contract with some, probably closer to four-year contract with them. And I think the milestones, as we look out into the fourth year, we believe are much more reasonable. And I think that the client would also agree that they probably held us to a standard that was pretty high. So this shouldn’t be interpreted that we missed something. The fact is the milestones were just a little too high as we guessed five years ago when we negotiated that contract. But I think the next one over the next four years we should be able to hit it all.

And that is essentially all margin, right? I mean, it might only be $10 million or something, but it almost all falls to the bottom line, correct?

Right. It does. I mean there’s management bonuses associated with it that go in there and the staff bonuses that we pay out as we hit those milestones. But, yes, you are right.

All right. And then I guess just finally, and I am thinking about the deal side. And I know you give guidance on EBITDAC multiples. I’m just curious, if there is tax reform, does tax reform change your view of the multiples you’d be willing to spend given you consider on a pretax basis? But does a lower overall corporate moving to 35% to 20% change your appetite or multiples on transactions going forward?

Yes, I think the math would say that if you move from 35% to 20% on a tax rate cash flow discounting on that you would probably have to pay a 1.5 times greater multiple on that. But I think you’d also look at the spread to our multiple would still be about the same. We are buying at probably a 3 point spread to our multiple and – but theoretically our multiple would move up too. But, yes, it’s 1.5 times the multiple – incremental. So if you are paying 7 you might have to pay 8.5 for the exact same cash, in theory just based on the math.

Excellent. Thanks a lot for the answers, guys. Good quarter, nice.

Yes.

Thank you. Our next question is coming from Sarah DeWitt of JPMorgan. Please proceed with your question.

Hi, good morning.

Good morning.

Just following up on the potential loss for the interest rate deduction. What would the GAAP impact be? Would that be the $45 million? And if that occurred would you use cash for debt reduction over M&A?

You are looking at it right. On Page 6 of the CFO commentary the $45 million would be a GAAP reduction. Again we would use tax credits, so there would be no difference on cash because we would use our tax credits faster. And would we favor debt reduction over M&As? No. I think that we would still continue to be an active acquirer of nice tuck-in acquisitions which would pay better than repaying the debt.

And remember, when a seller sells, Sarah, they are gone. You can’t get someone that wants to sell their business to decide they are going to wait a year and a half.

Right. Okay. And then on the brokerage margin, nearly 27% this year I think is near an all-time high. Is there a natural ceiling on the margin over time, or is the way to think about it, as long as you grow more than 3% organically there is really no limit to that?

Yes, it is an all-time high. I think our margin improvement over the last five years, we are probably up 400 basis points in margins in the last five years. So, yes, it is. Is it – trees don’t grow to the moon? I think there is a spot where you can have an unhealthy margin. You can’t reinvest into the business. And what I would like to think more about is how does it – to the extent that we have additional margin expansion, what do we do in order to continue to attract good producers and provide better clients to our customers? So we talked about the opportunities internationally. In the U.S. we need to continue to provide the level of service to our customers, so there is a terminal velocity that you reach on this.

Okay, great. Thank you.

Thanks, Sarah.

Thank you. Our next question is coming from Ken Billingsley of Compass Point. Please proceed with your question.

Hi, good morning. I’d also like to offer my well wishes to Marsha and her future endeavors.

All right, all right, for the rest of you on the call, that’s enough.

She’s in Florida right now listening to this. Let’s not feel too sorry for her.

There you go. My question is going to hop around a little bit here. The first one is on the brokerage segment, the $18.5 million line item for investment gains and gains on sales of books of business, I see that on Page 13 that gain on sales were negative $1.9 million. Could you just explain what the $20 million in investments, or just what to look at that from a modeling perspective going forward?

All right, there’s two things I think that you are looking at. If you are talking about in the P&L, investment income and gains on realized books of business, there’s two pieces in there. Premium funding income that we get on our premium funding operations around the world is in there, as well as book gain. And probably the best place to get book gains would be in the – as we adjust EBITDAC – I’m trying to get to that page here – the book gains for the year – stand by. Book gains for the year would be somewhere around, I don’t know, $6 million for the year, something like that. So your question – so now that I’m anchored on where you are. What was your question? This would be something if we decide a book of business doesn’t fit with us we would sell it off, or a producer – if we want to exit a producer sometimes we will sell them a piece of the business that they manage.

Okay, so this isn’t related to page 13 where you have gain on booked sales for the quarter of negative $1.9 million – of the press release?

All right, page 13, 14 on the press release – I’m still trying to get to where you are, $1.9 million there. Well, what we are doing – we had a gain of $1.9 million on a book, so when we get to adjusted we take reported and we are reducing that gain as we get down to adjusted because we just sold off a small piece of business.

Right. So the premium funding would be the remaining about – just around about $16 million of premium funding for the quarter?

No, not in investment income. If you look at investment income, the $16.6 million, you’d take out the book gain of $1.9 million and you would be somewhere around $14 million. Maybe I misheard your question?

Yes, I will follow-up after the call.

Yes, the rest of it would be premium funding income. To the extent that you pull out booked gains, the rest of it would be premium funding, interest income and then you will have an interest expense down in the P&L also.

So moving on to coal. I would imagine – you made some comments earlier that under Trump it would appear positive for usage and such. But on the tax side, do the plant owners own a piece of the tax benefit, or does someone else own that. And then the question really just relates to what is the incentive and desire if regulations are reduced in general for them to use the clean coal as opposed to not using the plant in their process?

First, more important, we own the plant or the facility that actually creates the clean coal – Gallagher plus our partners own that plant. So we take possession of the coal; we treat it and then we sell that coal back to the utility. And so as a result of that the utility can meet their environmental needs that they want to meet. And when – but the utility does not participate in the tax credit. They get a processed, refined coal that’s clean and that’s their incentive to use the clean coal plant.

But if there is any change in regulations on that side, do you guys have contracts – future contracts of purchase obligations with you guys?

If there’s a change in environmental regulation, yes, it could have some impact on their desire to make it clean coal. But most of our utility plants, it doesn’t cost them anything to use this clean coal to a great extent. So I think they continue to use it even if – we really haven’t had any mercury standards for the last 10 years and so they’ve been using clean coal since then. So I think they would – for the better good of society I think they continue to use it.

Your answer there – does it cost them more to use yours, or you said it doesn’t cost anymore to use yours…

No, it does not cost them more to use it.

Okay. And then the last question was on the – I just want to talk about healthcare, ACA, your employee benefits segment and more of the discussions you may have had initially with some of your smaller accounts. Don’t know where it is going to go, but if some of the smaller accounts that didn’t have to offer healthcare benefits and there were some changes and they no longer have to. In your initial conversations given where unemployment is, what’s their thoughts about retaining and hiring people? Is it something they are likely going to continue to offer? Maybe just – I’m just curious if you’ve had any initial conversations…

Yes, initial conversations, Ken – ACA is not that old. You go back in time, the number- one challenge for most business people is getting the right team together, right. It’s getting the right people on the bus. If you are going to do that for the most part you’ve got to have attractive benefit offers. Now, there were very small accounts obviously before ACA that were not offering benefits to their people. But by and large the majority of the clients that we talk to would continue on doing exactly what they did before the ACA, which is making sure they had a benefits package that was attractive to their employees. What they want is help understanding where this thing is going.

So if anything, maybe a reduction of what maybe is in the healthcare from the change in ACA, but definitely not going backwards and removing it?

I don’t think there will be a reduction. I’m not going to give you any numbers or percentages, but when there is change in the marketplace it’s good for Gallagher.

One of the things to also remember that in our practice, our employee benefit consulting and practice is that we don’t do a lot of customers that are under 50 lives. It’s just really not, we’re tend to be – when they start getting over 100 or towards 500 to 5,000, that’s where we are playing. So the number of small customers that really are kind of getting whipsawed by all this, that’s really not where we spend most of our time and effort. So it wasn’t a big practice before, it’s not a big practice now. We do it really well for a small customer that wants to use our services, but by and large we don’t play in that space.

Very good. Thank you for taking my questions.

Thanks, Ken.

Thank you. Our next question is coming from Mark Hughes of SunTrust Robinson Humphrey. Please proceed with your question.

Yes. Just quickly on interest rates. Doug, where do we have to get in terms of rates at the short end before it starts having an impact on your investment income? And then alternatively what’s the risk that higher interest rates tempt carriers to be more aggressive on pricing?

Let me take the carrier and work backwards on this thing. And I think on the carrier side they are still having portfolios that are rolling off at higher interest rates. And so their net renewals, as their portfolios roll it’s going to be renewing down. New money coming in to the extent they would grow would be slightly higher than last year. We are up 75 basis points. On the short end of the curve – probably going to take another 50 basis points in order for it to take any meaningful difference on our results, but it will drop into investment income at that point. You remember the days when we were getting 6% on our short money, that was pretty good. I think that was about $20 million back then. Now it would probably be closer to $100 million.

Yes. Very good. Thank you.

Thanks, Mark.

Thanks, Mark.

Any other questions, Donna?

No, sir. I would like to turn it back over to you for any closing comments.

Good. I do have a quick closing comment. First of all, thanks again, everyone, for being with us this morning. We do believe 2016 was an excellent year for Gallagher and our focus remains on executing on each component of our value creation strategy. We will grow organically in 2017. We will grow through acquiring the best brokers. We will improve our quality and productivity. And we are going to continue to invest and celebrate our culture. We think 2017 will be another great year as we build on the success of 2016. Thank you for being with us this morning.

Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day.