Good morning and welcome to the Arthur J Gallagher & Co.’s First Quarter 2017 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 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 first quarter 2017 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 are going to touch on the four key components of our strategy to drive shareholder value. The first is organic growth; secondly, growing through mergers and acquisitions; thirdly, improving our productivity and quality; and fourth, maintaining our very unique Gallagher culture. The team executed on all 4 of our strategic priorities this quarter and resulted in a strong first quarter. Even though our first quarter is seasonally our smallest, I believe this sets the stage for another outstanding year in 2017. First, let me talk a little bit about the Brokerage Segment. First quarter organic growth was 2.7%, all-in, with base commission and fee growth even a bit better than supplemental and contingent growth. The 4.8% organic in the first quarter of 2016 set a high hurdle to grow against this year, and I’m extremely pleased with this quarter’s growth. Domestic property and casualty organic growth was a little lower than our all-in organic, while international property/casualty was over 4%. Property and casualty rates globally continue to be a slight headwind, but are being offset somewhat by exposure growth. Taken together, rate and exposure reduced our domestic property and casualty brokerage organic by about 1 point. So we really haven’t seen much of a change in the U.S. operating environment. Internationally, the rate environment varies more by geography. Pricing remains challenging in our London specialty unit, while UK retail continues to see modest pricing headwinds. On a more favorable note, Australia and New Zealand appear to be turning the corner into positive-rate…

Thanks, Pat, and good morning, everyone. Like Pat said, what a nice solid start to 2017. Today, I’m going to provide my typical commentary on modeling, margins, clean energy, M&A and cash and capital management. Both of my comments will be using the CFO commentary document, which is posted on our Investor website. Let me point out a few things as you model the next 3 quarters of 2017. Starting on Page 2 of the CFO commentary, we provided our guess on the impact from foreign currency exchange rates on both revenue and EPS based on current FX rates today. For brokerage, you’ll see about a $20 million impact on revenue in the second quarter of 2017, but not much in the second half of this year. However, that doesn’t translate into much impact on EPS. About $0.01 or $0.02 drag in the second quarter, but next to nothing in Q3 and Q4. As for Risk Management, you’ll see not much impact on revenue or EPS. Next, if you flip to Page 5 of the CFO commentary, where we show you the roll-in revenues for the next 3 quarters for mergers that we closed through yesterday. Then, you’ll need to make a pick for revenues related to future mergers that we have not yet closed. And then finally, I’d suggest that as you roll in revenues for future acquisitions that you use the mid to late-quarter closing assumptions in your models. You’ll also notice on Page 5, and you heard Pat say that just a minute or so ago that Gallagher Bassett completed a nice little merger down in New Zealand, and we’ve given you those roll-in revenues too. And finally, as a reminder, remember to apply your organic growth pick to last year’s revenues after adjusting for FX, but…

Thank you, Doug. Donna, I think we’re ready to go for some questions and answers.

Thank you. The call is now open for questions. [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.

Pat, so first question on the expense ratio reduction Brokerage segment. If you look back since the third quarter of 2014, your quarterly run rate about $140 million, pretty consistent despite you being growing your business. So could you talk a bit about how do you control that expense? And can you keep a same level here going forward that you will have natural leverage as you grow your top line?

Yes, great question, Kai. Yes, our operating expense ratio and then just the absolute amount, the teams done a terrific job as we start to take our sourcing initiatives, our real estate initiatives, leveraging our IT even this quarter, our ability to go on source our office supplies contributed in the quarter. So you’ll see us being able to hold that operating expense ratio into the future as our sourcing efforts. We’re getting great traction in Australia and in the UK, using a lot of the techniques that they’re good at, we’re good at, and together, we’ve done a really good job of controlling those expenses.

Okay. So even at sort of like low to mid single-digits organic growth like to be below 3% organic growth, if you can help this scenario, we’ll still be able to see some margin expansion?

Well, I don’t know. I’ve always said that if it’s tough to expand margins. You don’t have 3% organic growth in the brokerage space. And we’ve done it – if we have long 3%, yes, maybe there’s margin expansion in there.

Okay. Second question is on your contingents and supplements. In the past two years, you’ve been growing year-over-year about if you add them together, about 15%. But this quarter is kind of flat year-over-year. I just wonder anything that’s behind it and because it’s high-margin business was that – if they’re slowing down, would that impact sort of potential margin expansion?

Good question. Last year, we had a nice step-up in our supplementals and contingents in the first quarter that contributed to the 4.8% organic. Our base last year, I believe, if my memory’s right, was about 3.5%. Our base this year is 2.9%, so it’s not all that dissimilar on the base commission and fees year-to-year. Supplementals and contingents again, geography between the 2, I wouldn’t worry about that too much. But in total, I think the step-up after last year and holding it this year was good. We still believe that there are opportunities for us, especially as we buy – continue to buy businesses to roll them into our supplemental and contingent programs. I think our relationships with the carriers are really good right now. So I see that line kind of being consistently growing. But it’s always going to be a little bit lumpy.

Okay. Lastly, just quick one and on the clean coal. For 2017, it looks like you're on track to achieve 10% year-over-year growth. Do you have any sense about 2018?

Not at this time. We need to look at coal consumption. We still – our plants are running well. I don’t really have a thought about that right now, Kai.

Okay, great. Thank you so much.

Thank you, Kai.

[Operator Instructions] Our next question is coming from Elyse Greenspan of Wells Fargo. Please proceed with your question.

Hi, good morning.

Good morning, Elyse.

I wanted to follow up on some of the comments you gave in terms of organic growth. You guys printed around us 3 in the Q1. And Pat, your comments imply you’ll come in about last year’s level, which was 3.6%. So I guess, how do you envision the step-up as we go through the remainder of the year? And as you think about getting 2017 looking like 2016, how do you see the components moving forward domestically and internationally, especially as you point to the market potentially turning harder in Australia and New Zealand? And one other question on that front. Did you say when the wholesale organic growth was in the quarter?

I didn’t mention it. Let me answer the first part of your question, Elyse. First of all, over the last few years, as you know, we built a much more balanced portfolio. We’re now one of the bigger players in New Zealand, Australia, Canada and UK. So we get the benefit of that balance. Organic in the United States this past in the property/casualty area was a struggle this quarter, and I think we’re going to see some improvement there. I also think we’ll see some improvement in organic at Gallagher Bassett as the year unfolds. Our benefits business was particularly strong in the quarter, and I see that continuing to strengthen. Australia and New Zealand were strong and Canada was strong. So with that balance and really what I’m seeing in the rate environment is – when I say that we’re down 1 percentage point from rate and exposure, that’s a great market for us. Really, we’ve been almost flat with regard to rates. To some up, some down property, in particular, over the last four years has been down significantly. But by and large, we have not seen the swings in the property/casualty market over the last five to six, seven years that we’ve seen for the last 40 years. And I think that’s a great environment for our people to be out producing, and I think that we’ll have a good new business here. We’ve got a very strong pipeline. I can look at that in sales force. And the bottom line, it just feels like last year. I think we will probably do about the same as we did last year maybe even a little bitter.

On the wholesale side, Elyse, first, let’s define wholesale. When you look at our program business, our program business was basically flat. We have some commercial auto in there that the markets are shifting on that. You’ve seen that in some of the carrier’s reports. So as markets come in and out, that’s flat, so they held in there nicely. Our open brokerage, I think, was over 5% for the quarter, and then our binding businesses were somewhere around 3% to 4% something like that. So we have good results across our wholesaling platform other than maybe in the program business. All-in, may be in the mid-2s.

Okay, great. And then in terms of thinking about the organic for the remaining three quarters, do you guys have a view kind of following up on the earlier question in terms of how the growth you might see in the supplementals and contingents? I mean, they did see strong growth in the Q1 last year, but a bit more even throughout the year. So as you think about the organic growth for the all three quarters, do you think the growth within supplementals and contingents will pick up?

I think it will outpace base, commissions and fees. So I think that in total, supplementals and commissions will actually contribute to more organic growth relative than how it did this quarter. Also, one of the things about organic growth, other than maybe a year or two. In last 10 years, our first quarter organic growth has historically been the lowest organic growth quarter. Not just seasonality, but in percentage-wise organic growth. So last year, about one in the case and maybe one other year in the last 5 wasn’t. So we feel as we lookout property, we don’t see as much as the headwind this year, as we come into the second quarter. Of course, that can always change. So that’s why we feel that this year, we should end up like last year maybe a little bitter.

Okay. And then in terms of the margin within the brokerage business, I mean, was pretty – the 120 basis points is pretty strong in the quarter. From your comments, I know you pointed to pretty strong international margin expansion, but it doesn’t seem like its anything on that’s one time in nature that would potentially cause us not to see a good level of margin improvement when we think about going forward right there wasn’t anything onetime in the numbers.

Not really, no. I think it’s just steady improvement. We are – our international folks are doing a terrific job of bringing the franchises together, working hard about trying to – we understand that their synergies, and there’s economies of scale and they’re doing a good job of getting after it.

Okay. And then one last question, if I may, on the deal front. You guys mentioned pretty strong pipeline there. Have you seen any change in private equity interest in the group? I know last quarter, there was you kind of speculated what potential tax changes could do to deal prices as well as interest in the brokerage space. Have you seen any of that play out? Or is it we kind of waiting to see actually how tax changes in the U.S. will take shape?

No, I won’t see any hesitation out there, Elyse. This is a frothy market. I mean, there’s a lot of private equity money that wants to be in the brokerage space. And every single deal that is going to have private equity competitor, it’s going to be a fiercely fought deal.

But frankly, also, Elyse, those that we’re actually courting and those that are actually merging with us have decided that they want to be with a strategic. They want our capabilities, they want our resources, they don’t want to be a part of a roll-up. They’re looking to sell insurance with us. They believe that their family and our family together will be better. So yes, there’s price competition out there. And of course, that always keeps it interesting at the negotiation table. But by and large, we’re looking for those partners that want to take a fair price to come sell insurance together with us.

Okay. Thank you very much.

Thank you, Elyse.

Thank you. Our next question is coming from Adam Klauber of William Blair. Please go ahead sir.

Thanks. Good morning, everyone.

Good morning, Adam.

Pat, I think you mentioned that the economy – the impact to the economy exposures pretty much leveled, if I heard correctly. Are there some regional differences with some regions are actually helping with some are more neutral.

I can’t really pick out too much on that, Adam. I think probably the West Coast is getting a good lift. We still I think are still seeing some decrease in the whole energy play in the South and the oilfields. Northeast seems okay and Midwest is fine. So I think that bottom line, we’re just feeling that our customers are, the businesses are in pretty good shape. We have a Board Meeting this week and we invited a customer to come in the board to ask to meet some of the actually work with us. And he was a small manufacturer locally, about a $100 million, $150 million manufacturing firm, U.S.-based. They do fire suppression work. Sprinkler systems seems like that and he was very bullish on his opportunity, so I think I see that, when I bump into customers across the whole spectrum.

Okay. Then on the benefit side, I think so the growth area is doing well. With some of the noise about ACA repeal and obviously, change in administration, has there been any slowdown in the decision-making or just clients pulling back saying we just want to wait till we see what’s going to happen? Or is the market – would you say the market proceeding more along normal range?

No, I think the markets proceeding normal. Well, let’s put it this way. I don’t think that market seem normal since the ACA was instituted.

Right.

We’ve got 30-plus people in our compliance department, most of them are lawyers. And that is all around having to help our customers comply with all these regulations across the board. And at the same time, they’re trying to balance that with the problem they’ve got at cost increases, with a problem they’ve got with a war for talent. So that is right at the heart of what we do for our clients. And that there’s no stepping back from that. That’s a constant concern, and it provides us with basically constant opportunities.

Okay.

And frankly, Adam, the beauty about it is the small guys can’t do it, right? So we’re doing acquisitions in the benefit space. And frankly, I can tell when they come in, when I meet them, if they have met our compliance people or not. Because when they come in, to be perfectly honest, they’re cocky about the ACA. They know they can handle it. They work, went there and sitting along [indiscernible] Once they’ve met our compliance people, they’re scared. So whole different deal, they go all, which must be advising our clients on all that? So it’s a great opportunity for us. It couldn’t be better.

Okay. And then on U.S. retail nicely acquisitions have picked up. How about growth in the producer force aside from acquisitions? Are you growing the force? Is it more – we always have a trained program, sorry, cut you off. Is it more from the training program? Are actually hiring from outside or both?

We’ve grown our producer headcount three ways. First of all, really excited. We’re coming into June and we’re going to have 400 kids domestically in our internship program. We’re going introduce 400 new young bright people to this industry and I’m hopeful that we’ll hire a good portion of those. So that’s number one. And by the way, that’s domestic. So if you had the additional about 100 globally that we’ll do. So we’ll end up introducing about 500 young adults to this business. Secondly, we grow producer kind of courses through acquisitions. And you guys can see that every day, every week. And then of course, we’re out looking for new people. And about 2 years ago, we started a program that the call Hire Right. At Hire Right is an effort to go out and find really good salespeople that are not in the insurance business. They can sell copiers, pharma, whatever it might be. Find people that have no call reluctance that really like to get in front of people and sell and teach them insurance. And that is going extremely well for us and is adding to our organic headcount in the producer force. So I feel really good about that.

So can you give us just a ballpark? Should the producer [indiscernible] acquisitions grow in a 2%, 3% range? Or is that a little too much?

I don’t have a number, Adam.

Okay. Thanks a lot.

Thanks you.

Thank you. Our next question is coming from Mark Hughes of SunTrust Robinson Humphrey. Please go ahead.

Hi, thank you. Good morning.

Good morning Mark.

What about the tax reform? Any early thoughts on what that could mean for the clean coal business?

Mark, just repeat your question? You kind of broke up on us.

Yes, sorry. Any early thoughts on what tax reform could mean for the corporate segment, for the clean energy business.

Yes. Actually, in the CFO commentary, we republished our pro forma where we took 2016 and we ran it assuming a 20% federal tax rate. So we did that pro forma for you. We published at January. It’s still out there. We didn’t update it, but we just pro forma, and history doesn’t change that much. How do I feel about and it tax credit strategy, as I believe that the credits that we have will continue to have value going forward. I believe that – it’s a credit, it’s not a deduction. So $1 under older tax and under new tax is same. And overall even with tax reform we’re going to reduce our taxes even more because if AMT goes away, we’ll actually going to use our credits even more. So I feel good about it. I think we’ve got a good inventory of credits that have a long life on it. We have the ability to produce more credits also going forward. But remember, this law sunsets on credits in 2021. So we’ve got four more years of generation on it, but I think that, that will create an inventory and warehouse that can stretch well into the late 20s.

Thanks for that update. And then any comments on line by line you would pointed out, I think property wasn’t as much of a headwind. Anything else you would call out as being particularly strong or weak from your perspective lately here?

Well, I think first of all, the world of risk is certainly growing every single quarter. Right now, I think the one that is that gives us the most opportunity and the most concern is cyber. And cyber is a very strong offering and something that all of our clients really need. Property, as you know, has been down significantly over the last four years and now is really kind of relatively flat. Transportation is a bit of an issue. That’s really kind – it’s an issue to our clients. Those prices are going up. And then I think I’d look across regular general liability, umbrella, et cetera, et cetera is basically flat.

Yes, I think and I just give you some actual numbers. If you go back to first quarter 2016, commercial property by illustration, was off according to our data here, 5.1%. And this quarter, we saw it only 1.4%. If you look at marine, marine was down 5% in the fourth quarter of 2015. It was actually up 1.7 this quarter. Package is flat, commercial auto is flat, so professional lines is flat, workers comps shows a little bit of an uptick this one quarter. So you’re kind of seeing that in the charts here where rates are that I’m not giving you quarter-over-quarter negatives, I’m given more flat or slightly up.

That’s very helpful. Then I have to ask, any thoughts on clean trends within the risk management business, if you think about the kind of U.S. workers comp business? What do you seen?

Client’s trends up about 1%

Yes, our clients – our U.S. business was up 2.2% pretty in the quarter, so overall.

Very good, thank you

Thank you Mark, anybody else got them. Anybody else, Donna?

Not at this time. Sir, do you have closing comments today.

Yes, I do thank you. I’d like to thank everyone again for being with us this morning. We believe we started off 2017 on an excellent footing, and our focus remains on executing on each component of our value creation strategy. We will grow organically. We’re going growth through acquiring the best mergers. We will improve our quality and productivity and we’re going to invest in what we believe is a strategic advantage, which is our unique culture. Thanks for being with us today. We appreciate it.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. And have a wonderful day.