Good afternoon and welcome to Arthur J Gallagher & Company's Third 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 discussed on this call are 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 these measures, please refer to the most recent earnings release and 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 & Company. Mr. Gallagher, you may begin.

Thank you, Karen and good afternoon everyone, thank you for joining us for our third quarter 2017 earnings call. With me this afternoon is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. Before we dive into our performance during the quarter, I want to start with some comments regarding the recent hurricanes, earthquakes and wild fires that have caused so much devastation over the past 90 days. The insurance industry is now fully engaged in the long process of putting everything back together. I'm really proud of how our professionals have handled our customer situations and in some cases even while dealing with their own losses and unfortunate circumstances at the same time. We've already helped our clients with thousands of claims related to the hurricanes alone. Unfortunately, there will likely be more claims filed over the coming weeks driven by the wild fires in California. 2017 could be one of the costliest insured natural catastrophe loss years on record, with catastrophe modeling firms estimating more than $100 billion of insured losses from the US hurricanes and Mexico earthquakes alone. In my opinion, this is the time for our industry, the insurance industry to shine as losses get paid and lives get put back together. I'm honored to work in an industry responsible for such an important task. Now, I'd like to go on to my comments regarding our third quarter. In our usual fashion, Doug and I are going to touch on the four key components of our value creation strategy. I'll address three of those, number one, organic growth; number two growing through mergers and acquisitions and number three, maintaining our very unique Gallagher culture. And Doug will touch on the fourth, which is improving our productivity and quality. Once again,…

Thanks, Doug and Karen, we're ready for some questions-and-answers. Hopefully answers.

Thank you. The call is now open for questions. [Operator Instructions] Our first question is coming from Elyse Greenspan of Wells Fargo. Please proceed with your question.

Hi, good evening.

Good evening.

My first question - so I was just helping to get a little bit more color on just on how you guys are seeing the market, obviously there is a pretty big delta out there in terms of the potential insured losses in the third event we've actually seen disclosed and I think that's led to a lot of dialogue around how much price we could actually get out there and you did allude to the potential performer prices in the U.S. We are kind of magnitude; do you think that we could see, and do you think that this is depending upon seeing insured losses and reported loses get close to about that $100 billion figure that's been floated around?

Well, Elyse, this is Pat. I think it's pretty earlier in the game right now. These processes are still very fresh and one thing we know from the past is awful lot of the modeling firms those models don't necessarily hold up when it comes to these catastrophes. So we don't know. I think right that $100 billion is somewhere close to what realty will be. There is plenty of capacity beyond that, but we are seeing people already talking to our folks in particular around catastrophe exposed properties. It's not across the board, but they say look need increases and it's reasonable. We got about 23 quarters by our estimate of decreasing property rates and that was I mean that was fair because the clients really want putting a bunch of loses into the market. So to see something on the order of 5 to 15 to 20 wouldn't be unreasonable.

Okay great. And then in terms of the organic growth outlook, in the prepared remarks was that you were trying to make the - trying to point out that the organic could end up around 3.5% also for the fourth quarter and then in terms of the go-forward view, you were saying '18 to look at a little bit better than '17. What type of price are you start going into that outlook, just so we can idea of prices exceed as I will look at the additives your initial view.

No, let's clarifying. I said that we are pricing if we had 3.5 points of margin - 3.5 points of organic in the fourth quarter we probably could post about 30 basis points of margin expansion, so I was just giving the sensitivity of flat 3 points probably not much margin expansion of that - if 4 points may be a little bit more. So that was the context of that. I wasn't really prognosticating on what the fourth quarter organic would be for right now, it feels a lot like the second and third quarter.

And then in terms of what kind of pricing applications you guys are taking about when you say next year could be a little bit better than this year?

I think that it is one of those things that last year maybe I think all of 2017 we might end up getting a head win from weight of maybe a half a point to a point. So if you think the mixture feels a lot like this, maybe you would see it go up another half a point to a point.

And that's an all in view meaning if there is any impact from these storms on your level of contingency you kind of affect that element letting us fill that?

Yes, correct.

Okay. And then I know that you guys let us know what your investor day that supplemental and contingent, they came out in my expectation to be about flat. Why I guess why were you expecting them to flat and do you have any kind of initial view on what we could expect in the fourth quarter?

Rates have been decreasing slightly over the past year plus. Loss ratios are up, and contingence are contingent and, so I think that as you go into next year, we will have to see what - the capacities themselves are not going to have huge pyramid, they may in their whole sale side, but across the PC operation globally shouldn't be a bigger impact, but if rates don't firm [ph] or at least hold stable loss ratios rolls high and there will be pressure on contingent.

Yeah, in this quarter in particular as a couple of million bucks in our wholesale operations domestically on a couple of our programs not related to the catastrophes. just on some of these general liability line and some of the loss of our property line in insurance parts and primarily casualty lines and so that's why we said the domestic wholesale is about flat this quarter and that's also the reason why contingents are about flat.

Okay, that's great. Thank you very much.

Thank you, Elyse.

Our next question comes from Kai Pan of Morgan Stanley. Please proceed with your question.

Thank you and good afternoon. By the way thank you for moving - making this call this afternoon making our life a little easier tomorrow morning.

Well, thanks for being here.

So the first question a follow-on Elyse's question on the pricing outlook. I just wonder what you tell your brokers right now you are producing it out there and just say in DC modeling and how should we help our clients. From your past experience is what you are experiencing like big catastrophe losses or potential rising prices. Is the environment for you to sort of like is a better or worse environment for you to retain customers or gain market shares?

That's a great question Kai and one of the things we realize is we probably got about 12 to 13 years of new hirers that have never had to take a price increase to a client. We brought in terms and reduced prices. So one of the things we are doing is putting out into the field some real training those are sort of little longer truth of been through a poor hard markets and nothing makes a client more unhappy than a surprise. So the idea that pricing is likely to move around these catastrophes and again being able to explain to a client that for 23 quarters we brought it cheaper prices which he deserved balance sheets were flush. Now you are going to have a hundred plus billion-dollar payout. It makes some sense. By the way pricing and catastrophe exposed areas of Florida at July first renewals were about equal to or less than 1992 when Andrew hit so to go back and say you know what it's time to reload these balance sheets in a 5% to 15% increase is not unwanted. You got to get out from that early because if you are surprise a client they are not happy, and we don't have people who had been trained in this so we working on it really hard.

All right. So in the past - this sort of an environment does you think that you will be able on top of the price increase you will be able to sort of gain market share?

Yes definitely. There is no question about it. There is nothing better than consternation in the market for our professionals to go out and solve some problems.

Okay that's great. And then just two quick follow up for Doug and one is on the clean curve and do you have sort of indication what is 2018 going to be like - they higher than the current levels or going to be sort of you will reach a steady stay levels.

Yeah, I think we have said that were pretty close to steady stay most of plants are putting production and our programs got in out of four years running on it, so we are pretty close to steady state on that. Obviously, there is an administrative favorability to call right now. So hopefully the plants will run little bit more than we originally projected but right now we see it flat up just lightly.

Okay. And then the other one is on - any comments on the pending accounting changes how would that change your sort of income statements for 2018?

We are still working on it. I think it's probably premature to comment on.

Okay, when will we be able to find it out its or you said in the fourth quarter -

Late in the fourth quarter we should some idea and certainly early in the first quarter. Clearly there will be movement by quarter because it will level out some of the seasonality that's been in our business, but what the actual impact is on four-year results, we are still working on that.

Okay, great. Thank you, so much and good luck.

Thanks Kai.

Our next question comes from Joshua Shanker of Deutsche Bank. Please proceed with your question.

Yeah, thank you. I want a follow up Kai's question what's on in the clients somewhat not - one of the under where as you mentioned earlier on a call today that positive property pricing could be too the inversion in the other monitoring lines that you are trying to work through in entire package for our customer. What do you think happens as you rise property prices is that bad of the casualty pricing cycle or where do you see its going right now?

No, I think what you got is a different market than we have seen - yeah, I have through four market cycles and had been the same since 2005. I think that the general market cycle is dead. I think you are going to have many market cycles based on lines coverage. So workers comp is soft, rates are going down make sense. The clients are better. Property looks like it's probably go up a bit. We got transportation, trucking and automobile it's definitely going up. So I think by-line across the board rates are going to move based on basically what needs to happen on that line. So I do not believe that higher prices on property especially when it comes to Catastrophe [ph] exposed property are going to have any impact on casualty at all.

Okay that was very forceful. Additionally looking at the pipeline on acquisitions an even now in the markets for a while overseas, are you finding the equity markets in the U.S. equally for over the ones overseas. If the Gallagher name out of the same extent that people know that you want to find good people to people to join the team and where will that stand within the next few years, where the folks will be on bringing new team members on?

Tremendous opportunities you know go back to 2014 and I think basically everybody was kind of had a wait and see add it to around whether Gallagher could truly integrate and have operations in New Zealand and Australia, Canada and the U.K. Those people are all aboard. We just finished our engagement serving globally with 93% participate and taking our survey. 95% of the people had answered the surveys and they understood the Gallagher are cultured to be unique and important and that's across those geographies and so the name is getting out there more and more tuck in acquisitions are that the pipeline is growing and is solid in every one of those locations. So we are seeing opportunities in New Zealand, Australia, Canada, the U.K. and Latin America and of course in the United States is very robust.

Thank you very much, best answers.

Thanks Joe.

Our next question comes from Ryan Tunis of Credit Suisse. Please proceed with your question.

Okay, thanks. Good evening guys.

Good evening.

Just following up more I guess on the conversation with some of the clients and thinking about maybe some of the unattended consequences of higher rates. I guess only answer is about is all these quarters you have gone back with lower property prices. Do you think that most of your clients have probably - have you been able to get a lot of clients to respond by buying more of other types of insurance arguably with some of the savings in that rate and is one of the difficulties in this conversation if that's true do you thinking if you are passing 10 to 20% rate increases is there - could it be an organic loss set from them maybe buying less elsewhere?

Well, clearly, we have in fact sold more insurance around the fact that rates have decreased over that period of time. People have extended both their limits and what they are buying one of the greatest examples of course is Cyber and I think you could see some cut tax. There are some clients that will say simply I paid excess zero in pay and tax this year. You tell me we are having a cut back. But I don't see that be in a predominant thing especially when you think about first of all your [ph] exposed property is one line of cover in a multi-line coverage of map. And if that goes up 5 to 15% its' not really impacting whether you want the causality limits at a 150 or a 100. I don't see that. So there could be some pressure, but I think that careers seem to be very reasonable in the approach we are taking now. After 2001 that was our last need jerk full on hard market. So it's been sixteen years and that's not over seen here.

Understood, that's helpful and then just give me a little more color on what's going on in Australia and New Zealand some depraving commentaries pretty good there and at this point how much I guess how big is that book for you guys.

About 300 million between Australia and New Zealand and we are seeing pricing increase down there around 5% or a little bit more. I think the real spark in what's happening down there is that we have been together now for three years and I think that they are seeing that the sales and service model is helping them sell more customers to so it's not just a rate story down there.

Okay and then my last one was I appreciate the commentary on maybe being able to accelerate organic growth next year, but hearing Doug talk about some of the efficiency initiatives, is real level of organic growth that you think you need be in regard even if it's not acceleration or you think you can still get margin expansion in '18 given this efficiency initiatives.

You know our standard answer on that is that it pretty tough to show any margin expansion should have got more than 3% organic growth. I think that we have only talk about how we are starting to have some of our other locations like Australia, Canada and the U.K. come on to our service platform that will provide a little bit of lift next year, but remember even if we got to the optimal point we are talking about 25 to $30 million extra of the EBITDA from those location. So on from that stand point that can certainly handle up and add a lot more weight I think that we can be in a position of sixteen thousand associates now, maybe fifteen thousand associates in two years even. So I think that we got the capabilities there, there are some pretty exciting stuff that we are doing them internally with lot of what you might refer to as in short or service and, so I think there is lot sum of opportunity there for us still to get better. And more important our quality at every point we are measuring quality and that's something that we absolutely know is very hard to we are working on that for 12 years now.

Thanks for the answers.

Thanks, Ryan. Operator Our next question comes from Adam Klauber of William Blair. Please proceed with your question.

Good afternoon guys.

Hi, Adam.

A couple of questions one on the liability causality side, are you seeing a tough environment and is that to some extend what's flowing through some of the tough casualty results these days?

I don't know if I would say it is a tougher legal environment. I have been around since as best as started really raised ugly had and exceed TEs going raise its ugly head and I think that the plan of as far as pretty good finding places to go so I wouldn't call it any tougher I just say its continuing to be a very look - just the United States in pick to its location.

Yeah. I don't know over the frequency of severity issue on that had better question for the carriers that really deep knowledge on what's coming in on the client side, but I am not seeing any run-away supplements happening so if it's anything it's a frequency issue. In the frequency issue would be triggered by economic growth because more things happen, more things can go bad. So it is the frequency lead charge that economically driven if that is necessarily because of the legal environment.

Okay. That's helpful. And then as far as all the avoid - in particular is taken, but taken some pretty big of - how big of a partner are they for the top 5, top 3?

No, probably top 4.

Okay, okay. My understanding is avoids in the particular is pushing hard for rate would you say that is true?

Yes.

Yeah.

Yeah. Okay as far as the balance sheet it looks like net debt modeling in last year I guess what level are you confident with going forward?

I think we are right now, our net debt to - adjusted that is probably about the same Adam, we have been running 25 and 26 on a covenant basis and that's been pretty steady on an adjusted basis in fact, so I don't know exactly what you are looking it might be the way you are detecting some of the cashes on the balance sheet. I don't know if you're picking up respecting cash or not, but I can tell you that we have been pretty steady right now and on a covered basis we feel investment grade to somewhere between 2.5 times to 2.8 times and that's what or about we would like to be.

Okay, that's helpful. And then finally for the first nine months of this year the last year has operating flow grown, grow materially?

Yeah and as you know it's very hard to find that from the GAAP cash flow statement, but yes obviously our cash flow is up substantially we are on integration is behind us building that new office building is done in behind us and this is cash flows off the businesses we grow more or up. So yeah, we are substantially stronger cash flow today. Now operating cash flows grown just nicely with respect to organic I mean as we grow organically our cash flows here as we expand margin our cash flow, but kind of one timers that have been that we have been spending cash on behind us at this point.

Okay great. Thanks a lot.

Thanks Adam.

[Operator Instructions] Our next question comes from Mark Hughes from of SunTrust. Please proceed with your question.

Yeah, thank you good afternoon.

Good afternoon Mark.

The question of Lloyds, I assume they're pushing on CAT exposed properties. Are they pushing on casualty as well?

No.

Okay.

Casualty market in the UK is soft.

Okay, how about the domestic in the ENS market?

No, property, casualty is flat.

Did you touch on the benefits with health reform on/off again et cetera? Is that having much of a difference, how has that performed organically?

Well, organically for the quarter we're about 2%. As we said, we had some stuff that sort of moved to the fourth quarter. So organically we're doing well. The consternation around the ACA is both good and bad for Gallagher. The confusion and the compliance requirements are good for Gallagher because we are out consulting with our clients. The bad news is that the confusion in the compliance drag our people away from just going out and knocking on doors and getting business. So it's a plus and a minus. Overall, I would the ACA is a big plus for Gallagher because it is complicated and now you've got the President basically saying that subsidies to insurance carriers are going to be withheld. You got insurance carriers that are basically committed to rates for 2018. You got all kinds of compliance rules around the carriers' loss ratios and things like that that are kind of influx and it's creating a bunch of consternation, which I think will flow through the next year depending on what happens with whether or not the subsidies are in fact killed, which will put immense stress on the whole system a year from now. So it's good for Gallagher then.

Yeah, I think one of the things Mark, just look at it this way. The capabilities that we have in our Gallagher Benefit services unit, the consulting capabilities and the tools that they have really allow us to distinguish ourselves and throughout they're competing and many times substantially smaller than us. The smaller a benefits broker, doesn't have any other resources capabilities or the expertise that we have and eventually they have to make choice, either they sell to us and join us because they want our resources, or they watch for clients eventually come our way. And so I think that scale matters in this, expertise matters, and lot of these small benefit brokers are terrific field folks, they've got great relationship with their customers and so as a result of that they look to us to join through mergers because they know that we can be better together. So there's that opportunity for us as a broker that's growing substantially to bring out more smart people that really are good benefit folks and just want our capabilities. So to me I see there's a positive on that side when you look at the M&A aspect of it.

Thank you.

Our next question comes from Bob Glasspiegel of Janney Montgomery Scott. Please proceed with your question.

Good afternoon and happy anniversary. You guys don't look 90 years old.

You've seen it from the inside Bob.

That's right, especially in the new location, which is quite impressive.

Thank you.

I also didn't think I was going to hang out rather than long enough to see you throw the word tailwind, whether it's pricing or foreign exchange. It seems like you've been using headwinds a lot more, but now that you think you're going to have some tailwinds in property, couple of questions. What does that mean to you as a company or how you manage day to day deal? Do you do anything differently in a hardening property market and softening property market? This is the second question; did you say that Doug that it cost you - your rates cost you 50 bps in organic in 2017 or did I miss that extremely?

In '17 we'll probably end up about 50 basis points in organic as a result of rates. Last year it was more like a 4 point in '16, so I think -

It's negative you were saying.

Yes, that's correct, so we'll be covered by half a point this year.

Right and so if we said we're in a hard market for property, does that get you to what?

Maybe another point, not sure.

So it gets you 50 bps - so it would be a 100 bps swinging from minus 50 to plus 50, if you got to that sort of environment?

That's right.

And Pat, how would you run the company differently if you knew that for sure. Would you hire more people, would you move people in the property or would you just let if all go to the bottom line?

Bob, I think the main thing right now that I'm concerned about is making sure that the people who've joined over the 12 years really get out in front of their clients. Again, I don't think it's jolting hard market somewhere to 2001 and 2011, but any kind of price pressure on the upwardly mobile price, we got to be out explaining to clients why it's happening. Now, memories get really short, so everybody that survived a hurricane or a huge flood this month, they're shaking their head I get it. By April, they're going to be saying, what are you talking about, you're bringing a rate increase. So you got to be out talking to those April renewals and those July renewals now and that's a training exercise Bob. And I don't think it's big enough to say that what we do is take this - I'm not looking at this as a windfall, but definitively I'm looking at it as something that really - we have to just take a moment and make sure people can explain why the market is dynamic. And our people are smart people and by the way our buyers are smart people, they'll get it.

There's no differed adversity you would now consider in a great scenario that I'm trying to create for you, where things are improving, and your organic be growing 4% of 4.5%, if you get 100 basis point swing, there's nothing that you need to invest in or there's no resources you need to service from your perspective?

No, just a reminder guys they've got. There were interesting things, we'll make sure when a lot of customers are shown up to rate increases, I think that they may - people have a tendency to shop more when the prices are growing up and I think that lets our folks get in there and demonstrate our capabilities from somebody that's been opening up their mail and getting price decreases for 10 years. Also now, they'll take that appointment, so you'll see that happening, so we got to protect those - to well inform them and for those other brokers out there that are sleep at the wheel, that's our opportunity coming and showing our ways and they are terrific capabilities and our clients will really like to see.

That's actually a really, really good point. I would hope that we would see some increased opportunities around the fact that our competition in particular this month - and you know this. We now measure, and we know that 90% of the time when we go out to compete on an account, we're competing with a smaller broker. So this is our opportunity to go out and say, hey, we really could help you navigate this market. There's a change in market, we're very good at this, we're one of the largest property placers in the excess and surplus markets, we know what we're doing, we've got the guns, let us help you.

Great, thank you.

Thanks, Bob.

Our next question comes from [indiscernible] of KBW. Please proceed with your question.

Thanks. First question, I know you said multiple times that you're competing against firms that are smaller 90% of the time. I'm just curious, how does that percentage change when you look outside the US?

It's about the same.

The other question I had, when you look back KRW and Olfa, it's look their property CAT index in the US had gone up in '06, but then went down in '07 and '08. Would you expect it to be here similarly this time around or is there any reason you think it would perhaps be different?

Depends on how much capital flows in. If the whole bunch of capital moves to Bermuda and starts taking CAT risk, it will slop in quickly.

Fine, makes sense. Thank you for the answers.

Our next question comes from Paul Newsome - Sandler O'Neill. Please proceed with your question.

Good evening, everyone. One of our peers - one of the insurance companies suggested that sort of a key component of whether a market that gets really hot or not is whether are not the MGAs are essentially are abounded by some of the backers, reinsurance backers. So my question is, do you agree with the promise and if so how do you think that might may or may not unfold? Is there sort of certain time that we should be looking at that happening and getting these thoughts about just doing well?

So first of all Promise is absolutely right on it. By the way we're the largest MGA in the United States, so that's really an important market for us and those programs are critical to us. But again remember, this market is not - this is not a major across the board. All ships are raising on high tide this is catastrophe exposed property that had a bad ninety day this is going to need to have some balance replenishment. This is not a threat to the industry in terms of the size of the loss its putting a capital repair and we are not seeing stress on our MGAs that outside the cared property market at all. So the answer to your question is yes, in fact what you said occurred we are across all the whole MGA book. Things gone withdrawn and our capacity got withdrawn that would be pretty dramatic. But that's not what is happening.

That's great, thank you.

Thanks, Paul.

[Operator Instructions] Our next question comes from Kai Pan of Morgan Stanley. Please proceed with your question.

Thank you for the follow up. Just a larger picture question and you know you are traditionally having focused on the into market clients, do you have a small basis insurance clients and how do you serving, how you have you been serving, and do you see that as a close of 20 for you because there is a lot of talk about that in the market place.

Yes, we see that as a huge opportunity for us in fact we had a project to put for the last 24 months importantly on a globally basis looking at how we service and changes the way we service small business. From doing it the way we had our middle market and upper middle market business in the very specific service centers that will do it better with a higher level of quality and will allow us to drive substantial margins which we will then invest in the marketing around and really try to drive small business into the company. We think there is a tremendous opportunity in small business. And that is both on a benefits and property casualty basis on a global basis. So - these efforts are put in Canada, the United States, Australia, New Zealand and the U.K.

Could you size it in term of the potential or opportunities in terms of percentage of overall look?

I don't think I can off the top of my head Kai.

All right. Thank you so much for your time.

Thanks, Kai. Karen, looks like that's about it?

There are no further questions at this time.

Let me make just a quick closing comment. I want to thank you again for being with us this afternoon. In closing I am extremely pleased with our 2017 performance thus far and I believe we will have a very strong finish to the year. And we look forward to speaking with you again in January and thank you all for being with us this evening. Thank you, Karen.

This does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.