Good afternoon and welcome to Arthur J. Gallagher & Co.'s Third Quarter 2018 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning 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 and the company undertakes no obligation to update these statements. 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 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. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thank you, Devin. Good afternoon. Thank you for joining us for our third quarter 2018 earnings call. With me today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. Before I get into our results, I want to acknowledge the devastation caused by hurricanes Florence and Michael. Our professionals now have the important task of helping our clients sort through their claims, get losses paid, and ultimately put their lives back together. And many of our own employees must do the same for themselves. I'm really honored to be part of the insurance industry,…

Absolutely. Thank you. Our first question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

Good evening. My first question, so just a couple things on organic growth. So 5.6% year-to-date and I know in September you kind of pointed to 2019 looking better than 2018, obviously another stronger-than-expected quarter in the third quarter. So does 2019 still seem like it'll be kind of in that over 5.5% organic growth range? J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Well, Elyse, we were about 4.5% to 5% when we met last. And I think about 5.5% is really terrific. So I'd say I think 2019 looks probably more similar than higher.

But similar to the 5.5%? J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Yes.

Okay, great. And then, a little bit more color on the quarter, pretty strong broad-based growth in the U.S. and internationally. How was the new business growth in the quarter? Would you attribute more of the growth to new business versus retention or just greater purchases by some of your existing clients? Just trying to get an understanding of what really continues to drive the strong organic growth within the company. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Well, first of all, I think you know this, I'm extremely proud of the fact that we are an aggressive new business company and we did have a good quarter. But I think this quarter an awful lot of it was also just down to (00:19:10). We're doing a better and better job of keeping our clients and that's critical to organic growth. You can't fill a bucket with a hole in it. So proud of the team, retention was up nicely and new businesses were strong.

Okay, great. And then, in terms of the margins, you guys did have that table in the press release kind of showing the drag, about 60 basis points for M&A in the quarter. I know in the past you guys have said that that is kind of equal to your margins on a full year basis. So when are these deals seasonally stronger? Like, will they help your margins in the fourth quarter or is it more taking into Q1 and Q2 of next year that you might see greater margin improvement driven off some of these deals? Douglas K. Howell - Arthur J. Gallagher & Co.: Elyse, it's probably split between the three quarters: the first; the second and the fourth if you really look at the way they perform. They'll have higher margins in the fourth quarter than they did in the third clearly and that should be above the margins they would have posted in the first and the quarter.

Okay. And then just one last question. In risk management, your book is about two-thirds in comp and I know you guys kind of highlighted a pickup in claims trends there. Claims trends continue to pick up, what you're hearing across the industry. Do you think that that could lead potentially to stronger organic growth within that segment when we start thinking about 2019? J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: I hope so, but as our clients' businesses become more robust and they add new ships and things like that, the more hours worked – and we work hard to mitigate this, the more claims occur. And so, yes, I think a trend from 1% of growth to 2% is good. Do I predict it will go higher than that? I do not. But our clients' businesses are showing strengths.

Okay, great. Thank you very much. I appreciate the color. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thanks, Elyse.

Our next question comes from the line of Sarah DeWitt with JPMorgan. Please proceed with your question.

Hi. Good evening. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Good evening.

First just on P&C insurance prices, you commented how you continue to see those increase. I was curious on your thoughts on how you expect that to persist going forward. We've heard a couple insurers this quarter say that the pace of increase has either slowed slightly or stabilized and I wanted to get your outlook going forward. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Well, Sarah, I think you've heard me say this for the last eight, nine years. I grew up in an era where markets were hard and soft. A hard market was seeing increases of 25% to 50% to 75% and probably not able to fill out the line of insurance. Soft markets were down 15% to 17% to 20% and would go on like that for years and years and years. What we're in right now and have been for almost a decade is what I would refer to as a flat market. So I wouldn't be all that concerned as an analyst as to whether or not we're seeing a break from 2% to 1.5%. If the market's down 2% to up 2%, I look at that as flat. And so I just think – you look at this and the reason we give the color we did around the world is, with maybe the exception of Australia, New Zealand, I would just simply call the market flat. Now, within that, you have certain lines that will exhibit the strengthening they need. For instance, transportation right now is difficult to place and the prices are moving up. On the other hand, workers' compensation is softer and clients deserve a break there. So I think you've got a really rational market. It's been rational for 8 to 9 to 10 years. If that's the new norm, that's as good as it gets for clients because clients don't need hard markets and no one benefits from softening markets that are just having the premium erode out from under them at huge chunks. And so I think it's been a pretty interesting decade and I think you'll see it continue to be flat.

Okay, great. That's helpful. And then just on the brokerage margin, if you can continue to generate the strong organic growth of 5% to 6% or so, how much higher do you think brokerage margins can expand over time, and is there a ceiling on the margin there? Douglas K. Howell - Arthur J. Gallagher & Co.: Well, listen, trees don't grow to the moon, but it think that when you get into the short term bursts of 5% or so, you can drop some of that to the bottom line. The bigger question is what can you do with the excess proceeds to help you fuel future organic growth. The efforts that we have to put more boots on the ground is to sell insurance, the efforts we have to harness our data and our digital efforts to sell more insurance, the ability to expand our brand that allows us to hire more, to acquire more and to sell more, those are opportunities that you can invest in at this point. There is underlying wage inflation that's happening, but we believe that we can control that. So, as we get extra organic growth, it's really more about the opportunities to invest in the business that should lead to further organic growth. I think that right now clients in a stable mode that we have, they see our capabilities, they see our resources, they understand they get more from Gallagher, and our ability to show them that to compare their pricing to what they could get elsewhere, et cetera, that's a really important thing and ultimately that will lead to better organic growth. Just like the efforts that we invested in improving our middle office layer, I believe that's directly attributable to the increase in retention. We just don't make mistakes for clients anymore. They have a higher quality service because of the efforts that we launched 12 years ago to improve our middle office operations. So, can margins go up? Sure. The more important thing is what you're going to do with the excess that you get from it and that's reinvesting in the business, so it turns into more organic.

Okay, great. Thanks for the answer. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thanks, Sarah.

Our next question comes from the line of Mike Zaremski with Credit Suisse. Please proceed with your question.

Hey, thanks. I'll try a follow-up to Sarah's question on the investments. So, organic has clearly been excellent year-to-date. The margins ex the roll-in acquisitions have improved, I think, under 50 basis points. And so, just curious if we're thinking into 2019, it sounds like we should expect a similar level of investments to last year, should organic stay at excellent levels, is that what you're saying, Doug? Douglas K. Howell - Arthur J. Gallagher & Co.: Well, I think there's opportunities for additional investment, but I don't see us spending more than last year, if that's your question. And to clarify in the front end, in the table that we provide on page 6, actually, we've expanded margin 53 basis points excluding the impact of roll-in acquisitions for the year. So our level of investment is controlled. It's not like we're going to plow in and just dump it – chase a lot of efforts and dump a lot of money into it. But I think there is a lot of good things that are going on and I think the level of investment that we have today, it'll notch up a little bit, specifically in data, but we're talking about $5 million to $10 million type of investment there, not $50 million, $60 million, $70 million.

Okay. Okay, got it. And another follow-up on the margins. So, thank you for showing the margins ex the roll-in acquisitions. But I just wanted to clarify, are those acquisitions lower margin and, over time, they'll kind of – their margin will increase more than the company-wide ex them or are those kind of permanently in the run rate (00:27:12)? Douglas K. Howell - Arthur J. Gallagher & Co.: I think it's almost pari passu with our margins by the time you get a full year in and by the time we get a little bit of our synergies and efficiencies there. So this happens to be in a quarter where they're just seasonally smaller and that will probably keep going in the seasonality. But when you stack them up at the end of the year, they'll be pretty close to our margins.

Okay. Okay, got it. And my final question is on the M&A pipeline. We've seen some sizable kind of top 50 business insurance deals this year and it seems like the bigger you get, the more expensive – the higher the multiple. Just curious do you feel that there is some kind of big fish in the pipeline or I don't know if you agree with what I said about the bigger, the more expensive, just kind of curious around the M&A dynamics in the pipeline. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Yeah. This is Pat. I think that it's clear that as you get to what private equity firms might consider a platform acquisition or you get someone that's publicly traded or you get someone that's in the top 100, those multiples are higher. Doug went through the multiple that we're spending, but you also have to realize that the average revenue for what we've done so far this year is $7 million. Those people we can really get to touch and feel their culture. We're looking for folks that want to stay in the business that love the business and love our capabilities and that will come aboard and grow faster than they can grow on their own. And our pipeline has never and, I mean, in my career, never been this full.

Okay. Thank you, guys. Nice quarter. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thank you. Douglas K. Howell - Arthur J. Gallagher & Co.: Thanks.

Our next question comes from the line of Paul Newsome with Sandler O'Neill. Please proceed with your question. Jon Paul Newsome - Sandler O'Neill & Partners LP: Good afternoon. Obviously, congrats on the quarter. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thank you. Douglas K. Howell - Arthur J. Gallagher & Co.: Thanks, Paul. Jon Paul Newsome - Sandler O'Neill & Partners LP: I wanted to ask about the contingent commissions in a little bit more of a broad way. I would have assumed that contingent commissions would slow down as profitability of the industry decreases and, obviously, we had some pretty heavy cat losses last year. What is offsetting that profit-related contingency piece? Is it just growth? Or is there something else that I'm missing here? Douglas K. Howell - Arthur J. Gallagher & Co.: Okay. A couple questions. We actually did have about $2 million to $3 million of lesser contingent commissions as a result of the catastrophes. In particular, Hawaii really hurt us on one of our programs. I think we lost $1.5 million on that one. So, what's happening right now to still cause the growth in contingent commissions, I think that the reality is, is as we continue to grow as our acquisition pipeline comes on, there is actually we can improve the business of those acquisitions. And as they roll into our contracts with the carriers, you can pick up some additional contingent commissions that way. Jon Paul Newsome - Sandler O'Neill & Partners LP: So, essentially your contingent commission deal is better than the companies that you're acquiring. So you're getting a little bit better cut of the total piece as you acquire these companies in contingent. Douglas K. Howell - Arthur J. Gallagher & Co.: Yeah. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: That's correct. Douglas K. Howell - Arthur J. Gallagher & Co.: Yeah. I think that the carriers – I mean, some of the things that we do with loss control, our knowledge on risk management, I think the carriers are a little more comfortable with paying us more than what you'd have in maybe a standalone independent. Jon Paul Newsome - Sandler O'Neill & Partners LP: Okay. That makes sense. Thank you. That was my question. Appreciate it. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thanks, Paul. Douglas K. Howell - Arthur J. Gallagher & Co.: Thanks, Paul.

Our next question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question. Kai Pan - Morgan Stanley & Co. LLC: Thank you and good evening. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Good evening. Kai Pan - Morgan Stanley & Co. LLC: So, my first question, Doug, you mentioned about the restructuring programs, 350-person plus, that's 30 positions. I just want you to give a little bit explanation for that is ongoing process or (00:31:33) sort of one-off and any potential savings were coming from these restructuring? Douglas K. Howell - Arthur J. Gallagher & Co.: Yeah, okay. Good question. I think if you go back in our history, there's probably been four times where we've kind of taken an opportunity to tighten our belts. Usually, it's when we get an opportunity – when a lot of our improvements are happening in the middle office layer, we get the opportunity to increase the span of control for the management ranks. That's usually when we have the opportunity to tighten our belts a little bit. You'll see in there that we think that this effort can save us $25 million to $30 million and we'll reinvest that into data, some additional production talent and a lot of our branding that we've been doing. So how much of that will hit the bottom line? Maybe a third of it, something like that. Kai Pan - Morgan Stanley & Co. LLC: Okay. When you mention tightening the belt, normally it will associate with the sort of top line growth probably slowing down, you need to sort of like tighten up the expense, but now you are running pretty well. So, why now? Douglas K. Howell - Arthur J. Gallagher & Co.: It just was…

Our next question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.

Thank you very much. Good afternoon. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Good afternoon. Douglas K. Howell - Arthur J. Gallagher & Co.: Hi, Mark.

You had mentioned how you pick up extra contingents when the acquisitions roll-in to your program. Generally speaking, how well do those acquisitions do, more broadly in organic growth if you look out a year or two, is it usually a pretty meaningful uptick? And if so, now that you've accelerated the pace of M&A, will that be a tailwind on your overall organic? Douglas K. Howell - Arthur J. Gallagher & Co.: Yeah, it could. I think that if you look at it in the first year, our organic right when some of the merger partners comes on, the first few months it takes them a little while to get themselves organized in that, but we do have some nice organic that happens in the first year that we own them, but we never reported in our organic numbers because we keep them out of organic numbers for a full year. Then what happens in years two and three, there is some pretty good momentum from then. Does it move the needle on our total company organic? Not that much just because of the sheer size differential from what's coming on versus the mass that's here already. But those that join us that are excited about our capabilities really do well over the three or four years after we open them. And that's evident by us paying in on earn-outs. They're hitting their earn-outs because they are growing better than we expected.

I've got a question just maybe to narrow gauge, but you talked about workers' comp being down 1%. Some of these loss cost numbers state by state are down high single and even low double-digits. I'm always surprised to hear people say pricing is down 1%. It seems like it's probably down more than that if you look at what clients are actually paying. How do you square that? J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Well, we've got good data on our own book of business and I think probably expenses are up, but we know what the rates are doing by geography, by line around the world. Douglas K. Howell - Arthur J. Gallagher & Co.: The other thing (00:38:24) understand when we quote rate, we're actually quoting rate in exposure so, as payrolls rise, the exposure are offsetting the decreases in the rates too.

Right. So, net-net down 1%. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Right.

Thank you. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thanks, Mark.

Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question. Charles Gregory Peters - Raymond James & Associates, Inc.: Good afternoon. Thanks for squeezing me in. I wanted to start off, Pat. I noted with interest this announcement earlier this month about your being named to the Hall of Fame by the Katie School and I am just curious if you're going to use that as an excuse to write off into the sunset or do you plan to keep on going from here? J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Greg, you know me well enough that you could answer that question for me. Do I sound like someone who's headed to the beach? Charles Gregory Peters - Raymond James & Associates, Inc.: I just saw all this press about it. It was worthwhile just checking in to make sure I wasn't missing something. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Well, thank you for mentioning it. It was a great honor and we raised a lot of money for Katie School, which is a very important educational institution for our industry. Charles Gregory Peters - Raymond James & Associates, Inc.: Perfect. Well, on a, I guess, slightly more serious note. And a couple people have referenced this before and you have as well. There has been a couple of large transactions by your competitors – one in the U.S. and one internationally. And if I think back in your company's history when your peers have made large transactions, it's usually been an opportunity for you to pick up dislocated brokers and sometimes customers and you've been pretty good at it. And I'm curious if you're hearing any noise in the market, and granted it's…

Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question. Meyer Shields - Keefe, Bruyette & Woods, Inc.: Great. Thanks. Pat or Doug, I was hoping you can talk about whether pricing trends in workers' compensation, in particular, have any meaningful impact on risk management organic growth? Douglas K. Howell - Arthur J. Gallagher & Co.: Well, typically, when you have a harder market on workers' comp then people will look more to the self-insurance arena. So, if anything, a softer workers' comp market right now would say that fewer people are looking at self-insurance or high deductible insurance. On the other hand, there is a lot of educated buyers out there right now that see that Gallagher Bassett can deliver a much better claim outcome. So I think they're getting just as many shots even in what I consider kind of a lower or a modestly lower market. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: And I think it's fair to say, Doug is right. 1% up, 1% down, go back to my earlier comments. It's a flat market. That's not driving Gallagher Bassett organic growth. Douglas K. Howell - Arthur J. Gallagher & Co.: Right. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: We're out selling in the marketplace every day that if you move your work to Gallagher Bassett, we'll deliver better outcomes on your claim costs. And that's what's moving the organic needle there. Douglas K. Howell - Arthur J. Gallagher & Co.: And it's been pretty impressive thus far this year. Meyer Shields - Keefe, Bruyette & Woods, Inc.: Yeah. No, I'm really trying to figure out if there was a headwind sort of baked in there that you've been overcoming. Second thing...…

Our last question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question. Kai Pan - Morgan Stanley & Co. LLC: Yeah. Thanks. Just quick follow-up on the tax rate. Doug, in your CFO commentary, looks like the range you narrowed that, the low end going up 1 point. Is that good rate going forward to 2019? Douglas K. Howell - Arthur J. Gallagher & Co.: Yeah, actually, good catch (00:46:35) I mentioned in my opening comments. Actually the tightening from a 24% to a 26% to a 25% to a 26% rate is basically because we're nine months through the year right now. So I think our insights into what our full year rate in our blend of our domestic versus international is going to be, that's the reason why we tightened it. What will we look at next year, probably go back for the full year, in January we'll probably get 24% to 26% again. The important thing to remember on that, however, is that that's the book tax rate, that's not the cash tax rate. We said this in the last call, maybe I shouldn't repeat it again here. Because of our tax credits we really don't see ourselves paying more than 5% cash taxes paid, 5% of our EBITDA in 2018 or 2019. So the cash taxes paid are well below that 24% or 25% number you're looking there on the sheet. Kai Pan - Morgan Stanley & Co. LLC: That's great. Thank you so much and good luck. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: Thank you, Kai. Douglas K. Howell - Arthur J. Gallagher & Co.: Thank you, Kai. J. Patrick Gallagher, Jr. - Arthur J. Gallagher & Co.: All right, Devin, I've got just one quick remark as a wrap up here. I want to thank everybody for being on the call here this afternoon. I think you could tell from Doug's and my comments, we're extremely pleased with our 2018 performance so far. I believe we have a very strong finish to the year coming up and we look forward to speaking with you again at our IR Day in December. So thank you, everybody, for being with us today.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.