Arthur J. Gallagher & Company (AJG) — Q3 2018 Earnings Call Transcript

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. Many of our own employees must do the same for themselves. I'm truly honored to be part of the insurance industry, an industry which plays the lead role in repairing property, but more importantly restoring lives. Okay. Onto comments regarding our third quarter. Doug and I are going to touch on four key components of our strategy to drive shareholder value. Number one is organic growth, number two is growing through mergers and acquisitions, number three is improving our productivity and quality, and fourth, maintaining our unique culture. We had an excellent quarter and, once again, the team delivered on all four of our strategic priorities. Before I dive deeper into organic pricing and mergers and acquisitions, let me give some financial highlights for the quarter. For our core brokerage and risk management segments combined, we saw an 11% growth in revenues and a 5.9% overall organic growth. Adjusted EBITDAC margin expansion was 67 basis points, excluding the roll-in impact of acquisitions, and we completed 10 mergers in the quarter, nine in brokerage and one in risk management, totaling about $75 million of annualized revenues—a really fantastic quarter by the team. Let me start with our brokerage segment. Third quarter organic growth was 6.3% overall with broad-based strength across all of our divisions globally. We did see some stronger than estimated contingents in the quarter, but even excluding those, organic growth was strong at 5.9%. Let me break that down worldwide. Our domestic retail PC operations had an outstanding quarter with organic growth of just under 7%, and even after excluding the stronger than estimated contingents, we were up nearly 6%. Our retail PC operations in the UK and Canada each delivered organic growth of about 4.5%. Australia and New Zealand had a terrific quarter, up 7%. Our domestic wholesale operations posted close to 6%. Finally, our benefits business also had a strong showing this quarter, generating more than 5% organic growth. Overall, rate and exposure continue to be a modest tailwind, and these two items combined increased our organic growth by just over a point in the quarter. Let me give you some more insight into the lines where we saw movement in the quarter based on our internal data. In our U.S. retail PC business, rates and exposures were flat or positive across most major lines. For example, commercial auto is up about 4%, property is up 3%, and workers' compensation is down a little less than a point. Moving to our domestic wholesale operations, a very similar story to the retail side. Property lines were up 5%, casualty lines were up 2%, and workers' comp was down a little more than 1%. Canada overall is up 2.5% with property up 3%, and professional and casualty lines up about a point. The UK retail sector is positive across most lines as well. Property, marine, and commercial auto are off a bit over 2%, while casualty is up a little less than 2%. Pricing in Australia and New Zealand remains the strongest, with property up 7% and stronger than casualty and specialty lines, which were up 5%. So overall, a couple of points up, a couple of points down; it’s essentially a stable market—one that is good for brokers, good for carriers, and most importantly, good for our clients. Next, let me talk about brokerage merger and acquisition growth. We completed nine brokerage acquisitions this quarter, representing about $62 million of annualized revenue, with an average size of about $7 million. Through the first nine months, our merger growth has been exceptional. We've completed 27 mergers, representing about $234 million of annualized revenue. That's more acquired revenue in the first nine months than we did in any of the previous three years. Looking forward, our pipeline of potential tuck-in merger partners is very full. Our internal M&A report shows over $500 million of revenues associated with about 70 term sheets either agreed upon or being prepared. We'll certainly get our fair share of these mergers, and I feel confident about our proven ability to track tuck-in merger partners at fair prices who are excited about our capabilities, believe in our unique culture, and recognize that we can be more successful together. I would like to thank all our new partners for joining us and extend a very warm welcome to our growing Gallagher family of professionals. Next, I would like to move to our risk management segment, which is primarily Gallagher Bassett. Third quarter organic growth was 4%, in line with the estimate we provided at our Investor Day in September. While organic growth can vary by quarter, we expect 2018 organic growth to be in the 6% to 7% range for the year. In the U.S., claim counts continue to inch higher. Workers' comp and liability claim counts are up about 2% year-to-date versus less than 1% last year. Moving to mergers and acquisitions, Gallagher Bassett completed one merger in the quarter, a U.S.-based risk management consultant focused on environmental and construction risks. This particular franchise will deepen our expertise and enhance our core loss prevention and mitigation capabilities, ultimately furthering our mission of providing clients with superior claim outcomes—another great example of the type of partner we are trying to attract to the Gallagher Bassett family. Finally, I'd like to touch on what makes Gallagher unique: our culture. Even as we grow bigger and more global, our Gallagher culture is as strong as ever. For example, we were recently recognized by Forbes Magazine as the World's Best Employer. This recognition is especially gratifying because it means we are treating people the right way and helping them succeed. It's also noteworthy that we were the only insurance broker in the world to receive this distinction. That is in addition to being named one of the World's Most Ethical Companies for seven consecutive years. I would also like to thank our employees. They came together last year and set a goal of 90,000 hours of community service in celebration of our 90th anniversary. The team volunteered more than 110,000 hours to their local communities over the past year, far surpassing our 90,000-hour goal. This is another great example of our people and their incredible drive to do what is right. Our people underpin our culture—a culture that we believe is a true competitive advantage. In conclusion, it was an excellent quarter by all measures. We're well on our way to another tremendous year. I'll stop now and turn it over to Doug.

Thanks, Pat, and good afternoon, everyone. As Pat said, another really excellent quarter. Today I'll make a few comments referencing the earnings release. I'll then move to the CFO commentary document we posted on our website, and then I'll wrap up with some comments on cash and M&A. Okay. Let's turn to page four of our earnings release to the brokerage segment organic table and take a look at the footnote at the bottom. This is what Pat mentioned. We had some stronger than estimated contingents this quarter that had a net positive impact on our all-in organic growth of about 40 basis points. Excluding these contingents, our organic growth would have been more like 5.9% than the 6.3% shown in the table right above that. Either way, being nicely in the upper 5% range for organic growth is terrific. I'm making a special point about this today because it highlights a significant difference between old GAAP and new GAAP. Under old GAAP, we booked contingents when we received the cash. Under new GAAP, we must now estimate these revenues. Naturally, actual results will vary from our estimates. I focused on this during our Special Investor Call in April when we discussed the adoption of new GAAP, and here it is. When I look toward the fourth quarter, it’s still early, but it’s feeling more like 5% organic growth versus the 6% we posted this quarter. Recall that we had a really strong fourth quarter last year, which creates a tough comparison. Next, let's turn to page six of our earnings release to the brokerage EBITDAC table. In our July earnings call and during our September 13 Investor Day, we foreshadowed that third-quarter margins would be compressed due to the seasonality of our roll-in acquisitions. So, we've added a table that levels for this roll-in acquisition seasonality. It shows that we would have posted 81 basis points of margin expansion without the roll-ins. This demonstrates excellent operating leverage. We're always striving to improve our quality, increase our productivity, and reduce our costs. Our service layer professionals continue to optimize our approach to small business, improve and standardize our workflows, shift work to our lower-cost operating centers, and reduce our real estate footprint. These productivity improvements were instrumental in allowing us to contract our workforce in September and early October, which we announced at our September Investor Day. Our efforts will allow us to reinvest in additional production talent, more data initiatives, and to build our brand—all aimed at helping us sell more insurance, provide more consulting, and deliver more risk management services. Moving now to pages six and seven of the earnings release, that's the risk management organic table on page six and the adjusted margin table on page seven. You will see that we posted 4% organic growth and an 18% adjusted margin this quarter. This is also excellent performance by the team, coming off a strong comparison from the third quarter of 2017 when we posted 7% organic growth and 18% margins, and we discussed that it would be a tough comparison in our September Investor Day, but the team delivered. Looking forward to the fourth quarter, we’re seeing risk management segment organic growth of 5% to 7% and margins leaning more towards 17% than 18%. If that happens, our risk management segment will come in with full-year organic growth of 6% to 7% and margins of about 17.5%, right in line with our targets discussed during our January 2018 earnings call. Let's shift now to the CFO commentary document found on our IR website, page 2 of that document. Most of the items were right in line with what we published at our September Investor Day. Two items are worth highlighting: severance expense, about $0.01 more in the third quarter than we forecasted, but we’re forecasting about $0.01 lower in the fourth quarter. So, in total, it looks like we will be in line with what we forecasted at our September Investor Day. Next, take a look at the amortization expense line. This one might create some modeling noise. It appears that Street estimates were a bit lower than we provided at our September Investor Day, approximately $0.01 lower; likely arising from our considerably more M&A activity this year than last. When modeling future quarters, it's worth an extra few minutes to consider Note 2 at the bottom of the page. That note indicates our amortization will increase about 1% for every dollar we spend in purchase price per quarter. So, if you model that on your estimate for acquisitions, it should get you close. Let's turn to page 3 to the corporate segment; here are three items to highlight. First, regarding the clean energy line, we had a really strong quarter, even better than we anticipated at our September Investor Day. With Hurricane Florence came a lot of heat and humidity, causing our plants to operate at full capacity during the last half of the month. To illustrate, the average daily temperature in areas serviced by our South Carolina plants was about seven degrees warmer than average over the final 14 days of September. This is a classic illustration of how weather plays a big role in our estimates. It's always good for me to caution that our estimates are never set in stone. Looking ahead, several of our utility partners will publish their fall maintenance routines soon and we expect that they will be pushing maintenance out of September into October and November. So, you'll see that we've lowered our fourth-quarter estimates just a bit. That said, it doesn’t affect the full year at all, and it looks like it'll be another great year provided, of course, the weather cooperates. Next, regarding the corporate line, we came in $0.01 better than our September estimates. The reason for that is the tax benefit associated with stock-based compensation. With the rise in our share price during September, more options were exercised than we expected. The final line in the corporate segment is the impact of U.S. tax reform. We came in slightly better than we guided in the third quarter mostly due to true-ups related to the transition tax and non-deductible compensation items as we finalized our 2017 tax returns. However, as we've been saying all year, this line is mostly just a book expense and doesn't cause us to pay more in cash taxes because we have an abundance of tax credits. In the end, tax reform has been a really positive outcome for Gallagher. Although the tax rate is down, it is offset a bit by the elimination of some deductions, but the billion-dollar gain was that it preserved our historical AMT and clean energy tax credits, totaling about $850 million as of September 30. It also preserved our ability to generate future tax credits through 2021. At current production levels, that may total another $700 million of tax credits, which will reduce our cash taxes paid well into the mid to late 2020s. Okay, to conclude my comments on cash and M&A: as of September 30, we have about $250 million of free cash. We expect to generate about $200 million of free cash in the fourth quarter and we have a borrowing capacity of about $500 million. That gives us about $1 billion to pursue M&A without using stock. So far this year, our weighted average multiple is 8.2 times, reflecting our ability to execute our tuck-in merger strategy at fair pricing, which gives us a nice arbitrage to our trading multiple. Furthermore, given that many of these mergers are in the U.S., factoring in the benefit of our tax credits effectively drops our multiple well below 8 times. Okay, those are my comments—an excellent quarter, an outstanding first nine months, and we're in a terrific position to continue our success in the fourth quarter and into 2019. Back to you, Pat.

Thanks, Doug. Devin, we want to open it up for questions, please.

Good evening. My first question is on organic growth. So, 5.6% year-to-date, and I know in September you pointed to 2019 looking better than 2018, especially after another stronger-than-expected quarter in the third quarter. Does 2019 still seem like it will be in that over 5.5% organic growth range?

Well, Elyse, we were about 4.5% to 5% when we met last. 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%?

Yes.

Okay, great. And then, a little bit more color on the quarter. There was 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 more purchases by some of your existing clients? I'm trying to understand what continues to drive the strong organic growth within the company.

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, a lot of it was also just down to retention. We're doing a better job of keeping our clients, which is critical to organic growth. You can't fill a bucket with a hole in it. So, I'm proud of the team—retention was up nicely and new business was strong.

Okay, great. And in terms of the margins, you guys did have that table in the press release showing the drag of about 60 basis points for M&A in the quarter. In the past, you've said that this is equal to your margins on a full-year basis. So, when are these deals seasonally stronger? Will they help your margins in the fourth quarter, or is it more about taking into Q1 and Q2 of next year that you might see greater margin improvement driven off some of these deals?

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, and that should be above the margins they would have posted in the first and second quarters.

Okay. And one last question on risk management. Your book is about two-thirds in workers' compensation, and I know you highlighted a pickup in claims trends there. Claims trends continue to pick up; what are you hearing across the industry? Could this lead to potentially stronger organic growth within that segment when we start thinking about 2019?

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. So, yes, I think a trend from 1% 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.

Thanks, Elyse.

Hi. Good evening.

Good evening.

First, just on P&C insurance prices, you commented how you continue to see those increase. I'm curious about your thoughts on how you expect that to persist going forward. We've heard a couple of insurers this quarter say that the pace of increase has either slowed slightly or stabilized, and I wanted to get your outlook going forward.

Well, Sarah, I think you've heard me say this for the last eight or nine years. I grew up in an era where markets were hard and soft. A hard market saw increases of 25%, 50%, or 75% and probably not able to fill out the line of insurance. Soft markets were down 15% to 17% to 20% and would persist for years. What we are 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 we’re seeing a break from 2% to 1.5%. If the market is down 2% to up 2%, I see that as flat. The rationale behind the commentary we provided around the world is that, with perhaps the exception of Australia and New Zealand, I would simply categorize the market as flat. Within that, there are 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 opposite side, workers' compensation is softer, and clients deserve a break there. I believe we've got a rational market, which has been rational for 8 to 9 to 10 years. If that's the new norm, that's about as good as it gets for clients because clients don’t need hard markets, and no one benefits from softening markets where premiums erode significantly.

Okay, great. That's helpful. Just on the brokerage margin, if you can continue to generate 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?

Well, listen, trees don't grow to the moon. In the short-term bursts of around 5%, you can push some of that to the bottom line. The bigger question is what you can do with the excess proceeds to fuel future organic growth. The efforts we put into having more boots on the ground to sell insurance, investing in data and digital efforts, and expanding our brand to recruit more, acquire more, and sell more, are opportunities we can focus on. Underlying wage inflation is happening, but we believe we can manage that. So, as we gain additional organic growth, it really becomes about the reinvestment into the business, which should lead to further organic growth. I believe clients in a stable environment recognize our capabilities, resources, and the added value we provide, which is significant. That ultimately leads to better organic growth.

Okay, great. Thanks for the answer.

Thanks, Sarah.

Hey, thanks. I'll try a follow-up to Sarah's question on the investments. Organic growth has clearly been excellent year-to-date. The margins, excluding the roll-in acquisitions, have improved under 50 basis points. Just curious if we're thinking into 2019. It sounds like we should expect a similar level of investments to last year, should organic remains at excellent levels. Is that what you're saying, Doug?

Well, I think there are opportunities for additional investment, but I don't see us spending more than last year, if that's your question. To clarify at the front end, in the table provided on page six, we've actually expanded our margin by 53 basis points, excluding the impact of roll-in acquisitions for the year. Our level of investment is controlled. It’s not like we’re going to go all in and dump a lot of money into it. However, the good things occurring warrant a slight increase in investment level, specifically in data, but it’ll be in the range of $5 million to $10 million, not $50 million or $60 million.

Got it. Another follow-up on the margins. Thank you for showing the margins excluding roll-in acquisitions. Are those acquisitions lower margin, and will their margins improve over time, or are those kind of permanently lower in the run rate?

They will generally achieve margins parallel to our margins by the end of the year. By the time we derive synergies and efficiencies, they will be fairly close to our margins. This is a quarter where they are smaller due to seasonality, but when you stack them at the end of the year, they will be pretty similar to our overall margins.

Okay, got it. My final question is on the M&A pipeline. We've seen some sizable deals in the top 50 business insurance market this year, and it seems the bigger you get, the more expensive the multiples. Do you feel there are any big opportunities in the pipeline? Do you agree with my sentiment that the larger firms tend to command higher multiples? Just kind of curious about the M&A dynamics.

Yes. It's clear that in what private equity firms may consider a platform acquisition, or a public company in the top 100, those multiples tend to be higher. Doug detailed the multiple we’re spending, but you also should recognize that our average revenue for what we've acquired this year is $7 million. These are businesses where we can truly touch and understand their culture. We're seeking individuals who wish to remain in the business, love the business, appreciate our capabilities, and are excited to grow faster together. Our M&A pipeline has never, in my career, been this full.

Okay. Thank you, guys. Nice quarter.

Thank you.

Thanks.

Good afternoon. Obviously, congrats on the quarter.

Thank you.

Thanks, Paul.

I wanted to ask about the contingent commissions in a more expansive way. I would have assumed that contingent commissions would slow down as the industry’s profitability decreases, and obviously we saw some heavy catastrophe losses last year. What is offsetting that profit-related contingency piece? Is it just growth or something more?

A couple of points here. We actually did have about $2 million to $3 million of lesser contingent commissions as a result of the catastrophes. Particularly, Hawaii impacted us on one of our programs, resulting in a loss of about $1.5 million. What’s happening right now to still cause growth in contingent commissions is that as we continue to grow and acquire, we can improve the business of those acquisitions. As they integrate into our contracts with the carriers, we can obtain additional contingent commissions that way.

So, essentially your contingent commission deal is more favorable than those of the companies you're acquiring, resulting in a better overall cut of the total pie as you acquire these companies?

Yeah.

That's correct.

The carriers appreciate the work we do with loss control, our knowledge on risk management, and they feel more comfortable paying us more than they would, say, an independent.

Okay, that makes sense. Thank you. That was my question. I appreciate it.

Thanks, Paul.

Thanks, Paul.

Thank you and good evening.

Good evening.

So, my first question, Doug, you mentioned the restructuring program affecting over 350 positions. I want to understand if this is an ongoing process or more of a one-off and any potential savings from these restructuring efforts?

Okay. Good question. If you look at our history, there have been four times when we’ve tightened our belts. Usually, that’s when a lot of our improvements in the middle office allow an increased span of control for management. It’s the perfect time to tighten our belts. We estimate this effort can save us $25 million to $30 million, which we’ll reinvest into data, additional production talent, and branding efforts. About a third of that savings might hit the bottom line.

When you refer to tightening the belt, it’s generally associated with a slowdown in growth, necessitating the need to control expenses. But now you're performing well; so why now?

It’s simply the right time for our technology initiatives and work shifting to our lower-cost locations. Frankly, the timing of our organic strength has little to do with it—sometimes the best strategy is to improve when you’re strong.

Okay, that’s great. Lastly, regarding your clean coal initiatives for 2019-2021, as those two tax credits expire, could you clarify the impact on GAAP earnings? I know it won't affect cash earnings much, but on a GAAP basis, what will be lost in which years? Do you have offsetting factors for 2019 and 2021?

To gauge how much our GAAP earnings are derived from clean energy efforts, refer to page 8 of our earnings release, which details these contributions. You’re correct that there’s a significant difference between GAAP and cash basis. Interestingly, after 2021, when these credits expire, we anticipate a substantial increase in our cash earnings, although GAAP earnings would decline to zero. I need another year to assess impacts for 2020 and 2021.

Understood. If I could ask one more: Pat, regarding the large acquisition of the international business back in 2014, would you say this established a substantial enough platform for you to pursue bolt-on acquisitions?

Absolutely—a pivotal moment, Kai. It was a significant leap for us into becoming a truly international player and likely one of the best decisions we've ever made.

The number of acquisitions on our list now is substantial for the international locations—strong in Australia, Canada, and the UK. Surprising even, New Zealand holds about 25% of the market already, but there’s still plenty of little brokers to partner with there. So, in those geographical areas, the opportunity to continue acquisitions similarly to how we have in the U.S. remains very high.

And the proof is in the pudding, Kai. When we acquired Australia, it was declining over 5% a quarter, and now they are growing nicely.

Thank you very much.

Thanks, Kai.

Thank you very much. Good afternoon.

Good afternoon.

Hi, Mark.

You mentioned picking up extra contingents when the acquisitions roll into your program. Generally speaking, how well do those acquisitions perform in organic growth over a year or two? Is there a meaningful uptick? And with your accelerated M&A pace, will that boost your overall organic growth?

Yes, it could. If you look at the initial organic growth when some merger partners come, it can take them some time to organize, but we do realize good organic growth in the first year after ownership, though we don’t report it in our organic numbers for a full year. The real momentum emerges in years two and three after they join us. Does it move the needle on our total company organic? Not by a significant amount due to the size disparity, but those who are excited about our capabilities grow better than we anticipate, and this is evident by us paying earn-outs.

I have a question to narrow gauge, but you mentioned workers' comp being down 1%. Some loss cost rates state by state are down high single and even low double-digits. I'm often surprised to hear people say pricing is down 1%. It seems like it could be down more significantly if you look at what clients actually pay. How do you square that?

Our data from our own book of business is quite good, and we see what rates are doing geographically and by line worldwide. Also, it’s important to understand that when we quote rates, we’re quoting rate in exposure. As payrolls rise, the exposure offsets decreases in the rates.

So, net net down 1%?

Exactly.

Thank you.

Thanks, Mark.

Good afternoon. Thank you for squeezing me in. I wanted to start off, Pat. I noted with interest the 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 ride off into the sunset or do you plan to keep going?

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?

I just saw all this press about it. It was worthwhile just checking in to make sure I wasn't missing something.

Well, thank you for mentioning it. It was a great honor and raised a lot of money for the Katie School, which is very important for our industry.

Perfect. Well, on a slightly more serious note. A couple of people have referenced this, and you have as well. There have been a couple of large transactions by your competitors—one in the U.S. and one internationally. Past context tells me that 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. I’m curious if you’re hearing any market noise from these contexts.

Whenever there’s change in the marketplace, when there's dislocation of any kind, it always creates opportunities, and we're an opportunistic company. We don’t believe in violating non-competes or advocating against gardening leaves or any of that stuff. You're also not going to see us pick up 250 people and ignore their obligations. What we offer is a very unique workplace; we have an unbelievable team that ranges from those with 45 years of experience to externs now accretive just three years into their careers. Yes, those acquisitions will create opportunities, and we’ll continue to be very opportunistic.

Okay, and the final question surrounding M&A, as the multiples you're paying are considerably lower than what we're hearing about larger deals. I am curious if your multiples are an adjusted multiple based on your assessment after right-sizing the organization or if they are simply the as-is multiples you're paying?

Yes, they are adjusted for excess owners' compensation. In some cases, an owner might pay themselves $1, while others might pay themselves 100% of the EBITDA. We adjust it down to fair compensation levels, which could be, say, $3 million for a branch—they'll make X. We typically gauge for 5% growth for earn-out fulfillment; if they grow 10% or 15%, they can maximize their earn-out. At the end of the year, we take all the deals and evaluate them against our earn-outs, and the multiples we’re paying are actually no greater than we anticipated.

Got it. Thanks for the answers.

Thanks, Greg.

Great. Thanks. Pat or Doug, I was hoping you could discuss whether pricing trends in workers' compensation, in particular, have any meaningful impact on risk management organic growth?

Typically, with a hard market in workers' comp, firms look more to self-insurance. So, a softer workers' comp market lowers interest in self-insurance or high deductible policies. However, many educated buyers out there recognize Gallagher Bassett can deliver significantly better claim outcomes; hence, we still secure an ample number of opportunities even in a moderately lower market.

Doug is right. A 1% shift up or down—it’s still a flat market. That’s not driving Gallagher Bassett organic growth. We actively sell that if you transition your work to Gallagher Bassett, we’ll achieve better outcomes for your claims cost. That's what's fueling the organic growth.

I’m trying to ascertain if there is a headwind clearly figured into that which you are overcoming.

I would say yes, a little.

Thank you. The second question concerns employee benefits. I wanted to know if you could conceptually break down overall growth into segments such as employee counts, pricing, or client retention.

Not really. Our employee benefits consulting division is so diverse now, including communications and really large companies that I won’t name, along with health and welfare, which is our cornerstone and traditional offering. So, our retention is very good, mirroring our overall efforts. We have much to offer our clients now. In property/casualty, we’re not solving a lot of pain-point problems, but clients attempt to retain employees in today’s full employment landscape while managing employee benefit costs, which are significant and escalating. That’s the primary driver for our growth.

That’s very helpful. Thank you.

Thanks.

Thanks, Meyer.

Just a quick follow-up on the tax rate. Doug, in your CFO commentary, it looks like the range you've narrowed the low end to going up by 1 point. Is that a good rate going forward into 2019?

Good catch; I mentioned it in my opening comments. The slight tightening from a 24% to a 26% rate is largely due to us being nine months into the year. Our insights into our full-year rate, including the domestic versus international blend, led to this adjustment. Looking at next year, I suspect we’ll return to the 24% to 26% range. It's important to note that this is the book tax rate, not the cash tax rate. Due to our tax credits, we don't foresee ourselves paying more than 5% in cash taxes paid, whether it's in 2018 or 2019. Our cash tax rates are well below the book rates you see there.

That's great. Thank you so much and good luck.

Thank you, Kai.

Thank you, Kai.

All right, Devin, just a quick note to wrap up here. I want to express my gratitude to all of you for being on the call this afternoon. As you could tell from Doug's and my comments, we’re extremely pleased with our performance in 2018 thus far. I believe we have a strong finish to the year ahead, and we look forward to speaking with you again at our Investor Day in December. Thank you all for joining us today.