J. Patrick Gallagher - Chairman, President and CEO Doug Howell - Chief Financial Officer.

Michael Nannizzi - Goldman Sachs Kai Pan - Morgan Stanley Josh Shanker - Deutsche Bank Bob Glasspiegel - Janney Capital Paul Newsome - Sandler O'Neill Mark Hughes - SunTrust Adam Klauber - William Blair & Company Brian DiRubbio - Tipp Hill Capital Management Meyer Shields - KBW Greg Peters - Raymond James Charles Sebaski - BMO Capital Markets.

Good morning. And welcome to Arthur J. Gallagher & Company's First Quarter 2015 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 that will be discussed on this call and which are also described in the Company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today. 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, Melissa. Good morning, everyone, and thank you for joining us this morning. This morning, I'm joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

As we said in our press release few weeks ago, we wanted to announce this morning and have our conference call, because many of us will be at RIMS next week. So, again thank you for being with us early this morning. I am very pleased with our quarter.

Brokerage and Risk Management are both off to an excellent start to the year as we carry the momentum we created in 2014 into 2015. As I have said often, we are focused on four strategic efforts.

We worked on number one organic growth, secondly, mergers and acquisitions, thirdly, quality, margin improvement and productivity, and fourth, we work hard to maintain a very unique and different culture. Adjusted revenues in our Brokerage segment advanced 36%, 4.5% of that was organic. I am pleased with our continuing new business growth.

Sales, is what we are all about. Everyday we get up and service our clients and work very hard to add new clients to our list. The first quarter was a great start to our year. In addition, we expanded margins by 210 basis points, which is just outstanding work by the team. In our Risk Management segment revenues are up 11%, all of which is organic.

Our margin expanded, finishing the quarter at 16.8%, a bit ahead of our 16.5% full year target. So, together, our Brokerage and Risk Management operations are up 30% revenues, up 46% in EBITDAC, margins are up 2 full points and we are up 18% in earnings per share. Let me move to mergers and acquisitions.

Our large acquisitions in 2014 are integrating extremely well. We are seeing good opportunities to do smaller bolt-on acquisitions in the U.K., Australia, New Zealand, Canada, and of course, United States. We are off to a good start in 2015, having closed 11 acquisitions for about $34 million and added revenue.

Our partners see the benefit of our unique culture and the capabilities we are investing in and they want to be part of what we are building. As I do every quarter, I want to welcome and thank our new partners. The merger and acquisition world is really, really competitive, with lots of choices and I am proud that these fine firms chose to join us.

A warm welcome to all of you and our pipeline continues to be very strong, so I see 2015 to be a very good acquisition year. Let me give briefly some color to the individual operations. Our U.S. property/casualty retail business continues to operate what I like to call a rational market.

Rates all in across -- all lines across all geographies were essentially flat for us in the quarter. This is good news for both our clients and for Gallagher. Give us a stable rate environment and with our aggressive sales culture we will drive organic growth. We are seeing our customer businesses improved with some growth in revenues and payrolls.

Both our international retail and our domestic wholesale businesses also had a strong quarter. Our employee benefits team is very busy, helping our customers manage their benefits and HR needs as a result of increased complexity and higher benefits and wages. In United States employers continued to deal with the impact of the ACA.

Our consulting team has tools and resources necessary to assist our clients to comply with this legislation. We continue to see solid interest in the Gallagher marketplace, which is our private label insurance exchange, as more employers understand the advantages in offering this to their employees.

The team continues to invest in tools and resources our clients need to manage their employee benefits and human resource needs, and this has helped with strong new business sales and continues to drive increased merger opportunities in the U.S. and globally.

Our Risk Management business, Gallagher Bassett is off to an outstanding start, with strong topline organic growth, margin expansion and we are still investing in systems and people on our marched to be recognized globally as the TPA who consistently delivers the best claim outcomes.

Our Gallagher Bassett International business continues to expand and contributed nicely in the quarter. Our culture is striving. We received two significant awards in the quarter. For the fourth year in a row Gallagher was named as one of the world's most ethical companies by the Ethisphere Institute.

In addition, we are recognized as one of America's Best Employer by Forbes Magazine. We work hard to promote and to protect our unique culture and we are very proud of this recognition. So we are off to a great start. We believe we have a solid momentum and hope to deliver a solid 2015. With that, I will turn it over to Doug..

Thanks, Pat, and good morning, everyone. The first quarter was a terrific start to our year. Before I start two housekeeping items, first, we have a small unit get reclassified from the Brokerage segment to the Risk Management segment. All historical numbers have been reclassified.

There was only about $4 million of revenue this quarter and it really doesn't have that much impact on your segments earnings or ratios this quarter. Second, last year we formed a start up Brokerage venture that we control so we consolidated, but we own less than 50% of it.

So since we don't own the majority we've adjusted organic to reflect only our portion and we have also footnoted the impact on EBITDAC. Frankly, is not all that bit and that's also seasonally the strongest in the first quarter, so you can probably just ignore it in the next three quarters when you build your models.

Okay, on to the results on the first page, $0.36 for Brokerage, $0.09 for Risk Management and $0.18 loss for the Corporate segment, show as an adjusted EPS of $0.27. The Brokerage segment adjusted EPS of $0.36 is nicely up 24% in the quarter.

You will then see the typical integration costs, changes in earn outs and some severance, and you can also see that foreign currency didn't have much year-over-year impact in the quarter. Looking forward, some modeling help on revenues.

First, rollover revenues, we have added on page 16 of the Investor Supplement, a table showing our range for rollover total revenues for the next three quarters for mergers done in 2014 and in the first quarter of 2015. We will update that table each quarter. But be careful do not double count premium funding revenues.

We're giving you total revenues on page 16, not just commissions and fees. Next when you model new M&A revenues, please ensure that your models weight the closing dates more towards the last month of the quarter.

And finally, foreign currency, we believe that before you apply your pick for organic growth, you should first adjust prior year revenues for the stronger dollar. For the first quarter, you'll see that FX caused a reduction of revenues of about $11 million for the Brokerage segment and $4 million for the Risk Management segment.

Looking forward and assuming current exchange rates, we estimate the decrease in revenues due to the stronger dollar to be about $30 million, both in the second and third quarter and then about $15 million in the fourth quarter. That was for Brokerage.

As per Risk Management, assume about $5 million reduction in both the second and third quarter, and $3 million in the fourth. In the end, step back to make sure your models consider that the impact of FX will caused us about $0.03 in the second, $0.02 to $0.03 in the third quarter and about a penny in the fourth quarter.

Making these tweaks for currency, M&A timing and a premium funding should help refine your models on revenues. Next integration, your heard Pat say that our integration is moving along as planned.

So looking out over 2015, we are still seeing integration costs of about $0.07 to $0.09 a quarter -- in the second quarter then about $0.06 to $0.07 in the third quarter and an about $0.05 to $0.06 in fourth quarter. Staying with Brokerage by turning the page two to the organic revenue table.

First, let me give you some flavor behind the 4.5% organic growth in base commissions. Domestically we are about 3%, which we call can be our seasonally smallest quarter. So we feel really good about that number.

Also rate and exposure together had about 1 point of drag on our domestic results this quarter, but then again since 2011 the rate and exposure impact has been about zero, a little plus, a little minus. So like Pat said, it’s seems we are in a really healthy environment for brokers. Internationally we posted about 10% organic growth.

So we are seeing some nice solid numbers around the globe. Next, as for supplements and contingents together up about 5% and we did see a couple carriers moved from supplemental to contingent, contingent was caused some geography shifts.

But by and large we did renew most of our contracts as is and we expect to see some moderate growth in these lines yet this year. Now flip to page three. To the appropriate segment, adjusted EBITDA margin table near the bottom of the page, adjusted margins are up over 2.4 points excluding the non-owned share.

About half came from our organic growth and expense controls and the other half from the roll-in impact of the larger deals. That’s really excellent work by the team.

As for the remaining quarters of 2015, we don’t expect much more margin expansion from the rolling of our larger deals as most of them were already in our numbers by the end of the second quarter 2014. We’ll get a little, but not much more.

Finally, on the Brokerage segment, let me give you some non-cash estimates for the remaining quarters for the Brokerage segment. For depreciation, I assume about $15 million of expense, for amortization of our $55 million and for acquisition earn-out amortization assumed by $5 million.

Then as we do more M&A for every dollar we spend, you’ll need to increase amortization by about 1% of the purchase price per quarter and that will get you close. Now turning to the Risk Management segment, really a terrific quarter across the board for Risk Management also.

Our domestic operations grew organically over 12% and internationally about 5% and we’ve continued to improve margins and slightly surpassed our 16.5% target for the year. We expect organic to be in the upper single digits for the rest of 2015.

Let’s shift to page five to the Corporate segment, a really nice quarter for our clean-energy investments and right in line with the estimates we forecasted last quarter. We haven’t changed our outlook for the rest of 2015 very much that we provide on page 15 of our investor supplement. So right in line both this quarter and looking forward.

And finally some comments on our M&A program, we did 11 mergers this quarter at a weighted average multiple of just over seven times. Also remember that we tend to do fewer mergers proportionately in the first quarter. I guess, we could call it lower seasonality with our M&A program and has been that way for five years or more.

We feel very good about our opportunities to do a lot of nice tuck-in mergers this year. Next looking at over the remainder of 2015 in terms of M&A funding, we used about 1 million shares this quarter and we think we’ll use about 3 million to 4 million shares in the second quarter, then for the balance of the year will be mostly using cash.

So those are my comments and like I said at the start, it was a really terrific quarter on all measures. Back to you, Pat..

Thank you, Doug. And Melissa, we’re ready for questions..

Thank you. [Operator Instructions] Our first question comes from the line of Michael Nannizzi with Goldman Sachs..

Thanks. Hey Pat, I was just wondering you mentioned 10% organic growth internationally. Can you talk a little bit about kind of what’s underneath there and can we talk maybe specifically about the recent integration or the recent acquisitions in the one that are being currently integrated. What sort of organic did we see out of those guys? Thanks..

Mike, this is Doug. I made the comment about 10% growth internationally..

Okay..

We’re seeing good results out of our London Specialty business. Retail business is there that have been in our books for at least a year performing nicely. So those are the two segments internationally. Our small previous operation down in Australia had a terrific quarter but again it’s so small, it didn’t move the number.

But those are the three places we’re seeing strong spot..

Also, like Canada contributed nicely..

Okay..

That’s for our organic. But they had some -- Canada actually had almost 6% organic growth but that’s not in our organic growth numbers yet.

If you look across the globe, it’s a little difficult in the first year or so until we get the accounting squared away on all the operations consistent last year but consistent this year just the way the billing practices were.

But our best guess right now says that if you add up all our other international operations that are not included in our organic, they’re probably flat to where they were prior year as we measure about the same and our organic would've been close to 4% total if we would have thrown them in and started counting them as organic in this quarter.

So we’re pleased with the results. There is some softening in Australia and New Zealand. So you are seeing some market pressures there. Canada is holding up nicely and the U.K. is holding up nicely..

Got it. And then just could you update us on sort of leadership in the U.K.

and I mean, there is, I’m sure there’s continuing to be some turnover and change as you guys kind of continue to purchase three companies together, any update on kind of what’s happening on that front?.

Yeah. Mike, I think we’ve got a very stable situation now. Grahame Chilton has taken over as our CEO for the overall international operations. Retail U.K. is very stable right now. Specialty is very stable. So really what we had in U.K.

is we’ve got about 5000 people there and we had five people depart and we’ve got a really solid leadership team that we’re excited about..

Okay. And then just lastly, just on Risk Management, what sort of operating leverage should we think about in that business? I mean, 10% organic and you have mentioned there is sort of about 16-ish percent margin.

Is there a level of growth where you can sort of pick up some additional operating leverage if you're able to continue to sort of grow at this level and where we could see that margin kind of lift up a little bit further? And then on that topic, just what -- maybe talk a little more about what's driving the current organic growth and what’s giving you confidence that you could see still upper single digits for the rest of the year? Thanks..

Hi. So a lot of questions in there but first that the -- if you recall, we have stepped up our margin target in the past. We were at 16 point and our margin target is now at 16.5 for this year. So we are moving the margin target up. It is the business that the operating leverage on that. We’ve done in the past.

You need about 5% to 7% organic growth in order to show much margin expansion in that business unlike the Brokerage segment that you can start to see some margin expansion at between 3% and 4%, around 3% you start to get it. The operating leverage on it probably the incremental is 25% to 30%, whatever you grow in excess of that 5% to 7% range.

It should be able to hit the bottomline..

Okay..

Claim outcomes is really what we’re selling in that business. That is when we show our customers that settling claims do it using Gallagher Bassett produce a better claim outcome. Our analytics drive that. It supports it. Domestically, our customers are seeing the value that the Gallagher Bassett brings. And I wish it were more sophisticated than that.

It’s just our customer see better claim outcomes..

Also like Gallagher Bassett, it’s a bit of a proxy for the U.S. economy. We’re seeing work comp claims on existing clients, up in claim count by about 4.8% and liability claims up about 2% on existing clients. So that basically is because of increased sales and hiring..

Got it. Great. Thank you so much..

Thanks, Mike..

Thank you. Our next question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question..

Good morning and congratulations on a good start for the year..

Thank you, Kai..

So first question is a number of questions. You guided for the first quarter, acquired revenue around $175 million but looks like the reported number is meaningfully below that.

Just wondering what would have driven that?.

Yeah. Kai, I think that you are asking it right. We did for the -- we came in at about $162 million with respect to total rollover revenues in the quarter. How was that different than $175 million that we guided. I probably rounded up $5 million and so rounding down $5 million in FX on that number probably cost us another $5 million.

So $162 million on bottom of page two of 11 compares $175 million guidance. One of the things I did note is there seem to be a lot of the folks that were putting the entire $175 million in commissions and fees. But that also includes the premium funding revenue that was down on the investment income line.

So I think there was double counting in lot of the models on the premium funding revenue. That might be causing you some noise in your model..

Okay. That’s great. And then second question is really on your margin. I believe you guided like about 80 to 100 basis point accretion from the acquisitions but not expecting much from the organically. But it looks like organic also contributed about half the margin expansion in this quarter.

You mentioned -- is that because of better organic growth than you expected or like you have expense control measures in place and how should we think about that going forward?.

First, my guidance last quarter was about -- we see about a point of margin expansion from the roll-in of the larger deals and we hit that number, so we achieved that. The rest of the margin expansion did come because we posted 4.5% organic growth, which we’ve said always that you can get some margin expansion above 3% in this environment.

We did have some good expense controls in the quarter, headcount controls. As we look forward, again, we are back into this environment now. We will get a little bit more margin expansion next quarter from the roll-in of the larger deals and that’s maybe a quarter to 50 basis points, something like that.

The rest of it will come, if our organic is in excess of 3%, we’d hope to some margin expansion on that. So that’s how you should look at it going forward..

Okay. That’s great. Last question, more of a bigger picture. If you look at the -- on the acquisition front, one of your comments on that, they see the pricing for deal is becoming competitive, especially committed for the private equity funds.

So do you see that and do you see that as challenge to your acquisition strategy, as well as on the industry consolidation front? Do you foresee some large scale consolidation also having the broker space among the public traded, the bank owned entities backed like brokers?.

I will give you the numbers. I will let Pat give some of his response on how he sees the consolidation of the industry going. The numbers last year of our 57 smaller deals, the weighted average multiple that we paid was about 6.7 times. When I look at this first quarter, we are just slightly over 7 times.

There was one in that mix that may have moved it a little bit. How do I see the rest of the year? I see that there is still competitive pricing in that 6 to 7 times range.

And I think that the reason why is that people and they look at joining Gallagher versus perhaps a PE firm or something as they really see our capabilities that can drive them to be more successful also. So when we look at it, we think that our multiples are competitive.

We think that people are choosing us because of the capabilities we bring and the expertise. As for the consolidation of the industry, I will let Pat talk about..

Yeah. I will talk about the environment a little bit, Kai. It’s very, very competitive on business that’s a little bit larger in scale. So if you take a look at business insurance last July, to be number 100 in terms of the U.S. size you did $24 million in revenue.

I was at the conference this past week and the estimate that this consulting firm had in terms of the number of brokers in the United States was 37,000. I have used anything from 18,000 to 30,000 in many of my speeches. So there's a very, very fragmented industry and there are just aren't an awful lot of those that are over $25 million revenue.

And we are very good at attracting those people that have entrepreneurial firms, $3 million to $5 million in revenue, make us have a solid margin on those, have no expectation of 9 to 10 times. And frankly as Doug said, it's not just all about the money. Yes, we have to be competitive 6 to 7 times. EBITDA is probably right in the wheelhouse.

But really it’s about the capabilities and the culture. Our people are choosing to join us. They have lots of choices and in the end, they are choosing to join Gallagher because of what we are building and we are excited about that. We are very happy to have people with $3 million to $5 million in revenue join the company..

And on the largest skill side, do you see sort of a more consolidation happening in this space?.

I think you are going to see consolidation happening just like it has for the last decade..

All right. Thank you. Thank you very much..

Thank you..

Thank you. Our next question comes from the line of Josh Shanker with Deutsche Bank. Please proceed with your question..

Yeah. And follow-up to each of Kai’s and Mike’s questions. On Kai’s question about the margin expansions, Doug, you said that you don’t expect anymore margin expansion from the roll-ins and if there is no more margin for the rest of the year, I just want to be clear that’s just related to the roll-in.

Do you still probably expect margin expansion as long as your growth remains consistent on the organic side?.

Yeah. What I said was is the roll-in acquisitions in the second quarter might contribute a quarter to a half of point of margin expansion. By that time, most of all will be in our books, so won't have much impact for the rolling going through the rest of the year.

Then if we grow over 3%, we might see margin expansion at that level too in this environment of wage inflation. So you're hearing it right that the roll-in of the deals, maybe another quarter to a half in the second quarter.

After that not much more because they are already in our books and then organic growth should drive margin expansion if it’s above 3%..

Okay. That’s helpful. And then regarding Mike’s question, I wondering if you can give me a Theory of Everything on management and producers and whatnot? To what extent, do you lose something when you lose managers and important businesses and to what extent have you have gained someone, you pickup someone like a Chily to run the business.

What is the potential weight of producers? What is the potential gain of producers? What’s the net sum on all of these changes?.

Okay. So, Josh, the Theory of Everything is this. We will do extremely well when people join us and we will take a hit when people leave us. And the size of that will depend on whether or not the folks that are with the company are excited to be here and stay or whether they leave.

And to tell you the truth, the nice thing about Gallagher is I think if you take a look at our turnover, if you make a $100,000 at Gallagher you don’t leave. Our turnover is literally no. And we do a very good job of bringing people aboard both by the merger and acquisition efforts, as well as just organic recruiting.

And so frankly, I look at where we are today and I know you're referring to our London departures. And we haven’t lost $1 of revenue, not $1. And I think with Chily in the seat, the line of people that are looking to be hired by Gallagher has actually expanded substantially and we feel really good about that.

So, I think net-net in the end, we are going to be up nicely in revenue..

Have you net gained or net lost? There is really no need to worry..

Not one, not one. Not one producer..

Have you gained some?.

Yes. Yes. We are still looking at new hires as a great opportunity, not just in London, globally. And yeah, we are net up and we are thrilled about it..

And regarding cash to come, is there any risks of having Chily being dual-added or are there any significant benefits to Gallagher in that?.

The benefit to Gallagher is outstanding. I mean, I’ve just got to tell. This guy is the real deal, just intended our Board Meeting this week. Board is incredibly comfortable with Chily. I have known Chily for a long, long time. And to be on the same team is really exciting.

He is a solid, solid Senior Executive who has great experience in running public companies. He is a brokers’ broker, which I like because we are a Brokerage run by brokers and we speak the same language. He is a very solid executive with a great reputation and we’ve got a - as I said, we’ve got a very long line of people who want to join us.

So it’s kind of exciting..

Yeah. I’m sorry. I guess I misspoke.

Do you have any advantages being -- is there an alignment in Capsicum in anyway? Anything that you can gain from that relationship?.

Well, we own 25% of it and we have about 35% economic interest and ultimately that’s going to be -- Capsicum will be one of the stories that will vow you guys in the future..

Okay. Great. Thank you very much and good luck with everything..

Thanks, Josh..

Thank you. Our next question comes from the line of Bob Glasspiegel with Janney Capital. Please proceed with your question..

Good morning, Gallagher..

Good morning, Glasspiegel..

I’m glad you ran the last name basis, that’s great. Given your presence in U.K., I’m going to use you guys as my [quasi] [ph] economists. We’ve had the euro and the pound go down in these currency wars but in theory it’s going to cause little bit more economic growth in the region because currency wars are zero-sum game.

But the outlook for European growth has expanded the markets. Stock markets are up in those regions. So, yeah, you’ve got the currency hit there but the offset is you may get a little bit faster economic growth in the region. What your economists had on and tell me what you're seeing in Europe and U.K.

economically?.

I think you heard it right, Bob. Our organic growth was strongest in the quarter outside the United States. I think those economies have been sluggish for sure for the last number of years.

I think the dollar -- pound, dollar, euro change will spur some growth in those economies and we will be the beneficiary of that, especially with the moves we made last year on the retail side..

So it seems to me, I mean, devil’s advocating the Doug’s currency headwind needs to be offset by little bit better growth underneath, so we really shouldn’t take $0.03 out of Q2 completely..

Well, I don’t think it moves that fast, Bob..

Bob, if I were you, I would use Doug’s guidance..

Right. I know those will come out on the currency and we will see levelized currency from the revenues coming out the year ago for sure.

But my point is that there is an offset if in fact you are getting more growth outside the U.S.?.

Yes. I hope so, Bob. I really do. From your lips to God’s ears..

Okay.

The other thing is CIAB numbers, I guess down 2, you would quarrel that sort of with your flattish commentary, or is minus 2 sort of consistent with flattish?.

No, I think minus 2 -- here is what I have been saying for the last number of quarters. You and I have witnessed real cyclicality go back to 70s, the 80s, early 2000s, that’s real cyclicality. Everybody is worried about the rate of increase decreasing.

And I am saying guys if it’s 1% to 2% up or 1% to 3% down in my history, in my experience that’s not a cycle, that’s flat. In our book of business for the quarter, rates and exposures essentially produce no increase nor any decrease. But I don’t quibble with the CIB. I think they are accurate and remember that’s anecdotal as well.

But I think that basically we are in a flat rational environment. There is still as no investment return for these guys. I have said this many times. The first time in my career when I meet with CEOs of major insurance companies and they tell me what’s going on in the field and they are right.

There is much better information and I think they are just more disciplined. So rational market, which is fantastic..

Pat, that’s my market, that’s my crystal ball as well. I hope we are both, right..

Me too..

Thank you..

Thanks, Bob..

Thank you. Our next question comes from the line of Paul Newsome with Sandler O'Neill. Please proceed with your question..

Good morning. And congratulations on the quarter..

Thank you, Paul..

I was hoping you could talk a little bit about the competitive environment within the Brokerage business itself. It looks like you are gaining a little bit of market share relative to your peers.

Maybe you could talk about where you think that market share is coming from in general?.

Yes. I would be glad to talk about that. In fact, we know for a fact, Paul, we are getting better and better at knowing our data and being able to study what’s going on in our book of business. And we know that over 90% of the time when we go in the competition, we are competing with somebody that’s smaller than we are.

So when you look at share, I don’t want you to thinking Marsh, Aon, Willis, Brown, and we are battling it out on every account. That’s just not the way it is. The real marketplace is that fragmented place, which is relationship driven and is middle market drive. We do a very good job on Risk Management accounts. We love to pursue large accounts.

But by and large, our people day in and day out are competing in the middle market. When they do that, they are competing with the local broker. One of the reasons our acquisition pipeline is so robust and one of the reasons we are closing as many deals as we are, is because people really like to see the capabilities.

When I started in 1974, we fought above our weight class every single day. Today we can go out to any account of any size, anywhere on the globe and tell them we could be helpful. Our brand is getting stronger.

People are beginning to know more about Gallagher and frankly, we put a lot of boots on the ground and we are an aggressive cold calling company. So we are out there everyday pounding the street trying to get new business. Ad when we don’t write an account, it is frankly because we can’t break the relationship.

And I look forward to the future time when those relationships, you could hold onto your best friend from high school for a while, but ultimately my capabilities are going to push you..

I am not sure my best friends even talks to me anymore. Thank you. Appreciate it..

Thanks, Paul..

Thanks, Paul..

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

Thank you. Good morning.

Could you give us general thoughts on contingents and supplementals, how you think those will be shaping up as we get through 2015? If pricing is a little bit more flat to down, underwriting results flat to down, how do you think that will show up on your revenue line?.

Well, for the rest of the year, we see that being that you take the two numbers, add them together, last year we see them being up organically this year. So I think that the carriers and Pat can talk about his conversations with the carrier, but the carriers recognized the value we bring in the distribution.

And I think they see themselves seeing the supplemental and contingens help align our interest with our customers’ interest and with the carriers interest. And so they tend to like it. We are starting to see -- we are having professional conversations about which pieces help move both of our interest forward as we grow together. So they like it.

I think our relationship with the carrier is pretty damn good frankly..

Yes, Mark, I would say that having gone through the Eliot Spitzer era and all the controversy around contingents and supplementals and what you have and going through the rounds of negotiations, it’s very stable right now.

I think the carriers here at a point where they have got programs that they believe are driving good results for them and it’s a very stable thing.

We are not having a lot of conversations about should it change next year, how much should it change up or down, they are those carriers that solidly believe that they just want to stick with contingents and that’s fine with us. And there is others that understand that supplementals drive the bus as well. So I would agree with Doug.

I think you will see. I think supplementals and contingents will follow our organic growth..

If we see underwriting results under a little more pressure, we wouldn't necessarily assume that will have an impact on your contingents or supplementals?.

No, I think that the underwriting results do deteriorate, then you will see in the contingent line. So if you look at the table on page 2 I think it is, then the contingent line will come under pressure..

There is no pricing power out there, Mark. We believe that the carrier still have the ability to price for rational -- there is room, they are starting to have lines that are suffering and there is room to price those lines up to get their profits back into the right spot..

In the Risk Management business, do you have a view on workers comp claims, whether frequency is up, down, sideways? I know you are taking share and your clients are adding payroll, so that may be influencing your frequency, but aside from that?.

You hit right on it. The Gallagher Basset is up 4.8% and workers compensation claims this year from existing clients, that’s a definite proxy for the economy. That’s because there is more employees in place..

Thank you very much..

The world is getting to be a safer place. That’s what Gallagher Basset helps our clients do. But just the growth in the economy also fuels more claims. So as the economy grows, it should offset our customers getting safer..

Right. Thank you..

Our next question comes from the line of Adam Klauber with William Blair & Company. Please proceed with your question..

Good morning, guys. Couple of different questions..

Good morning, Adam..

How is RPS doing? Was organic RPS in line with the Brokerage, better, or worse?.

It was little better..

Okay.

And how would say submissions are now compared to year ago RPS?.

They are up -- just up slightly single digits..

Single digit. Okay. Thanks.

And then as far as the benefits business, again the same, is that doing, would you say, better or worse than average on the organic side?.

Better than its PC relative. The benefits space is, it’s a great space for us right now, Adam. You’ve got the Affordable Care Act and compliance issues, employers now are seeing growth in there business, so payrolls and HR is huge issues and we are not just doing health and welfare anymore.

We are helping our clients with everything from what position they are going to take in terms of their HR, whether it would be compensation, whether it would be wellness, whether it would be health and welfare, how do you communicate that, all that works together.

And frankly, the small broker in the house space is dead, they just haven’t laid down yet..

Right.

And as far as exchange, do you think you will have more business this year than last year?.

By a factor of a lot..

Okay. Those are all my questions. Thank you..

Thanks, Adam..

Thanks, Adam..

Thank you. Our next question comes from the line of Brian DiRubbio with Tipp Hill Capital Management. Please proceed with your question..

Good morning, gentlemen..

Good morning, Brian..

Just a conceptual question, probably more for you Doug.

As you guys thinking about more, a few more international acquisitions, does it make more sense to use your cash that’s located overseas or to start issuing debt overseas, especially with the European bond markets are doing right now in terms of yield?.

Well, I think first is use the cash that’s created by the indigenous operations there, so it’s better to keep it there reinvestment and that’s actually works great. And remember, if we do bring it back, we are in a fortunate position that even if we brought it back to higher tax jurisdictions, our tax credits will shelter that.

So we do have the flexibility of moving currency around the globe and not have a damning effect on our taxes. So that’s worth a thing. Looking at international, yes, I think those are some opportunities there. There are some issues about doing that.

There needs to enough of a sizeable offering there to attract attention, but it’s certainly something that on our radar screen to see as we look forward, maybe that’s a spot to do the debt. So you’re thinking about it the right way..

Got you. And then just, Pat, for you.

At what point do rates have to start coming down before your clients start pushing you to change carriers? I mean, is it -- down 1%, I guess most people won't change because of the convenience factors, but I mean do rates have to start coming down 5%-plus for that to start occurring in the market?.

Yes. I think what’s interesting, of course you have to be competing on price. I mean, people say, whether you compete on and prices are big part of it.

And if there was a carrier that wanted to break for market share and was willing to be 7 to 10 off I think but not 5 but 7 to 10 off that could cause some consternation in the market and could cause some movement. They would in fact pickup share doing that.

And that’s why it’s interesting to me to see this rational behavior in terms of the competitive landscape. I’ve never really live with this before, so it’s been one way or the other, either you’ve got rates coming down substantially and you sharpen everything or rates are going up and you’re scrambling to get the coverage you want.

So I think there is a C change here. It’s been probably four years now of relatively rational behavior by underwriters and I think it’s very similar to what we saw with the benefits business in the 70s, going into the 80s.

The cycle came out because people began to understand that the inflation behind what was going on with medical care would not allow you just to compete on price. And I think people see that. We do have claim inflation in the marketplace. There is tort inflation.

There is not a lot of good rates of return in the buyer market and they got to make their money underwriting and they’re very, very -- they much better equipped at this time in my career with information that I’ve ever seen.

So when I talk to CEOs of insurance companies, they know by line, by geography, where they’re making money, where they’re not making money, and they’re holding those offices and those underwriters accountable for underwriting profit. And I think that’s a great place to be..

Got you. Great, guys. Thanks for the comment..

Thanks, Brian..

Thank you. Our next question comes from the line of Meyer Shields with KBW. Please proceed with your question..

Thanks so much. Good morning..

Good morning, Meyer..

So one question. We haven’t talked about this in a while. Heath Lambert had some sort of Western Europe aspiration. Can you talk about what you’re doing outside of the U.K.

and Europe?.

Yes. We have -- in fact, I will be meeting with them next week.

We have what we refer to, Doug refer to, our branded network is called the Gallagher Global Alliance and that’s how we’re trading in Europe through affiliates that are independently owned agencies that are vetted by us and contracted by us to help our clients and we mutually share the work on clients that they have in locations where they don’t have operations in the same and we do the same.

And right now in Western Europe, we have nothing in the pipeline to move in that direction..

Okay. Thank you. And then a question for Doug, I was just trying to get the straight. You talked about getting -- I don’t know about half of the margin expansion from headcount control internally.

Does that change the bogie from 3% organic growth to translate into margin expansion or is that sort of assumed in there?.

That’s assumed in there. The fact as we get better at what we do, we have the opportunity to become more efficient, more productive and still raise our quality, but there is just a natural -- people deserve --w here those stay reserves raises though that we don’t re-hire. Consolidate jobs, but that’s baked in there.

Headcount controls or something that’s baked into my assumption that you still got to have headcount controls even you have 4% organic growth too..

Okay.

And then finally given the London market presence, is there any impact on margins from foreign exchange changes?.

Yeah. I mean, just the math would show that could cause some margin contraction. So just by the way you do the math, we actually have a nice book of dollar denominated revenues, because of our specialty business in London, so that kind of helps a little bit with the pounds. So it’s not so big.

We don’t have that kind of dollar denominated revenues in Canada, Australia and New Zealand there. So it does have a little impact on margin but it -- but not that much just by the pure math..

Okay.

But the little impact is, its sounds like you’re saying it is adverse on that base?.

Correct..

Okay. Great. Thanks so much..

Great. Thanks, Meyer..

Thank you. Our next question comes from the line of Greg Peters with Raymond James. Please proceed with your question..

Good morning, Pat and Doug. Congratulations on the quarter..

Thanks, Greg..

Hey. From a big picture perspective, it seems like technology and analytics are playing an increasingly important role in revenue production.

And so I was wondering, how you measure the adequacy of your continuing investment in this area in the context of the margin improvement you laid out for the balance of the year?.

Well, we’re getting good technology improvement lift. As you know we’re still investing in Gallagher Bassett, our analytics workbench there is probably the best in the business right now, but beyond a doubt its bringing great value to our customers and so we’re getting value from math.

Some of the technology investments we are making, they are table stakes. So we’re doing that and then when you look over in the Brokerage segment, our ability to capture all the premium that we place around that globe, so we can sit down and have valuable productive conversations with our carriers is delivering value too.

So in terms of measuring our technology investments, some of it just stay competitive in the business and some would generate revenue and we think that what we’re doing both in the Gallagher Bassett, analytic workbench and then in the -- on the Brokerage side, of our smart market, our advantage products, which are data products, we think we’re doing a good job on that.

And it’s leading to some nice revenue opportunities for us..

Yeah. I would agree, I think, when you look at this, Greg, the payback that we’ve gotten on technology investments, it’s pretty high to put your finger right on it, but putting salesforce.com in place. Having the technology -- the technical capabilities now to have all of our U.S.

operations on the PC side, on one agency system we’ve been in -- basically one agency system in the benefit side for years, giving us tremendous abilities to use a data warehouse. We now know more about our book-of-business every single day than we did years ago and it’s incredibly helpful in terms of being able to compete.

When I go see the contracting risk and I can tell them exactly, how many dollars of premium we have in the contracting space, you can tell them, how many accounts, where they are, what size they are and why they should trade with us.

And I can translate that to what that means to the insurance carriers that we are placing that business with, it gives our producers a real leg up..

From a budgeting perspective, do you measure your investment as a percentage of revenue and is it done by segment? And would you say that that increase stable or decrease thing trend wise?.

It’s about stable with our -- as a percentage of revenues, I don’t have that committed to memory, but it's about stable. We are not seen it increasing. Our revenue growth -- one of the advantages of getting scale, allows us to continue to reinvest in the technology space with more scale.

And so our efforts are to remove the duplicity that comes with putting together a lot of agencies together, take that spend that's they were spending individually aggregate and reinvested in tools, technology tools, that help us sell more and help our clients do better with managing their risk. So that is the advantage of scale.

There is no question about that that our offshore centers of excellence in India benefit from the scale, as we bring new smaller tuck-in agencies onto our platform, we get that -- we harvest that spend in reinvestment. So there are advantages of the scale, Greg, there’s no question about that..

On the offshore centers of excellence, have we pretty much harvested all that can be done out there or ....

No..

Do you see further opportunities?.

Oh! I see huge opportunities. I believe 20% to 25% of our employees ultimately will be in those centers, whether they are in India, whether they are in the Philippines or they are here in the U.S. or wherever we put them.

I think the service centers that we are creating will continue to be tremendously additive to two things, both -- first, our margin, but most importantly to our quality. We’ll issue over a million certificates of insurance out of India this year. We know for a fact. We can go in and look at this. We do that that 99% accuracy.

Now when I was addressing a group of independent agents and brokers just last week, I asked them how many of them had any clue what their level of quality was on the certificates they put out. There’s not one of them that even knows how to measure it. And that I believe is sellable in the marketplace.

When I can go into a client and say look, here is the facts, your certificates are going to out at 99% accuracy, do you care about that, well, yeah, you do care about that. Because that's what you're relating to your vendors and your clients, what your coverage is, it better be accurate. So there's tons of opportunities..

Right. Thank you very much for your answers..

Thanks Greg..

Thanks Greg..

Thank you. Our next question comes from the line of Charles Sebaski with BMO Capital Markets. Please proceed with your question..

Good morning..

Good morning, Charles..

So, first question, Pat, you are talking about before the rating and the sort of the dynamic of what's going on in the rational pricing.

I guess, I am curious on your take on how much of that is the information that carriers have versus the low interest rate? And I guess my -- what I am trying to get to is do you think this rationalization -- when rates -- win rates normalize that the need is -- the information will still be there, but the need on underwriting return will be less?.

Well, now that's a great question. Charles and I have to be honest with you. I don't know we are going to find that out, aren’t we? I mean, I think that certainly interest rates have played a large part in the rationale approach. But will also -- I think there’s three other factors that have added to this.

Number one, I think you’ve got senior management, the senior leaders that clearly have better information and a much stronger understanding of their role is to generate returns year in and year out. And they can get their hands around what's going out on the field like they never could before.

The other thing is I do believe that Sarbanes-Oxley is having an impact. I’ll use this as a generalization. In my past years, if an underwriting carrier -- if a carrier was -- could post 93 combined and I won’t ever mentioned any names they’d post 99. And they put the rest away as kind of nuts for the winner. And you can’t do that anymore.

Boards are all over reserves. You guys are very good in the analytical world of looking at reserve redundancies or reserve shortfalls. And I think that people have to play it as it actually comes out of the box. So if you got it 89 combine, you are going to have to tell the world you had an 89.

So yes I think you are right, if interest rates go up it will create, I believe, some enticement for underwriters to understand that they can do better on the investment side that may soften the market. But at the same time, I just see a higher level of professionalism in the CEO suite and much better information..

Yeah, I think Charles, you also have the dynamic of frequency reverts more to the historical norm. Some of the pricing advantages that carriers have been having or result of advantage has been from lower frequency on the actuarial picks than expected.

So even if you got any tick up in interest rates a little bit than frequency reverts more to where it was during the more active period in our economy, those could have a mid offsetting effect to one another. So you can’t look just at interest rates.

The great thing about is with the data that the carriers have with the sophistication they will be able to adjust that as it comes along. And so when frequency goes up they’ll bake that into pricing. When interest rates go up, they’ll bake that into the pricing. When severity changes, they can bake it. And I just don’t see them subsidizing.

They are not going to have a lot of lines that they would consider to be loss leaders. I just don’t see that working well. They are either going to make money in that line or they are not going to write it. So that is a different environment to you..

I think Doug hit at it. What we are seeing now is really cycles within the cycle right. So we know that large property accounts were soft last year 2014. We expect continued softening in 2015. So our RPS unit as it comes around to July 1st is going to see serious competition for catastrophe property globally.

Not seeing that in worker's compensation you are not going to see that on a regular property accounts through Oklahoma. So it’s -- I think Doug’s point is a good one -- line by line geography by geography, they are underwriting, they are really truly underwriting..

Can I ask about your guys plan more internationally, where does -- what does Gallagher look like in two or three years. I guess it seems like the international expansion has kind of picked up last year.

I'm wondering if there's going to be a larger press for South America, Latin America other emerging market type companies and what your presence might be like two, three years down the road?.

We that's a good question. First of all, we’ve always covered at the world. So we've been very opportunistic. We’ve been in Australia for 15 plus years with Gallagher Bassett and with some smaller acquisition on the Brokerage side. The moves that we made last year, I think were seminal moves for the company.

I compare that to strategically going public in 1984. And you are going to see us do it tremendous number of bolt-ons. We are going to able to do what we’ve done in the United States now, in Australia, some degree in New Zealand, clearly in the UK and very clearly in Canada.

We’ve got those pipelines building and we've actually done some of those deals. So you’re going to see us bolting on in those places where we’ve created a platform. We are active in Latin America, we like emerging markets. We took a 21% stake in our Mexican partners three fours years ago. We’ve invested in smaller firms in Chile and Peru.

We have -- Singapore has been active for us now for almost 15 years. We did a small partnership with one of the largest brokers in China. And so I think you’ll see us continue to take toeholds in locations where we’re not, and bolt-on in locations where we have a platform..

And finally to Doug, I guess, I have a question about the margin expansion and the roll-in. You said that in the next couple of quarters there might be 25 or 50 bps of margin expansion from the new business roll-in.

And I guess my question, is that just due to those new businesses being higher margin and whether there is any margin to be had from those new business from synergy costs, cost containment outside of just the natural higher margin of those businesses were doing and how that would work for the next four quarters, five quarters give or take?.

Right. So just for semantic purpose, let’s not refer to our M&A as new business because that might confuse somebody as that’s new organic business. So just for our M&A rollover, you heard me right that there was a probably a quarter to 50 basis points in the second quarter.

I don’t know if there is much more in the third and fourth quarter from the roll-in of those slightly higher margin businesses that we bought. So that’s the large deal roll-in affect of that. Going forward, there are opportunities for synergies that can result from those -- as we fully integrate those operations.

So that could produce some margin -- further margin expansion as you get to 2016.

But let’s get integration done first and then I will -- to make that that we are delivering a unified brand, a unified IT system, a unified telephone system, marketing together and then we’ll go to that next step to see whether that synergy will naturally falloff for that..

I appreciate all the answers..

All right..

Thanks, Charles..

Thank you. [Operator Instructions] Our next question is a follow-up from the line of Adam Klauber with William Blair & Company. Please proceed with your question..

Thanks. The clean energy -- Doug, I think you said, it’s more around how you thought.

Could you add some color for us to get visibility and do you still think that business could be up materially this year compared to last year?.

I’ve never said that it’s going to be up materially this year. I said that this year is a platform year for a step-up in ‘16..

Okay..

And perhaps, this is a flat year but I do believe there is upside in next year. We are having tremendous appetite for our remaining plans. Remember, our desire is to own a portfolio of plans, so you are going to have always have some that start-ups, some that shutdown for production reason, for appetite for clean call.

We see that the appetite for further planned installation has been very strong at this time. So this is a platform year relative to 2014, but in ‘16 we see another step-up in that..

Okay.

And then as far as interest and banking costs, should we think about the rest of the year similar to what we saw for this quarter?.

Yes. We provided the guidance back on page 15, I think of the supplement. We feel comfortable with the ranges that we provided on that supplement there. So if you use that you will get pretty close to your interest and banking cost, as well as the other Corporate line..

Okay.

And then finally, as far as share count, non-acquisitions, what should that do?.

Typically, what we have is about a 1.5 million shares between basic and fully diluted related to our option, in our restricted stocks, et, cetera that go out, would be the employee compensation that is on slide. I see that somewhere in the 6 million to 7 million ranges, just constantly at that level..

So is that for quarter, for the year?.

That’s just for the year..

Just for the year. Okay..

The thing is our basic plus -- if you just take basic and add about a 6 million to each you get to the fully diluted..

Great. Okay. Thanks a lot..

Thank you..

Thanks, Adam..

Thank you. Gentlemen, our last question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question..

Thank you for taking the follow-up. Doug, you mentioned you issued 1 million shares first quarter, expecting 3 to 4 million in second quarter.

Just curious, is that because you see some large deal in the pipeline, would need some larger allocation of the stock component?.

Kai, we’ve got a couple of tax-free exchanges that are lined up during that quarter. Remember, we use stock in a tax-free exchange and frankly, there is a lot of our partners right now that want the stock. We have future partner that want the stocks, which we like. So that’s the real reason there..

Okay.

So it's not specifically allocated for some potential large deals?.

That’s right..

Okay. Thank you very much..

Thanks, Kai. I think that’s all our questions.

Lisa, is that correct?.

Yes, it is sir..

Okay. Just one quick comment. Thank you again everyone for being with us this morning. We really appreciate it. As I said at the beginning, I’m incredibly pleased with our start to 2015 and look forward to continuing to execute. I think we’ve got good momentum and hope to have a solid 2015. Thank you for being with us this morning..

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