Good afternoon and welcome to Arthur J. Gallagher & Company's Fourth Quarter 2019 Earnings Conference Call. Participants have placed on a listen-only mode. Your line will be open for questions following the presentation. Today's call is being recorded. And if you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws.

These forward-looking statements are subject to certain risks and uncertainties discussed on this call or described in the company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements.

In addition, for reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J.

Gallagher & Company. Mr. Gallagher, you may begin..

Thank you very much. Good afternoon. Thank you for joining us for our fourth quarter and full year 2019 earnings call. With me today is Doug Howell, our Chief Financial Officer as well as the heads of our operating divisions. We finished 2019 on a high note. The brokerage and risk management teams delivered outstanding results on all measures.

In the quarter we combine to post 17% growth in revenue, 5.8% all in organic growth, expanded margins of 134 basis points and we completed 11 mergers during the quarter representing about $117 million of annualized revenue.

This caps off an excellent full-year where our combined brokerage and risk management teams posted 14% growth in revenue, 5.6% all inorganic growth, expanded margins 76 basis points and we completed 49 mergers representing about $468 million of annualized revenue, an outstanding quarter, an excellent full year and I'm more confident today that this momentum will continue in 2021.

I want to thank every Gallagher professional for their relentless focus on delivering the very best insurance brokerage, consulting and risk management services to our customers around the world.

Let me peel back our fourth quarter results a bit more by segment and give some thoughts on why I have reason to believe that 2020 will be as good, if not better the 2019. Our comments today will focus on the four key drivers of our long-term value creation strategy.

Those four are, number one, organic growth including what we're seeing around the world in terms of rate exposures. Number two, merger and acquisition growth in our current merger pipeline. Number three, improving our productivity and quality. And four, what makes us -- what makes all this happen which is our bedrock culture.

Now let's moved to our brokerage segment performance starting with organic. Fourth quarter organic growth was 6.1% all in, base commission and fee growth was a little over then that due to the repricing of a wholesale program, which we discussed at our December IR day.

But contingents performed a bit better than we expected not an exact offset, but close. Let me breakdown our organic growth by geography. First, our domestic retail P&C operations were very strong above 6% and retail benefits were up around 4%.

Our domestic wholesale operations, that's our open brokerage program manager and underwriting business were up about 7%. Outside the U.S. our UK operations posted 6% organic. Canada was up more than 10% and Australia and New Zealand grew around 6%.

PC rates and exposures continue to be a tailwind to our organic growth, with renewal premium change now comfortably above 5%. Let me give you a few noteworthy sound bites for the quarter. Starting in the U.S.

our retail PC and wholesale business, up about 5.5%, property lines are up about 9%, while casualty lines are up about six, workers compensation is down a couple points. Renewal change in our open brokerage wholesale business is the strongest domestically up about 7%. Moving to the UK.

Retails up about 3.5% with continued upward pressure on professional liability, which is up close to 7%. London specialty is up around 5% to 10% in many classes. In Canada, up about 5% across most lines of business with property up [Indiscernible] New Zealand is up around 4%, but its been drifting lower from 2018 levels.

And finally Australia is of about 7%. So after trending higher geographies for the past two years, I would characterize the PC market is having moved from stable to firm, not hard like we saw the mid-80s in the nearly 2000s, but certainly firm.

Our recent survey of our PC producers suggest that the 2019 rate momentum has continued in the 2020, further unemployment remains at historically low levels nearly everywhere in our clients businesses are expanding in a favorable economic environment.

Taken together these market conditions should continue to provide us with a nice organic growth tailwind. That said, we're still in an environment where professionals can develop creative solutions that help our clients mitigate or partially mitigate rate increases.

In addition, clients will ask us to deliver a risk management program within their budget that might be flat or up only a percent or two. That means they might opt out of certain coverages, increased deductibles, reduce limits et cetera. In other words, not all the rate tailwinds show up in our organic growth.

So as I sit here today, I see 2020 brokerage organic growth again in the upper 5% range and might very well take over 6% especially if we don't have a deterioration in economic confidence. Now let me talk about brokerage fourth quarter merger and acquisition growth.

We had another active quarter completing 11 brokerage acquisitions with average revenues of about $10 million. Our merger and acquisition momentum continues. Already this year we've announced four tuck-in mergers and also moved to 100% ownership of Capsicum Re. We are excited to be fully together now the Capsicum team.

And I would like to thank all of our new partners for joining us. And I extend a very warm welcome to our growing Gallagher family of professionals. Looking forward our internal M&A pipeline report shows around $250 million of revenues associated with about 50 term sheets either agreed-upon or being prepared.

This is down a little bit for the last few quarters as first quarter deal activity can be a little slower than later quarters.

But I'd still believe that 2020 should be another strong year for our tuck-in merger and acquisition strategy as we continue to attract entrepreneurial partners that believe in our unique culture and realize that we could be more successful together. Moving to productivity and quality.

Brokerage adjusted EBITDAC margins expanded 151 basis points this quarter, helps by higher contingent commissions and acquisitions. This marks the 33rd consecutive quarter of margin expansion and is a reflection of all the hard work that brokerage team is done to find efficiencies and increase quality.

So to wrap up the brokerage segment, for the full year we delivered 15% growth in revenue, 5.8% all in organic growth, adjusted EBITDAC margin expansion of 75 basis points and we completed 46 mergers representing about $452 million of annualized revenues. What an outstanding year for our brokerage team.

Next, I would like to move to our risk management segment. Fourth quarter organic growth was a solid 4.7% in line with the mid-single digit organic guidance we provided at our December IR Day. Underlying the organic results we saw workers compensation and general liability claim counts growing in the 1% range for the full year.

Pricing increases are modest. But new business wins highlight that are highly effective in customized claims, handling capabilities are being recognized as driving better outcomes. We continue to see carriers outsourcing a portion of their claims operations as a great long-term opportunity for Gallagher Bassett.

As we look forward to next year, we estimate 2020 risk management organic will be in the 5% to 7% range.

So wrap up my risk management comments, for the full year we posted 5% growth in total revenue, 4.4% all in organic growth, adjusted EBITDAC margin of 74%, and we completed three mergers representing about $16 million of annualized revenue, another really solid year for the Gallagher Bassett team.

And finally, I'll touch on our unique Gallagher culture. You can see from the results that we've shared today, the Gallagher Way continues to drive our consistent growth. Our shared values help maintain our culture and encourage employees worldwide to push for excellence in everything we do.

Our cultures has earned us recognition in 2019 as the world's most ethical company, eighth consecutive years running. Just last week, we also received a top score 100% on the Human Rights Campaign Foundation's Corporate Equality Index. This is the second consecutive year we receive this honor.

As proud as I am of the outstanding performance we had this last quarter, this last year and this last decade. I'm more proud of the way our culture has stay true throughout all of that. We've always been guided by the Gallagher Way and for 92 plus years we've been building this unique culture.

I'm looking forward to seeing our culture thrive in this new decade. Okay. A great quarter and a fantastic year across the board. I'll stop now and turn it over to Doug.

Doug?.

Thanks Pat, and good afternoon everyone. Before I dive into our result, I too would like to thank all of our professionals around the world for such a strong finish to a great year. It is especially exciting to report back-to-back years as a more than 5% organic growth and the environment is right to make that to repeat here in 2020.

If I step back and look at our adjusted results for the quarter, our brokerage segment posted $0.67, our risk management segment $0.09, and our corporate segment a loss of $0.18. So total adjusted EPS of $.58.

Risk management and the corporate segment were in line with our December Investor Day expectations and our brokerage segment came in even better.

When you look at the brokerage organic table on page five and the EBITDAC margin table on page six, you'll see that strength in our brokerage segment came from strong organic growth of over 6% and adjusted margin expansion of 151 basis points.

Of that 151 basis points about a third was related to higher contingents, about another third due to seasonality of a couple recent acquisitions and the remaining third is margin expansion we would expect in a mid 5% base commission and fee organic environment.

Having now been through our 2020 budgeting process, it is clear that we're seeing the benefits of our constant focus on improving our productivity, lowering our cost all the while ensuring that we raise our quality also.

It is an environment where rates are increasing -- excuse me, in an environment where rates are increasing, it takes more work by our teams to develop creative solutions, shop the market and guide our clients, that increases our cost somewhat.

In addition, we're making substantial investments in hardening our IT environment, building our data and analytics capabilities, investing in marketing and brand awareness, growing our producer ranks and other investments that help us sell more hire more and acquire. However, we can offset these rising costs and still expand margins.

Our businesses are proving that scale and our efforts over the last 15 years to standardize and shift work into our offshore centers of excellence can lead to steady improvements that offset wage increases and inflation and yet still allow us to make very important investment. So, when I look at 2020, I see another year like 2019.

If we have organic in the upper 5% range, margin should expand 50 to 70 basis points. One other small net, when you get back to page 12, you'll see that the impact of minority interest on our brokerage segment EPS is better than our December IR day estimates. On the surface that gives the appearance of a couple million dollars or a penny or s better.

But that's not really the case. You can't see if there's a like-for-like unfavorable amount in our base numbers, so that washes out to nothing. So no impact on EPS.

Moving to the risk management segment on pages six and seven, you heard Pat talk about the solid organic growth and we posted margins above 17% despite lesser performance revenues and I think that's really good work by the team this quarter.

Looking towards 2020 we're a bit more optimistic about organic and we're also targeting margins in the upper 17% range. Our risk management team is also seen scale advantages which is allowing us to provide deeper and more specialized services that deliver better claim outcomes for our customers.

As for the non-GAAP adjustments this quarter, most are very close to what we forecasted during our December IR day. But there was one new item for the fourth quarter. Our full year 2019 effective tax rate dropped during the fourth quarter when we filed our state tax returns.

These filings triggered a benefit primarily due to reinforcement and some changes we made our legal entity structure. It's a real drop for the full year and going forward. But we did adjust out the favorable catch up amounts from earlier quarters. Moving now to the corporate segment on page eight of the earnings release.

Nothing significant here from our December IR day. Interest is in line. Clean energy a little better. M&A costs were little higher yet corporate costs a little lower. So now, let's move to the CFO commentary document we post on our website.

On page two, you'll see that we have now provided our first look at 2020 for items related to brokerage and risk management segment. As an overall, we have the capacity to do another $1.5 billion to $1.6 billion of mergers again this year with cash and debt.

But you should know that we don't include any future mergers in any of the estimates we're providing in the CFO commentary document. Our estimates only include mergers that we've closed by today and debt that we have borrowed as of today.

So this mean you should start with our estimates for amortization expense, estimated earnout accretion expense and interest expense, but you must then make an estimate for additional amount for each of those line items that arise from future M&A.

So for example, if we do $1.6 billion of M&A this year and let's assume that all happens equally each quarter, call it $400 million a quarter, you'll see in footnote one that it says amortization should increase about 1% per dollar spent on M&A.

So call that an additional $4 million [ph] in the second quarter, $8 million in the third and $12 million in the fourth. As for earnout accretion that should grow about $1 million to $2 million a quarter on that example. And then asked for interest expense. We just closed a $575 million round. So our numbers already include interest for that.

But if you assume we borrow another say $300 million on June 30 that would mean your interest expense estimate should go up by $3 million in third and $3 million in the fourth. Again, these are just examples for illustration.

My point is simply to make sure the assumptions for M&A factor in the non-cash amortization accretion and also the interest expense. Two other items on page two of the CFO commentary. Noncontrolling interest, much lower going forward especially in the first quarter, because we now owned 100% Capsicum.

And you'll see that we lowered our expected tax rate reflect the tax -- the state tax benefit I mentioned earlier. Moving into page three of the CFO commentary, we've now added the light reddish columns which provides our first look at 2020 quarterly estimates and also updates our full year estimates that we provided during our December IR day.

Two matters to note. First, when you update your brokerage and risk management segment for our lower tax rate you'll need to also update for a lower state tax benefit in the corporate segment. We've done that for you in the reddish column. The total company is actually a $0.02 to $0.03 benefit, but there is some geography between segments.

Second, our 2020 quarterly comparatives to 2019 will change. Recall that in early 2019, we sold a non-core brokerage operation, that triggered a large gain, which then causes to recognize the large amount of credits in the first quarter of 2019.

We don't have any meaningful sales and profits, though we are not anticipating recognizing as many tax credits in the first quarter 2020. That will also caused all of 2020 quarters to be proportionally different than 2019. Okay. I'll wrap up.

It was an outstanding quarter to close out a really terrific year, setting us up for even a better year here in 2020. Back to you, Pat..

Thanks Doug. Great quarter, fantastic year. Let's go to some questions and answers.

Operator?.

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

Hi. Thanks. Good evening..

Hi, Elyse..

Hi. My question is on -- I guess starting off with contingents within brokerage. Pretty strong this quarter. And it seems like that was really what drove the upside on the organic relative to your December expectations.

Is that trendable? Or I guess, could maybe you could expand on what you're expecting from contingents in 2020 embedded within your upper 5% organic revenue guide?.

Yes. I think just at the level set, we had 5.5% on base, we had 6.1% or 6% or so on supplemental and then contingents were higher than that. It did drive a little bit of the upside. I think in December we're talking about being in the high 5% range. So it did add a little bit.

Recall that we did reprice one program that we gave you a heads up about, that detracted from that. As we're going forward, we think our position on contingents is still strong.

The issue will be as the program start to have or contract start to have loss ratio problems you could see some softness in that in 2020 compared to how strong it was here in 2019. On the other hands if that's the case, you'd see that kind of the offset and stronger base commissions also..

Okay. And then, the compensation of expense ratio that trended down nicely on this quarter and probably I think for most of quarters of 2019. Can you just talk about how we should think about savings going forward.

I know in the press release you guys mentioned some headcounts and employee benefit savings as we think about modeling the potential margin improvement in 2020?.

Yes. I think -- we have some pretty good success. We had another wave of harvesting some of the gains from our offshore centers of excellence, so we have some headcount reductions. We watched attrition pretty closely this year.

I wouldn't see the same amount of improvement purely in the compensation line, rather I think that if we're in the upper 5% you're going to see margin expansion in that 50 to 70 basis point range..

Okay.

And then, did the -- the aviation business, did all the earnings come on in the fourth quarter? Just trying to understand if that was a big impact on the margins you saw?.

Yes. I said in my comment, about a third of that came -- third of 150 basis points did come from the acquisition activity that rolled in the fourth quarter, a big piece of that is the aviation business. When you look at supplementals and when you -- you'll see a pretty good number there from acquisitions.

That really is coming from a couple of the recent acquisitions that we did mid-year that came in the fourth quarter. But so, 50 basis points of our margin expansion is result of the rolling of acquisitions..

Okay. And then one last question. The M&A multiple, you guys took up the range I think a little bit, but didn't change the high-end. And it did seem like some of your deals have been kind of above that of late.

Is that just the larger deal? So -- are still like the smaller sized transactions, has the multiple just not moved that much on those deals?.

That's right. I think if you look at it for the -- I think there were seven large deals that we did this year. I'm going from memory and I think that those might have been about 9.5, but for the rest of the deals that we did it really were somewhere around between 8.5 and 9 or maybe like 8.8, if I remember right exactly.

So if you bifurcate that -- and our M&A pipeline right now doesn't have any large deals that might push that multiple higher..

Okay. Thanks. I appreciate the color..

Thanks Elyse..

Our next question is coming from Mike Zaremski with Credit Suisse. Please state your question..

Hey. Good evening..

Hi, Mike..

Follow-up a follow up to Elyse's question. So, Doug, in terms of the very healthy margin expansion in the brokerage segment, the seasonality from acquisitions, that's permanent, right, so we're not -- that's going to persist in 4Q 2020 and beyond.

So I just want to be -- make sure?.

Yes. That would be right. So I might have some softness on margins a little bit in the first and the second quarter, but it would be there again for the first year -- for the full year..

So yes. So then -- so if those acquisitions you're saying are lighter on margin.

So, should we be expecting in some -- you're saying some a little bit basis points wise of pressure on the go forward 1Q, 2Q, 3Q?.

It might. I think if we're looking at a full-year of 50 to 70 basis points, let's split the difference, call it 60 basis point. You might not see a full 60 basis points in the first quarter and you catch up more towards the end of the year. But overall for the full-year will be in that 50 to 70 basis points in this environment at this point..

Okay. Got it.

And just to clarify the tax rate guidance you said that at this point permanent on a go forward basis?.

Yes. That's right..

Okay. Got it. And well, thank you for all the color on how to do that M&A math in terms of accretion and whatnot.

But -- so just want to kind of like at a high level, if multiples don't move higher as you -- given your guidance, the amount of EPS accretion you're getting as a percentage of earnings for 2020 versus 2019 should be similar?.

Yes. That's right..

Okay. All right. Great..

I think if you look at -- I think our whole program from last year probably added about $0.80 of EBITDA per share. So if you look at our program last year, and then you lose a little bit about on EPS, not losing, but it detracts that because the amortization of the intangibles. And so maybe that was somewhere around $0.20 to $0.30.

So our whole M&A program if we took it as a one big bucket last year probably added $0.80 to $0.90 on a EBITDA per share basis and somewhere around $0.30 on a EPS basis..

Okay. Got it. Thank you very much..

Thanks Mike..

[Operator Instructions] Our next question is coming from Mark Hughes with SunTrust. Please state your question..

Thank you. Good afternoon..

Good afternoon, Mark..

The risk management business you have historically wanted to kind of restrain the guidance or kept the number at about 17%. It sounds like its -- you're seeing it come in a little higher.

Is that a change in mix, change in philosophy? What is driving that?.

I think it's just the fact that they are getting scale advantages. They've done a really great job of restructuring the field adjusting staff and resolution managers into a more specialized focus.

So it's purely the fact to be able to put specialization, standardization right at the point of contact with a customer, and its delivering amazing outcomes in terms of the claim outcomes. People are getting back to work faster, cost to get them back to work are lower.

It's really pretty remarkable the investments that the group has made over the last seven or eight years. So we think that those scale advantages will come through starting this year..

And then, I certainly hear your optimism about the 2020.

Pat, I'm curious if you could maybe lay out a little, why you feel so optimistic? Kind of what is it in this market that you think gives it durability?.

Well, in terms of durability, Mark, I think we said in the prepared comments. This is no mid 80s to early 2000s. But I do think that there's a recognition by the underwriting community that in particular in specific lines they've got to get this right. Again, this better than I do.

You sitting there with really not much of a return on a huge investment portfolio that the industry has historically used to make sure that they've got a little wiggle room when it comes to combined ratios. And we also -- are saddled with the social inflation, current inflation. So I think there's a really good knowledge of that in the marketplace.

And frankly these underwriting companies are being very firm with our people in terms of what they need.

They're not willing to put out the same kind of limits at really cheap premium amounts that they were just two, three years ago, is that they recognized that rates in particular in some of the property areas and cat exposed areas still need -- that it needs bolstering and I don't see that as something that's going to go away in the short term.

So while I'm not sitting there saying, wow, this is like 85. I do think that you get some discipline. We've talked about that in the past a bit. And I think if that continues along with our capabilities that continue to grow every quarter, we just get stronger and stronger in the marketplace.

Remember, every time we go out to compete, I shouldn't say every time, 90% of the time plus we're competing with somebody smaller than we are. And the amount of data analytics that we're doing today. The amount of strength in our verticals just continues to grow literally every month, every quarter.

Our acquisitions don't just add earnings to the picture, they had terrific talent. These people have built great, strong entrepreneurial cultures. They join us. Those cultures meld nicely and we've got a lot to sell.

And I think as customers in particular in the upper middle market start to face down, increase in prices, maybe some reduction in coverages, they're more receptive to listening to our professional capabilities and that adds up to better hit ratios.

So when I look at that across the whole board, are there pockets of softness, sure, worker's comp is going to continue to be a place where it's not firming, but at the same time I just think our capabilities shine in these types of markets..

I appreciate that.

And then could you just refresh me quickly on the how much of your revenue comes from commissions, might be more sensitive to pricing and exposures as opposed to relatively fixed fees?.

Yes. I would point out. We did in the -- for the year we did $3.3 billion of commissions out of and fees were $1 billion. So out of the $5 billion a brokerage total revenues $3.3 of it are commissions. Call it [Indiscernible]..

Thank you..

Thanks Mark..

Our next question is coming from Meyer Shields from KBW. Please state your question..

Great. Thanks.

Pat, I wonder if you could give us sort of an introductory overview as to Capsicum's current focus in terms of lines of business or region?.

Yes. I mean, I think that they -- well, it's been -- let me just back up a second. I've been really pleased as you know that was a partnership that we were partial owner of before we went to the 100% perspective. Its probably the best de novo startup I've seen in my 45-year career. These guys have really done an unbelievable job.

And it has been something that's been done literally focus by focus. So not to get into all the specifics of each individual operation. What was kind of amazing to me in the startup of this, and Grahame Chilton and I become close friends. We made a real effort at building out Calgary just 10, 15 years ago and it was a complete failure.

And one of the reasons was we were behind the eight ball when it came to huge amounts of analytics. And I think what Graham and Rupert and their team have found is that at the same time analytics are important, the whole capability to execute as a broker was something that was kind of diminishing in the marketplace.

And they felt that they could take advantage of that by bringing a board, people who really were solid brokers supported by analytics as opposed to analytics people trying to broke. And I think that's proved out. So very, very strong in auto, very.

very strong and property, very, very strong in FAC and very, very strong in international, very strong in cyber. And you see that again as we just continue to build verticals and that doesn't put us up against our major competitors in terms of their core day in and day out business. And there's just lots and lots of room to grow in that business.

So I think it's going to be a great acquisition for us..

Okay. Fantastic. That was helpful. Second small ball question.

Is -- does the renegotiated wholesale contract have any impact in future quarters? Or is that a onetime hit?.

There'll be a little drag in first and second quarter, but we think we've got the pricing right now. So I think we're in pretty good shape..

Okay. Fantastic. Thank you so much..

Thanks Meyer..

[Operator Instructions] Our next question comes from Greg Peters with Raymond James. Please state your question..

Good afternoon. I just thought I'd follow up by -- I've been listening to these conference calls and you guys certainly reaffirmed it. We're in a strong pricing environment in many lines except maybe worker's comp.

I'm curious what you're hearing from your customers? How are they reacting to it? Is it requiring more work from your brokers to place the business.

Do you see these customers more willing to switch carriers? Do you see any change in retention ratios as they have to deal with these higher prices?.

Well, let me make sure I hit all the questions, because I try to get them in order, but number one, our clients are not happy. As an industry we trained for well over a decade clients to expect reductions. So it's a pretty easy job to renew an account when you walk in and say, the good news is that this year prices are less than last year.

And we've been doing that now since 2005. So you've got 14 years of flat to kind of down rates. And when you turn around and say, well, here it is that it's not going to be that way anymore. They're not happy.

Now one of the things you've got to do about that to your question about renewal retention and that type of thing is, we're coaching our team by and large the majority of our team have never really operate it in a firming market or a firm market to get out real early, and explain to clients that it's going to be different.

So retentions at this point are very solid and similar to what we've seen along the way. But make no bones about it. This is the type of market that causes people to think twice the next time the phone rings and someone says I like to talk to you about your insurance.

We've got to be really diligent on that and be once again selling to a client, why being with Gallagher provides them with a great difference in their own business. It's not about our business. They don't care about our business. They care about what it's doing to them and their competitors.

And I think that's where our analytic capabilities come in really handy explaining that look, I'm not saying it's easy and I'm not saying you can even pass it on immediately, but your competitors are facing the same type of thing. So I think retentions will be solid if we handle our clients well. Make no bones about it, they're not happy.

This is not a disaster. The good news is we can get it done. If you say, look I need 100 million of cover. That's what my contracts require or that's what I feel comfortable having. We'll get it. The price is just going to be a little different than it was before. And so, we've got to pull out that playbook..

And Pat, this is follow up to that. So, we're hearing from some of the carriers that their retention ratios are dropping, which means that your customers are in some instances more willing to consider switching than ever before.

Does that -- is just -- is there -- on a very granular basis, does that mean that particular customer is less profitable because you have more work to do? Or how does that boil up? I mean, you're -- obviously you're guiding to margin expansion and wonderful organic revenue growth for 2020.

But how do I -- how should I think about that in terms of its effect on your organization?.

Let me try again to take both questions in order. But number one, let's be real clear about this and there's no question about it, while we value our relations with our carriers and we view them as partners in helping our clients we represent our client period and the statement. We don't represent an insurance company. We represent our client.

And that means where we sit down and they're saying, what do I do about this. That's one of the benefits about being with Gallagher is we can bring in the expert. We could show you how to navigate this and if it means higher retention and if it means change in carriers we'll recommend that.

And that's what -- how the client benefits from being able to do business with us. Yes. There's more work. Does that mean it drives costs through the roof. Not necessarily, because you got to be out real early. So you're going to see the more work in different ways.

People are already bitching about the fact that it used to be easy to roll out a bed and place $25 million of umbrella without having to make more than two phone calls. That's not happening right now. They've got to get out of bed earlier. They've got to get their track shoes on and they've got to be better. That doesn't naturally drive costs up..

And Greg, one of things as you know over the last 15 years as we've invested in our centers of excellence. The volume of additional quotes. The volume of some more proposals, we have the ability to do all that work in lower cost labor locations.

So that helps knock the top off the cost escalation that might be there with some additional travel maybe needing a few more hands domestically working on the accounts. So we have a pretty good safety valve for that and that's why we can continue to make investments in the business.

And I gave a laundry list of all the things we're doing, yet still show margin expansion. When you look at this quarter, we still add 50, 60 base -- 50, 60, 70 basis points of margin expanded just on our core 5.5% base commission and fee, revenue growth.

So without supplementals, without contingents we're still seeing that kind of margin expansion in the face of rising costs, rising wages, there is inflation out there and it's because we have the ability to have the use of lower cost labor locations that really are a machine that can pump out good high quality work for our customers without the escalation in cost..

Thank you for those answers. I want to stay on the pricing commentary, but I want to pivot to your smart market operation. I think at your Management Day you said you had approximately 20 or 20 carriers on your smart market service.

And I'm certain that many of the lines of business that are running through your smart market are the same lines of business that are seeing these changes in price. And I'm curious if the market, the firming of the market changes, the appetite for carriers to be on something like your smart market platform.

And maybe you could just use that as an opportunity to just update us on the status of the smart market is the outlook for 2020 going to be -- is it going to be a growing business for you? Or is it going to be stable as consistent with it was last year? Some additional color there. Thank you..

Thanks. Smart market I think is one of those examples of both scale and digital and IT capabilities really playing to the strength of an organization that has some size and breadth.

For the audience basically what this does is it allows carriers that have, that are members of the smart market group to be able to look into a renewal book of business, not by name of account, but by SIC code and by anniversary date and by size, and to say this is a type of business that we're looking for to be able to tag that account, say, if in fact you are planning on marketing it, we'd like to see it.

Those companies that have participated, smart market had superior growth rates to all the other companies that we've traded with on just a general trading basis. And that's not going to change because it's great intelligence.

For all of my career if you wanted to penetrate Gallagher, number one, it was difficult, because we traded geographically from business units. So if your XYX the insurance company and you want to grow Gallagher, you better get in the car and get out to our office and see our people. And it's catch as catch can.

Some of our folks are in the office, some are marked. Yes, you can make appointments, but it's a hard slog. Well, it's a different thing if you've said I'm coming. I want to see this producer on this account and here's why you should listen to me.

When producers are running hard and account managers are running hard and they don't really want to hear XYZ's general approach to the marketplace blah blah blah. They all sound the same. Now, what you've got is a targeted approach.

Just come and see somebody would say, I can help you on this and the reverse of that is true in our offices where we might be sitting there pulling our hair a little bit. They can, AIG has just announced they're getting our a surety. I know, the surety markets, but I'm not exactly sure where this one fits in. I've got Chubb coming in today.

Let me ask him about it. So it really is. It's a program that works very well on both sides and that's not going away. That's just going to get stronger because what happens in this market is people start just over shopping and in particular those folks that have never seen any kind of a firm market before because their renewal is a phone call.

Well now guess what. They're going to sit across from Mr. Tough buyer who ain't happy and he's going to want to know why did you pick this company. How many other quotes did you get? Why did they turn me down? How come he didn't get more quotes? Our folks can sit there and say, we represent these carriers.

We are able to talk to them about what their appetite is. And we went to those that truly have an appetite for your type of risk. It might be a little bit more money, but the renewing incumbent was up X plus 50. This we've matched you with someone who really wants you. It's not quite as onerous. It's a way more professional conversation.

In the old days, you've said, why do I know I have a good deal. I'd say because I went to three markets. Here's the best deal. Buy it. That doesn't wash today. So really if you think about it, this puts Gallagher in such a strong position against our smaller competitors. They've got no analytics. They've got no market intelligence.

The market's appetites are changing. You get to learn that from conversations in the hallway and maybe the principal that has an account that he or she has handled this all these years. You're doing, you're flying by the seat of your pants. 90% of the time when we go out to compete that's who we're competing against.

I think we're going to do pretty well..

Thank you for your answers..

Thanks Greg..

Our next question comes from Elyse Greenspan with Wells Fargo. Please state your question..

Hi. Thanks. One follow-up question. I think we were at your Investor Day in December. Doug, you had mentioned that there was the potential for some of the bills to the extent that you guys could generate credits, the clean energy credit beyond the expiration.

And I know I think you were keeping some employees on hand at the start this year in case there was an extension.

Do you have any kind of update there as we think about not just the 2009 plans, but also the 2011 one?.

Yes. I think great question. I think first of all the level set. We were very successful in the fourth quarter of preserving many of our 2009 locations by shifting into those locations, a 2011 era plan that has an extra two years of production life on it. It was a machine. So we moved the machine.

There was a low generating machine from one location into a higher producing location. That preserved a good chunk of the 2009 era production. We do have a handful of facilities that are kind of in shutdown mode right now waiting for a potential law extension. If we got the extension, it might add another $5 million to $10 million of earnings.

But it's not a substantial amount of earnings to turn those plants back on. That said, where does it stand in the legislative process right now? I don't think we'll see movement on that much before the summer. And really our objective on that is really to see if we can get an extension primarily related to the 2011 era plant.

So we really do have the summer of 2020. We've got the fall session. We've got a lame-duck session regardless of which way the election goes. And then you also have into 2021 where you can get an extension on those for another couple of years. So, no progress in Washington on any front right now. But maybe we'll have some this summer as well..

Okay. Thank you very much..

Thanks Elyse..

Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Mr. Jay Patrick Gallagher for closing remarks..

Thanks everyone for joining us this afternoon. As you can tell, I'm extremely pleased with our 2019 financial performance and we're excited about our future. Before we wrap up though, I'd like to thank our clients for their continued trust, our 33,000 plus colleagues for their passion, hard work and dedication.

And finally our carrier partners who do play such an integral role in meeting our clients insurance and risk management needs. We look forward to speak with you again at our March 17th IR day in Rolling Meadows. Have a great evening and thanks for being with us..

This does conclude today's conference call. You may disconnect your lines at this time..