Arthur J. Gallagher & Co's CEO Discusses Second Quarter Results - Earnings Call Transcript

Aug. 1.12 | About: Arthur J.Gallagher (AJG)

Arthur J. Gallagher & Co (NYSE:AJG)

Q2 2012 Earnings Conference Call

August 1, 2012, 09:00 am ET

Executives

J. Patrick Gallagher, Jr. – Chairman, President, and CEO

Scott Blumenthal – Executive VP, Television

Rich Schmaeling - CFO

Analysts

Greg Locraft – Morgan Stanley

Mark Hughes – SunTrust Robinson Humphrey

Brian DiRubbio – YCAP Management

Sarah DeWitt – Barclays

Dan Farrell – Sterne Agee

John Campbell – Stevens

(Chris Lakim) – William Blair

Operator

Good morning and welcome to Arthur J. Gallagher & Co's second quarter 2012 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be opened 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, Jr., Chairman, President, and CEO of Arthur J. Gallagher and Company. Mr. Gallagher, you may begin.

J. Patrick Gallagher, Jr.

Thank you, (Claudia), and good morning, everyone. Welcome to our second quarter conference call and thank you for being with us this morning. This morning, I'm joined by Doug Howell, Chief Financial Officer as well as the heads of our operating businesses.

As we usually do, I'll add some color to the quarter, Doug will make some additional comments, and we'll move quickly to questions and answers. As I said in our press release, I am really very pleased with the performance in the quarter and frankly, year to date. I feel like we're hitting on all cylinders.

All of our operating divisions contributed to our growth in the quarter. Adjusted brokerage revenue's up 18%. Five percent organic is a solid result. Adjusted brokerage EBITDAC up 21% is simply outstanding. Seventy-two basis points of margin improvement illustrates the leverage that this business enjoys.

Year to date, we've completed 32 acquisitions, which will bring in over $130 million of revenue. All in all, a strong quarter in brokerage.

Our risk management segment is also very strong this quarter. Revenue's up 7% and base organic fees up over 8%. Adjusted EBITDAC up 11% and our margin expanded by 50 basis points.

So all in when I put both our operating segments together, brokerage and risk management, we had adjusted revenue growth of 15% and adjusted EBITDAC growth of 20%.

These results don't just happen. They happen because our great team gets up every day everywhere around the world and works hard for our clients. I could not be prouder of the team. Our unique Gallagher culture is alive and well as we continue to grow our business

Remember, every single day at Gallagher, we focus on four strategic areas; the first is organic growth. We have over 140 interns that are winding up their internship this week, very exciting summer. Secondly, we focus on mergers and acquisitions. We've had a solid six months.

Thirdly, operational excellence in productivity. We had margins expansion again this quarter and fourthly, our culture which we believe we have a very unique team-oriented global culture that we continue to foster. The organization performed nicely the first half of this year in all four key strategic areas.

Let me add some more color to our operations. Property casualty retail continues to show organic growth around the world and in the United States. We continue to see rate increases. The Council of Insurance Agents and Brokers quarterly survey came out this week.

The major lines that we placed – work comp, property, commercial auto, general liability, and umbrella are up approximately 5.3% for the quarter for a sequential gain of 60 basis points over Q1. This is not – and this is very important. This is not a classic hard market. Frankly, that's a very good thing for us, our clients, and our markets.

This is my fourth cycle. We don't want to see 100% rate increases and big cutbacks in coverage. The industry is not reacting to balance sheet problems but rather the income statement and loss ratio concerns. An environment of incremental rate growth is ideal for us. If we had a 4% rate gain per current quarter per year for a number of years, that would produce an opportunity for organic growth each and every quarter.

New business was strong in the quarter. Our retention remains nicely in the mid-90s and I think that speaks volumes about our aggressive sales and service capabilities and we continue to see our customers' businesses stabilizing to growing slightly. We did not see our clients adding employees so there's still caution in the marketplace but we are seeing additional premium audits which is a good sign.

Our wholesale and NGA business had a very strong quarter with solid organic growth. This reflects business moving back to the excess and surplus markets and an increase in small business formations.

Our benefits business continues to be helped by the new health law. Now that the Supreme Court has ruled, our customers and prospects know they need our help. The compliance issues alone in this law are very difficult for our customers to deal with so they need our expertise.

Mergers and acquisitions in the brokerage segment has been a key strategy at Gallagher for over 26 years. We're thrilled that our new partners chose Gallagher. Each of the firms that joined us had a choice and we want to welcome them to our growing family. Our merger and acquisition pipeline remains very strong and we contemplate a number of additional transactions will close before year end.

Our international brokerage is also showing improving results. Our acquisition of Heath Lambert in the UK last year is proving to be a significant strategic move in the UK. We're growing the business with some very nice account wins and some additional acquisitions outside of London.

The Heath acquisition is doing what we thought. We're recruiting people we couldn't have and doing acquisitions in the UK – three so far this year – which we wouldn't have been able to do if Heath and Gallagher had not joined forces.

Let me move to our risk management business. As I said, a strong financial quarter, great client retention and globally, good new business propelled the quarter. Underlying our organic growth, we saw existing client-to-claim counts were up about 1.5% and we're getting about 2% in rate increases. As our clients' businesses expand, we will also benefit.

Our international risk management business had another great quarter primarily in the UK and Australia. I'm convinced that Gallagher Bassett continues to gain recognition as the best provider of claims management services in the marketplace. I'm pleased with our progress and I'm glad two quarters are in the books. As an aside, we're up double digits on almost all important measurable metrics.

Doug?

Doug Howell

Thanks, Pat, and good morning, everyone. It's nice to post another strong quarter. We'll start on the first page of the earnings release in the brokerage segment. First you'll see $0.02 of Heath Lambert integration costs and appending of severance. That's been lying with our comments from our last conference call and we heard Pat mention that we're on track and progressing nicely with integrating that merger.

Looking forward, we're still seeing – we're still forecasting integration and severance to run about $0.02 to $0.03 a quarter through mid-2013 and then we should be done with that.

Next you'll see we picked up a couple of pennies from acquisition-related adjustments. We adjusted our estimated earn-outs on 12 deals which totaled about $7 million of adjustments and we wrote off about $3 million of intangibles relating to three historical deals. Those net to $4 million which after tax is $0.02.

Finally, you'll see we booked $0.02 because we prevailed on a tax position related to one of our foreign brokerage operations. So while there's some ups and downs, it all washes out to about a penny.

Let's look to the second page to the brokerage organic revenue table. Let me put some flavor behind the 5% organic growth on our base commission and fee line. Our domestic P&C units – that's our US retail and wholesale units – posted mid-5% organic growth. Our international operations organic was up in the upper single digits and our US employed benefits unit posted organic of about 3%.

Moving down a table to supplementals and contingents, let me give you some help in modeling the third and fourth quarter. As of now, we are seeing total supplementals and contingents of about $20 million to $22 million in the third quarter. That's down a few million from 2011 mostly because of deteriorating loss ratios on a couple wholesale programs and another million or so will get pushed back to 2013.

As for the fourth quarter, we are seeing total supplementals and contingents of about $16 million to $18 million which is about flat with last year. So it's backing up to be another good year for contingents and supplementals for us.

Moving to page 3, you'll see that we've added tables that show adjusted compensation and adjustment operating expense ratios and both of those had nice improvement this quarter. We've added a table to put the computations next to the commentary and it also allows us to eliminate the full adjusted P&L columns from the back pages of our earnings release.

However, please note we are still providing the adjusted P&Ls on pages 5, 8, and 13 in our investor supplement that we post on our website. We really encourage you to use that supplement when building your models, especially the adjusted pages.

Moving to the bottom of page 3 to the brokerage segment margin table you heard Pat talk about but we are really pleased to again post margin expansion in this environment. Similar to the first quarter, we were up 60 to 70 basis points or up about a full point without Heath. About half of the favorable upside was additional supplements and contingents and the other half was from compensation and expenses discipline.

Next moving to page 4 to the risk management tables; organically, we are seeing really nice growth in our base fee line. You can also see that we had solid performance bonus revenues this quarter and you can see that our work on the New Zealand earthquake is running down quickly.

So when modeling future quarters, we suggest you apply your organic growth pick to the base fee line only then assume about $2 million to $3 million of performance bonus revenues in each of the third and the fourth quarters and then assume next to nothing related to the New Zealand earthquake claims.

Moving down the page, we've included an operating table like we did in the brokerage segment. Both of those had – we had nice improvement on our comp ratio but we got stung by about a million dollars in additional litigation costs this quarter which hurt our operating expense ratio a little bit. It's unfortunate; these things can happen sometimes.

Moving down to the EBITDAC margin table, we still believe we can post 16 points of margin for the second half of the year.

Finally when you get done building your models for the risk management segment, step back for a minute and make sure you have contemplated that the third and the fourth quarters of 2011 each had about a penny of earnings from the New Zealand earthquake claims and remember, that program is effectively over.

Next let's turn to page 5 to the corporate segment and here's an update as you build your models. All of these amounts are after tax. First assume about $7 million of interest and banking costs per quarter. Assume about $5 million of acquisition costs per quarter.

Then assume about $2 million to $3 million of corporate costs per quarter and finally, assume about $12 million to $14 million of clean energy investment earnings in the third quarter and about $7 million to $9 million of earnings in the fourth quarter.

When you get done, the corporate segment should show about $0.02 to $0.03 of earnings in the third quarter and show about break even in the fourth quarter. Clearly those are approximate. A lot can change, especially when it comes to wrapping up and rolling out our clean energy investments.

Speaking of which, we continue to work out the kinds related to those plants operating under long-term contracts and you can read that we are making steady progress on getting three more plants deployed.

As for the other plants, we feel like our prospect list for deploying those other plants is developing very nicely. That said, these things take a while to deploy, especially as you put new plants into utility so we measure that in terms of quarters, not weeks.

As a wrap-up comment, like Pat said, we had an excellent six months on all fronts and the team, in my opinion, is hitting it out of the park. If inflation stays in check, the rates continue to firm, and the economy doesn't stutter, we are well-positioned to deliver solid results.

Okay, Pat, those are my comments.

J. Patrick Gallagher, Jr.

Thank you, Doug. (Claudia), we'd like to open it up for questions now.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the call is now open for questions. (Operator Instructions). Our first question is coming from the line of Greg Locraft of Morgan Stanley. Please state your question.

Greg Locraft – Morgan Stanley

Yes, hi, good morning, and very nice quarter.

J. Patrick Gallagher, Jr.

Thank you, Greg. Good morning.

Greg Locraft – Morgan Stanley

Just wanted to get a sense with the top-line doing as well as it's doing and it sounds like some good visibility there if current trends hold. Can you talk about the margin potential for each of your businesses? How high can it go?

Doug Howell

Oh, well, I think a better way to answer that, Greg, is saying that we believe that in an environment of plus-3% organic growth, you'll see some margin expansion in the brokerage space and when you look at the risk management's going to take a plus-5% environment to continue to grow to margin.

In risk management, I wouldn't expect any margin expansion over 16 points for the remainder of this year and the brokerage space, when we have 60 to 70 basis points of margin expansion incrementally, that probably could hold true for another couple quarters. So in this environment with low inflation, you can get maybe 60 or 70 basis points of expansion.

Greg Locraft – Morgan Stanley

OK, so just to reiterate, the threshold is a three on the brokerage side and then a five on the claims side.

Doug Howell

Right.

Greg Locraft – Morgan Stanley

OK, perfect. Thank you very much.

Operator

Our next question is coming from the line of Mark Hughes with SunTrust Robinson Humphrey. Please state your question.

Mark Hughes – SunTrust Robinson Humphrey

Thank you very much. The Supreme Court decision, once that settled, did you see an up-tick in activity in the benefits area?

J. Patrick Gallagher, Jr.

Yes, Mark, we did. I think there were an awful lot of clients that just weren't going to spend a lot of time and effort on this if the whole law was going to be found to be unconstitutional. We heard that repeatedly and now that they know this law is, in fact, going to go into place, there's an awful lot of effort that clients have to go through to get ready for it.

Mark Hughes – SunTrust Robinson Humphrey

And then on the clean energy business, Doug, did I hear you correctly? Break even in the corporate segment in the fourth quarter?

Doug Howell

Yes, $0.02 to $0.03 in the third quarter and break even in the fourth quarter for the total corporate segment.

Mark Hughes – SunTrust Robinson Humphrey

Right, and then how do we think about that going into 2013 in terms of run rate?

Doug Howell

I think that our 2013 position will be better than it was in 2012 as we get more plants deployed. Give me til October to give you kind of a firm number on that but I see the second quarter as being a little illustrative of what – probably illustrative of what 2013 would look like each quarter.

Mark Hughes – SunTrust Robinson Humphrey

Thank you.

Operator

Thank you. Our next question is coming from the line of Brian DiRubbio with YCAP Management. Please state your question.

Brian DiRubbio – YCAP Management

Good morning, guys, how you doing?

J. Patrick Gallagher

Great, Brian. How are you this morning?

Brian DiRubbio – YCAP Management

Doing well. Just a quick question. I think you took your ownership stake in CGM up from 38.5% to 80% in the quarter. Did that have any – is that business meaningful enough to have any impact on any of your results?

Doug Howell

It's not of the size that would cause any change in any of our organic or top-line numbers of significance and we do not include any of it in our organic numbers. So moving from a 30% to an 80% does not fuel any of our organic numbers.

Brian DiRubbio – YCAP Management

Got you and just on the (Ken mod), Doug, any thoughts about your ability to monetize some of that investment in the actual company by year end or early next year?

Doug Howell

I don't know If I can comment necessarily on the timing of it but I still remain with my earlier comments that there will be a time where we would like to monetize our (Ken Mod) ownership interest there. If you recall that we are now five years into – six years into our ownership of (Ken Mod).

As a matter of fact, a notable point is in June, if you add up all the cash that we've deployed on all of our clean energy investments since 2005 til June 30 of this year and look at all the cash flows that've come back to Gallagher, we are now in positive territory.

The entire clean energy program is in positive cash flow territory at this point. We're getting good success on rolling out our plants and we think that (Ken Mod) has a demonstratable product now that could position it to be better owned by somebody else.

Brian DiRubbio – YCAP Management

Great, and I guess just a final question. With the cash now that you're bringing in from (Ken Mod) and obviously the better operational results that you guys are posting, do you see the potential for you guys to be using more cash rather than shares for acquisitions going forward?

Doug Howell

Yes, I think two things. I think our pipeline is so strong right now that we will be using stock in the near future. I think the cash flows that come off of our clean energy investments are exactly for that purpose. Remember, those cash flows are to go out and have us expand our core operations but that certainly would reduce the amount of stock that we need to use in the future.

Brian DiRubbio – YCAP Management

Perfect. Thanks, guys.

Operator

Our next question is coming from the line of Sarah DeWitt with Barclays. Please state your question.

Sarah DeWitt – Barclays

Hey, good morning. If you could just talk about your view of the cycle and to what extent you think rate increases will persist, particularly if we don't have any hurricanes this season.

J. Patrick Gallagher, Jr.

I'll do that and it'll be a great forward-looking statement but nobody knows if I'll be right or not but just as I said in my remarks, my thought cycle, and it's completely different in its feel and its look in any that I've seen before and I think in many respects, that could be a positive thing.

What we're seeing right now is, I think, disciplined management recognizing that present rates with no investment income to speak of, that they have to improve the pricing of the product that they sell in the marketplace in order to have any kind of return to shareholders.

Now that's driven primarily by two lines. Worker's compensation is a real nightmare for underwriters across the United States and property continues to be problematic. I think underwriters would tell you that three, four years ago they felt that the place where they could really get nicked on property was probably the coasts with wind and earthquakes.

In the last few years, the center of the country is really hitting them and so there is an environment that I believe is sustainable in terms of getting rate increases across the book and there's not a balance sheet need here that says we have to dump all our clients or cut back on coverages and what have you. There's simply a discipline.

Now I'll make another side comment. This is the first time in four cycles in my experience that what the CEOs of the trading partners we have, the insurance companies are saying is exactly what we're seeing from the underwriting desk and there is significance discipline and I think there's just better information today than there ever has been in the past in this market.

And our people on the street are finding that they have to take these rate increases out to our clients. Now let's recall, rates today are probably at par or maybe lower than they were before the last market turn in 2001. So when we're asking clients to consider – not asking them to consider. Actually telling them that they don't have a choice because the market is what it is, to consider the fact that there's a 4% to 5% to 7% or 9% increase

They understand that. They thrilled about it? No, they don't want to see increases but at the same time, they do understand and the carriers I think are proving that this time around, they can get these increases incrementally.

Sarah DeWitt – Barclays

Great, thank you, and then on acquisitions going forward, how should we be thinking of the acquisition revenues now that the Heath deal has (lapsed)?

J. Patrick Gallagher, Jr.

I'll speak to the pipeline; I'll let Doug speak to the numbers. I couldn't be more pleased with the pipeline that we have. I've said that quarter after quarter and we continue to crank out just incredible work completing 30-plus deals so far this year. The team is working extremely hard. I mean, that's not easy to close, as you know, an acquisition and whether it's $2 million or $8 million, the work is still the same.

We've got our human resource people in place. We've got to integrate these operations into our family and we're really, really good at this and we now have – if you look at our investor slide at our website, we've got numerous operations that are expert in bringing – in sourcing, helping us price, and bring aboard acquisition partners and the partners that we've brought aboard this year are excited, they're turned on, and the ones we brought on in previous years are still with us.

So I think it's just a really, really good place as it relates to the pipeline and the opportunities to grow our business and rank position. Doug, you want to hit on the numbers?

Doug Howell

Yes, couple things. As you're thinking about the numbers, obviously you can see int eh press release that we've done 27 for around $100 million. You heard Pat say we've done another five since then that adds another $30-some million and I would say that we'll continue to be strong through the end of the year.

In terms of the numbers, one of the things about our acquisition program, it's going to add more amoritizations. So every time we do a deal, the departure between cash earnings and GAAP earnings gets bigger and that's one of the things I would encourage everybody on the call to do is to make sure you understand that amortization is going to be going up, that we're going to be using shares in acquisitions so we're going to have share create.

But by and large, the deals that we're doing right now are nice, strong, individual, team-type acquisitions. They're nice, tuck-in mergers with us. We're getting great production talent that are profitable organizations. We always say around here if they're not making money for their family, they'll never make money for the collecting guy, Gallagher Organization, and we're really excited to have them join forces with us.

They're seeing the need for our expertise and so the numbers generally are pretty good performers. So you see margins in excess of – we've even had margins in excess of 20% and they have some nice growth prospects ahead of them.

Sarah DeWitt – Barclays

OK, great. Thanks for the answers.

Operator

Our next question is coming from the line of Dan Farrell with Sterne Agee. Please state your question.

Dan Farrell – Sterne Agee

Thanks and good morning. Yes, Pat, I thought you made a good point of gradual organic over multiple years being a good environment for brokers. I was curious when we think about margin in successive years if the multiple years of gradual organic have a ramping impact on the margin.

I guess what I'm trying to get at is this year, you've talked about 3% organic being the threshold to start to get margin improvement. I'm wondering as you get successive years of organic if that threshold maybe drops to 2.5 or 2 because you're always reinvesting but you need to reinvest at the same pace or can it slow a bit?

Doug Howell

I think – hey, Dan, I think you're right. I think you're on point there. If we have five years of 3% organic growth, I believe in this current inflation environment and the current workforce environment, you would have margin expansion even at a 2% or 3% level. We're still working very hard to improve our quality and our productivity and we're having some significant wins on those fronts still.

We've got an engaged workforce at this point that I believe has been fairly compensated. We've been given raises along the way. So if a workforce inflation problem doesn't develop, you would have margin expansion going forward in this current environment but looking too much further than six months is pretty tough for us to do at this point.

Dan Farrell – Sterne Agee

No, understood, and then just on the unrestricted cash, can you tell us how much is in the international versus US subsidiaries?

Doug Howell

A hundred and twenty million.

Dan Farrell – Sterne Agee

Is in international?

Doug Howell

Correct, $120 million is in our international operations. We probably will not bring that home. We'll probably use that to fuel our acquisition pipeline in the UK and Australia, which is where most of that cash sits right now.

Dan Farrell – Sterne Agee

OK, and I'm guessing do you feel as favorable on the international pipeline as the US, as well? I know you've done some more recent US deals but does that pipeline still look good, as well?

J. Patrick Gallagher, Jr.

Yes, in my comments, that's why I mentioned the Heath deal. We would not've had the pipeline building in the UK that we have today had we not done the Heath acquisition. In Australia, we have a very nice pipeline developing and so I think you'll see us be active in both those markets over the next six months and in the years beyond. Great opportunities.

Dan Farrell – Sterne Agee

Excellent. Thank you very much.

Operator

(Operator instructions). Our next question is coming from the line of Brett Huff with Stevens. Please state your question.

John Campbell – Stevens

John Campbell in for Brett Huff, good morning.

J. Patrick Gallagher, Jr.

Good morning, guys.

John Campbell – Stevens

Hey, so I was just wondering on the share count, looks like that accelerated a bit from 1Q and Doug, I believe you briefly touched on this on a previous question but was that share count increase more of just excess shares used over cash used in acquisitions or more a product of just less shares repurchase in the quarter and then just a little further on that, just give us a sense of what the company is thinking about for share repurchase going forward if you were to assume the stock kind of stays at these current levels.

Doug Howell

Let's work backwards. We're assuming no share repurchases and we haven't been active in that arena in the last three or four years. The amount of shares we're using in acquisitions tend to be between 50% and 75% of the acquisition purchase price. We're putting shares in our merger partners' hands.

In terms of the share growth in the second quarter, we used about 1.6 million shares for acquisitions. We used about 200,000 in earn-outs and we used about 600,000 related to option exercises and just dilution as a result of our stock price inflate for outstanding options that are unexercised. So you can see that year-to-date we've used about 3.7 in acquisitions and about 1.7 million came from option exercises.

John Campbell – Stevens

OK, great, thanks, and then just on the international organic growth, that seems like it's tracking along pretty nicely in high single digits. I mean, given the weak UK economy, I mean, you guys see that kind of continuing and then further on that, if you guys could break out by country kind of what you're seeing.

J. Patrick Gallagher, Jr.

Well, most of our global brokerage business is in the UK and in Australia. We do have some brokerage business, of course, in Canada and Bermuda but the lion's share of it is in the UK and Australia and both those markets are performing in that high single-digit area and we think that'll continue.

Doug Howell

Yes, we're having some really good success with hiring teams, especially in (heat field) right now but I think there's an appetite to join our operations over there in the UK and so we're doing a pretty good job of picking up some nice producers.

J. Patrick Gallagher, Jr.

I think that there's sort of a feeling, at least when I visit the offices in the UK, that there's somebody fresh in the marketplace. We're not positioning ourselves as a Bluefin or Towergate roll-up company. We're positioning ourselves to do in the UK what we did in the United States, bolting on smaller acquisitions, giving people a career path, trying to recruit the best producers in the cities that we're in.

In Australia, we're very strong in Perth and Sidney, lots of opportunities to look in Melbourne and Brisbane for acquisitions as well as in Sidney and Perth. So I think that in both countries, we're kind of looked at as a fresh face in the marketplace.

John Campbell – Stevens

OK, great. Thanks for taking our questions.

J. Patrick Gallagher, Jr.

You bet. Have a great day.

Operator

Our next question is coming from the line of (Chris Lakim) with William Blair. Please state your question.

(Chris Lakim) – William Blair

Hi, good morning. Just a quick follow-up on the clean energy side. I saw that Doug mentioned the volatility over the next two quarters versus the run rate right now. Is that a product of the investments going on or is there some seasonality in the cash flows on the clean energy side that we should be aware of?

Doug Howell

There is seasonality in the cash flow and particularly the reason why the fourth quarter is lower than our expectation of the third quarter is that we're not going to be running one of our plants in the fourth quarter as we look at it right now. As we take that down for further testing for maintenance and so now I say that now but if we have an extremely warm fourth quarter, maybe we won't be taking that plant down.

And it's really not our decision to take the plant down. It's the utility's decision but that's our best view right now. So I would say just normal operational running of the plants that we just don't think it's going to be quite as strong in the fourth quarter right now.

(Chris Lakim) – William Blair

OK, great, thanks, and then on the acquisitions side, I saw you guys did the debt placement in July. Is that sort of an additional option on the table in terms of deal financing? How do you sort of weigh that versus additional shares and cash going forward.

J. Patrick Gallagher, Jr.

Well, we thought it was a good opportunity to pull down $50 million. We had a maturity opening in eight years from now that we've filled in with the $50 million and we just saw it as a – our acquisition pipeline is so strong. Just taking that extra pill at $50 million seemed to make sense.

(Chris Lakim) – William Blair

OK, great, thanks a lot, appreciate it.

Operator

Our next question is a follow-up from the line of Brian DiRubbio with YCAP Management Please state your question.

Brian DiRubbio – YCAP Management

Thanks. Just one final question Pat, with your comments about worker's comp and property lines being sort of the focus of price increases, do you see any opportunity for unbundling to occur with claims management?

J. Patrick Gallagher, Jr.

Any time the market firms at all, Brian, it gives us opportunity for that. For instance, a lot of our captive activity – we have an operation we call (Rtex) Captive Management seeing a lot more success. A number of our school and public entity pools are adding members again. So any time there's some price move, people are interested in the alternative market and we get the benefit of that.

Now 4% and 5% aren't going to drive the kind of jump that we see in the alternative market when the market slams up 100% and there's no coverage available but it's a – any time there's movement to the positive, people are very interested in alternatives and the benefit of being part of Gallagher, frankly, is that we've got great expertise in that area and we've built terrific alternatives.

Brian DiRubbio – YCAP Management

Great. Thanks a lot, guys.

Operator

There are no further questions at this time. I would now like to turn the floor over to Mr. Gallagher for closing remarks.

J. Patrick Gallagher, Jr.

Thank you, (Claudia). Thanks, everybody, for being with us this morning. We appreciate it. We know there's a number of other calls going on and I think our company has performed across all divisions extremely well for the last two quarters. As Doug mentioned in his remarks that the economy continues to show improvement and rates continue to move up even slightly, we believe we're on track for a great year.

The team has really turned on. We are winning. We're having fun building a world-class company and you know what? All of around here are excited because we believe we're just getting started. Thanks for being with us and have a great day.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time.

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