Feb 1, 2012
Executives
J. Patrick Gallagher, Jr.
- Chairman, President and CEO Doug Howell - Corporate VP and CFO Scott Hudson - Corporate VP, President, and CEO, Gallagher Bassett Services, Inc.
Analysts
Yaron Kinar - Deutsche Bank Adam Klauber - William Blair Arash Soleimani - Stifel Nicolaus Bob Glasspiegel - Langen McAlenney Brian DiRubbio - Y/CAP Management Dan Farrell - Sterne Agee Ray Iardella - Macquarie Mark Hughes - SunTrust Robinson Humphrey Scott Heleniak - RBC Capital Markets
Operator
Good morning and welcome to Arthur J. Gallagher and Company Fourth Quarter 2011 Earnings Conference Call.
Participants have been placed on a listen-only mode. (Operator Instructions) As a reminder today’s call is being recorded.
If you have any objection 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 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 & Company. Mr.
Gallagher, you may begin.
J. Patrick Gallagher, Jr.
Thank you, Rob, and thank you everyone for joining us this morning in our fourth quarter conference call. I appreciate you been here.
We are sitting here in beautiful 45 degree weather in Chicago, a year ago we were settled under 22 inches of snow. 2011 was a great year, and we finished we think was a very, very strong fourth quarter.
At the beginning of 2011 things still look to be really tough out there, but during the year we continue to build significant momentum which culminated in a very strong finish to the year. I’m proud of our team’s performance in the quarter and last year, and I want to sight some key highlights for the group this morning.
All divisions, all of our operating divisions across the entire globe contributed to our profit growth this year. Brokerage revenue on an adjusted basis was up 22%, we were back with positive organic growth at 5.2% which is really, really good work, I’m pleased with those results.
Remember 2010, our organic revenues were down 2%, so a 7% turnaround is great work by the team. Adjusted EBITDAC up 27%, if you look at that organic growth there is a very simple calculation.
We essentially had flat rates for the fourth quarter, we had a flat economy, zero really declined from the economy and the organic was made up of new business less our loss business. Our Risk Management segment adjusted revenues up 13%; our organic growth was very strong at 12.6% which Doug will make some comments on in a moment.
Very good work by the team, adjusted EBITDAC in the Risk Management segment up 22%. During the year our merger and acquisition activity, we had a record year, we purchased $277 million of additional revenue.
During the year we did our largest acquisition ever which was Heath in the UK which is integrating very well. We finished in the Risk Management segment integrating the GAB acquisition all those clients are now up and operating on our claim system and our client retention is very strong.
2011 adjusted EBITDAC with our Brokerage and Risk Management segments combined, we broke through $400 million market $428 million. 2011 supplemental commissions and contingents came at over $94 million which is outstanding work by our field management team.
Business was strong throughout the year, but especially strong in the fourth quarter. We finished the year with 12,000 colleagues and over $2 billion of revenue.
During the second half of 2011 we finished 15 more clean coal plant that will contribute significantly to after-tax income in 2012 and beyond. Total return to shareholders in 2011 was 20% and if you go back to 11/08, what we view as the start of the great recession, total shareholder return is 70% including our dividend and our Board of Directors increased our quarterly dividend to 3% at the last meeting.
All and all just a great year, I’m very proud of our team. I think everyone contributed from all over the globe.
Let me highlight three particular points, so I’d like to add some color to it, and those will be the property casualty rate environment, our economy and mergers and acquisitions. And I will start with the PC rates.
The Council of Insurance Agents & Brokers survey came out last week. It shows small accounts up 3.1%, medium accounts cost going up about 3.5% and larger accounts about 1.8% which averages out to 2.8% and that’s pretty much exactly what we are seeing.
There are some exceptions, catastrophe exposed properties especially the big wind exposed accounts are virtually in a hard market. In some instances we have seen a 100% rate increases.
Property in general across the Board is increasing more than the 3%, work comp as a line of coverage needs significant rate adjustments especially in California, Illinois and New York. Management liability, directors, officers, etcetera in particular in the middle market is showing some firming.
I think it's fair to say in general, carriers are resisting decreases. Now having said that I’m declaring a hard market here, a great account with a good loss record one that hasn’t shopped every year is likely to receive a very competitive proposal.
And secondly, on the economy, I’m not an economist but my own anecdotal evidence as I travel our network shows that our clients’ businesses are improving. I’ve talked to a number of clients across many of our offices, whether it’s a small contractor or a medium-sized manufacturer, their businesses appear to be improving and we are actually seeing some additional premium audits.
Finally, in mergers and acquisitions, as I said already, 2011 was a great year. Our pipeline remains very, very full.
It does look like capital gains tax rates may reset in 2013, so we think we’re going to see a continued strong interest in joining our firm. I believe 2012 has all the potential to be even a stronger year than 2011.
As I’ve already said, rate reductions appear to be over, organic growth is back after three years of reductions, the economy does appear to be improving and our merger and acquisition pipeline is strong. But, most importantly, our team is incredibly energized.
We’re winning way more than we’re losing. We’re focused.
We’re turned on and the team is producing. We have a strong new business culture.
Everyone, from myself through the entire organization, is involved in serving our existing clients and producing new accounts. We all realized nothing happens until someone rings the cash register.
Doug?
Doug Howell
Thanks, Pat and good morning, everyone. Hey, it’s really nice to wrap up 2011 by delivering excellent financial results.
Today, I’m going to flip through the earnings release like I do and I’ll give you some flavor on a few items and help you with some of your thinking as it comes to building your 2012 model. Okay.
On the first page, looking at the Brokerage segment, the big item is the Heath Lambert integration cost of $0.04 per share, which is in line with what we were expecting. Looking forward to 2012, we anticipate about $0.08 of integration cost for the year in 2012 and then about $0.04 in 2013.
Staying on the first page but moving down to Risk Management, as we forecasted in the third quarter call, we had about $0.01 of integration cost related to wrapping up GAB Robins. We’re done and we don’t expect any integration cost in 2012.
I’ll also echo what Pat said earlier. The GAB Robins deal is really turned out to be a nice deal for us and we have lots of positive thoughts about Heath going forward too.
Flipping to the organic revenue table on the second page and for the Brokerage segment, as you model 2012, please apply your organic growth pick to only the commission and fee line. Then please think about supplementals and contingents separate from core commissions and fees.
At this point in the pricing cycle, we’re not expecting supplemental and contingents to go up in 2012. Holding them flat in 2011 should be viewed as good work in this environment.
Now flip to page three to the Brokerage segment margin table. Posting margin expansion this quarter is consistent to what we’ve been telling you.
If organic is over 3%, you’ll see a bit of margin expansion assuming a low inflationary environment. But below 3%, don’t expect margin expansion, also one other important modeling point for 2012.
Because our first quarter is seasonally our smallest revenue quarter and Heath Lambert is also seasonally smallest in the first quarter, please do not expect any margin expansion in the first quarter of 2012. Moving to the bottom of page three to Risk Management organic table, we’ve added a line at the bottom of that table that shows you organic without both the performance bonus revenues and without the New Zealand earthquake claim settlement revenues.
Effectively, that is organic for core fees. We think that’s a better number to focus on because performance bonus revenues can be lumpy and we’ve been discussing that the New Zealand earthquake claims will begin to dry up later in 2012.
So, when modeling 2012 revenues for Risk Management, apply your organic growth pick to the fee line only. Next, assume between 2 and $4 million of performance bonus revenues per quarter and finally grade down the New Zealand earthquake revenues from about 4 million in the first quarter to about 1 million in the fourth quarter and that should get you close.
Turn to page four. I want to spend a little time on how we are viewing margins for the Risk Management segment.
You’ve heard us say before that we are targeting adjusted EBITDAC margins between 15 and 16%. We’ve essentially hit the upper end of that range for the last two years and we hope to hit that again here in 2012.
Let me explain why you shouldn’t model margin expansion in this segment in 2012. First, remember the business model.
As claim counts grow, we need to hire more adjusters. Accordingly, as a general rule of thumb, 20 to 25% of incremental revenues hit the bottom line.
So, if you do the math, you’ll see that organic growth before 5% would not move overall margins much at all, especially if you factor in a bit of inflation. Even organic growth between 5 and 10% doesn’t have that much impact on margins again, if you contemplate a little bit of inflation.
Second, also contributing to a flattish margin in 2012 is our Risk Management team is planning to invest about $5 million during 2012 to improve our service offering to our clients. Two examples include developing predictive models focused on medical management and fraud detection.
Another example is building some new litigation management and return to work tools. We think these client-centric investments will help us improve our retentions and attract new customers over the long haul.
Let’s flip to page five for a minute and then I’ll come back to the Corporate segment on page four. On page five, we provide a detailed update on all of our clean energy investments.
In a nutshell, we successfully built and placed in service all 15 of the 2011 era clean coal plants in the fourth quarter. Five of the new plants are burning coal under long-term contracts.
We’ve got an agreement in principle for another plant, and we’re making headway on deploying the remaining nine 2011 Era Plants and the remaining two 2009 Era Plants. It will take most of 2012 to get most of the other plants deployed, but progress is encouraging.
Also, it’s important to note that the quarterly earnings estimates we provide on page five are ultimate run rate amounts. There will be some operational tweaking that happens during the first half of this year, so we don’t expect to hit those numbers immediately out of the gate here in 2012.
Also near the bottom of page five, we’ve added a paragraph about forecasted earnings from our 42% investment in Chem-Mod. Recall that Chem-Mod is the entity that owns the technology recipe used in the clean coal plants that we build and is also being used in plants built by other unrelated parties.
As of today, we believe we could earn 2 to $2.5 million of net after-tax earnings per quarter from Chem-Mod. Looking forward, as we deploy our remaining plants into long-term contracts and other unrelated licensees do the same with their plants, we expect our earnings from Chem-Mod to grow, but we are not in a position at this time to make an estimate.
All right, with that on the clean energy, let’s turn back to page four and look at the Corporate segment. We believe that the best way to view the Corporate segment is the shortcut table we put on page four.
So looking back, as for the fourth quarter, the interest line, clean energy line and acquisition line came right in where we forecasted in our October conference call. The Corporate line beat by $0.02 and the legacy investment line beat by $0.01.
The beat on both of those lines was because we favorably resolved some tax positions in the fourth quarter. So you should view that beat as one-timers.
Looking forward to 2012, here’s what you should model for the Corporate segment. And the numbers I’m going to give you here are net of tax, so the right column in that table.
Assume about $7 million of interest and banking cost per quarter, assume about 1 million of acquisition cost per quarter, assume about 2.5 million of Corporate cost per quarter. Now, assume about 9 million of clean energy earnings in the first quarter and grade that up to about 17 million of earnings in the fourth quarter.
And then I wouldn’t assume anything for legacy investments at this point. Okay, when you get done with that, back check what you end up with.
You’ll end up with a Corporate segment that should about breakeven in the first quarter, show about $0.02 of earnings in the second quarter, $0.04 of earnings in the third and $0.06 of earnings in the fourth. Clearly, a lot can happen to cause those numbers to change, but that’s our best guess based on what we know now.
All right, for my last comment, just a reminder that our first quarter is seasonally our smallest. And once again, I really encourage you to convert your models to closely follow our financial supplement that we post on our website.
When you do, please make sure you’re using the adjusted numbers as your baseline for projecting future results. There’s not that much difference between reported and adjusted in the first quarter of 2011, but there are significant differences in the last three quarters.
All right, those are my comments. The team did obviously a great job closing on 2011.
I’m looking forward to 2012. Back to you, Pat.
J. Patrick Gallagher, Jr.
Thank you, Doug. Rob, we’re ready for questions and answers.
Hopefully some answers.
Operator
Thank you. The call is now open for questions.
(Operator Instructions) Our first question is coming from Yaron Kinar for Deutsche Bank. Please proceed with your question.
Yaron Kinar - Deutsche Bank
I have a question or maybe the first question would be on the P&C markets and exposures, listening to a lot of the underwriters, it seems like they’re expecting additional improvements and we’re already at roughly 2, 3% rate improvement. I think, Pat, you had mentioned in the past that you are expecting kind of very slow and modest but longer term improvement in this cycle.
Do you still see that as the case and if rates actually do improve more than, I think the 2, 3% rate improvement that we’re currently seeing, do you think that’s going to start hurting your clients’ ability to buy insurance?
J. Patrick Gallagher, Jr.
Yes, Yaron, I think you raised a great question there. What we’re seeing at the present time is in fact that the 3s, 4s, 5s, 6% increases were accounts that have hurt underwriters.
You can see more than that. But in fact where the market is hard, as I mentioned in catastrophe-exposed, wind-exposed property on any of the coasts, we’re seeing exactly what we predicted.
If the rates are up 100%, their drop-in coverage is 50%. I mean, we do not think that our clients in this economic environment can take a spike recovery that we saw in 2001.
And we are, in fact, seeing kind of a slow steady increase in that 3 to 5% area and it’s interesting. I’ve been to a number of our production meetings across the country.
There have been times when carriers have asked for an increase. We’ve said this doesn’t seem warranted.
We’ve gone out to the market and in fact found the coverage back with the originating carrier. So rates are moving up slowly, but they are steady.
It’s across virtually all geographies and most classes of business with some additional cost for property and some of those other areas I mentioned in my prepared remarks, but we don’t think that the economy and the clients can take a big spike.
Yaron Kinar - Deutsche Bank
Okay. And with that in mind, looking forward, should we expect like what mid single-digit organic growth in Brokerage now that you’re also facing a little bit of more difficult prior year comp as opposed to in the last couple of years?
J. Patrick Gallagher, Jr.
Well, let me put it this way, yes, if I get a flat economy and flat rates, you see exactly what the organic was in the fourth quarter. We’re a new business machine.
That’s what we do every day. Every single one of us gets up every day and thinks about taking care of the clients we’ve got and get new ones.
If I don’t have the headwinds of a bad economy and think about that 2008, 2009, many of our businesses lost 50% of their business. And If I don’t have a 5 to 6 to 7% rate decline, yes, I will maintain organic growth.
Yaron Kinar - Deutsche Bank
Okay. And then, maybe one final question again on Brokerage.
You talked in the past about how anything above 2% organic growth and you should see some modest margin improvement or more. And, I guess I was just a little bit surprised that with 5% organic growth, margins only improved like 50 basis points.
Doug Howell
Yaron, this is Doug. I think actually we improved basis points in the fourth quarter 140 basis points if you exclude the Heath Lambert acquisition.
We improved 70 basis points, if you include Heath Lambert which we know has lower margins. A point, a point and a half with 5% organic growth, that hangs together pretty well.
Yaron Kinar - Deutsche Bank
Okay.
J. Patrick Gallagher, Jr.
Also, let’s get this straight. What Doug has been saying to the street forever is 3% organic, no margin expansion.
Yaron Kinar - Deutsche Bank
Right.
J. Patrick Gallagher, Jr.
Not, two.
Yaron Kinar - Deutsche Bank
Okay. Yes, and the Heath Lambert, I did not factor that in, that’s a good point.
Well, thank you very much.
Doug Howell
Thank you.
Operator
Our next question is coming from Adam Klauber of William Blair. Please state your question.
Adam Klauber - William Blair
Again, great growth. So, in the first half, what was the first half of 2011, what was the headwind from written exposure?
J. Patrick Gallagher, Jr.
Boy, all right.
Doug Howell
I can pull that out.
J. Patrick Gallagher, Jr.
Throw us another question and Doug will dig.
Adam Klauber - William Blair
Sure. 5% net new.
I mean, that’s great. Any big wins in there or is that just a lot of (inaudible)?
J. Patrick Gallagher, Jr.
Singles and doubles across the whole network.
Adam Klauber - William Blair
Great.
J. Patrick Gallagher, Jr.
And I’m very pleased. I think what we’re seeing, Adam, is that we’ve talked a long time about our niche focus, understanding our clients’ business, being out talking about our capabilities.
Those things are really paying off.
Adam Klauber - William Blair
I’d have to imagine that RPS was doing really well in this environment. Did that help growth in this quarter or is that something we’ll see more in 2012 than 2011?
J. Patrick Gallagher, Jr.
Helps very nicely in the quarter.
Adam Klauber - William Blair
Okay.
Doug Howell
Adam, the answer to your question is between exposure units and renewal, we were seeing negative 3, negative 2, if you combine those two numbers together and we’re flattish now between that. And in the past, we’ve said it’s about 50/50.
So, I’d say that’s probably a pretty good guess for the first half.
Adam Klauber - William Blair
Okay. And then Heath Lambert, obviously that’s not included in organic, but how is that doing from an organic standpoint?
J. Patrick Gallagher, Jr.
Right now it’s flattish, but it’s hanging together very, very well. The integration is going well.
It’s a difficult integration. We probably moved 400 people’s desks in London alone, just where they sit, who they sit with, where they’re located, what have you.
So, it’s been a very active six months of integration. I think we’ve done a terrific job of making sure those people feel like a welcome part of the family.
And we’ve worked very, very hard on that. I think things are settling in and we’ll start to see some new business production.
We’re also seeing some teams of people and other acquisition opportunities emanating out of that.
Adam Klauber - William Blair
Great. And one last question.
Other expense growth in the Brokerage was materially less than revenue growth, that’s great to see. Anything unusual in there or can you keep other expense growth at a relatively low rate?
Doug Howell
In the fourth quarter, we did tighten our belts on some travel. In the fourth quarter, we saw an opportunity to maybe pull back a little bit on that compared to our first three quarters run rate.
And the team did an excellent job of really targeting where they need to go and who they need to see. And we also had some pretty favorable business insurance experience in the quarter too.
Operator
Our next question is coming from Arash Soleimani of Stifel Nicolaus. Please state your question.
Arash Soleimani - Stifel Nicolaus
Just a couple of quick questions. Just looking back, it looks like natural gas usage has been increasing while coal usage has been decreasing.
Just looking forward into the future, I’m just trying to get an idea of how big of a risk factor do you think that is when it comes to the clean coal tax credits going forward?
Doug Howell
Good question. Well, there’s a lot of different risks that affect our clean coal investments, so one of them is that coal could be displaced at a plant with natural gas.
In our case, I believe that the plants that were put in, the utilities that were putting these plants in have a good idea about whether they are going to immediately replace those plants with natural gas and probably would not be putting these plants in place if they have that expectation. That’s the first thing.
Second thing, if they do displace coal with natural gas, those plants are movable. And we would find another utility to put them in or hope to find another utility to put them in and resume production.
So it could take us out of service for a year on them. But at this point right now, we don’t see that the current ones that we’ve got in place are high exposure to displace sort of natural gas.
Arash Soleimani - Stifel Nicolaus
Right. So the numbers that you had provided on page five for the clean coal, are those best-case scenario or the quarterly after-tax?
Doug Howell
I think that the reasonable run rate expectations based on the plants that we know based on their historical production rates; it’s a nice down-the-middle number.
Arash Soleimani - Stifel Nicolaus
Down the middle. Okay.
And then my next question is just on to Risk Management. I guess, right now I think CIAB had workers’ comp rates around 7%, market scale had them around 3%.
How high do those really need to get for you to see an uptick in business in Risk Management?
J. Patrick Gallagher, Jr.
Well, it’s a great question. I really don’t know the answer to that.
I think that any time rates begin to run in the workers’ comp world, we see more people enter into self-insurance and the alternative market. And that’s been historical fact for the last 40 years.
Do I have a specific number like 5% and then it’s Katy bar the door, no. But what ends up happening in the work comp line is, when it goes bad, it seems to get really bad.
And those rates tend to not run three, fours, and fives, but you tend to see customers really being pushed hard and that’s when they will jump to the alternative market. So any rate increase bodes well for Gallagher Bassett.
Arash Soleimani - Stifel Nicolaus
Great. Okay.
And then, I guess, the main reason for the lack, I guess, the reason it’s more difficult to see margin expansion within Risk Management if that’s what you were saying before, having to hire more adjusters rather than Brokerage, you don’t have to hire necessarily more producers.
J. Patrick Gallagher, Jr.
Yes, exactly. It’s a very labor-intensive business.
With every dollar revenue comes claims work.
Operator
Our next question is from Bob Glasspiegel with Langen McAlenney. Please state your question.
Bob Glasspiegel - Langen McAlenney
I guess three areas of questions. On your Risk Management, do we look at Q4 as a reasonable run rate ex the extra Australia, New Zealand claims or is there something else we should be considering thinking about the quarter because that was certainly a mini breakout relative to several years of results there?
Doug Howell
Yes. I think, Bob if maybe a penny’s worth I mean, by the time you look at page 3 of 14 and you see the adjusted in fees relating to international disasters, it’s not all that rich in margin.
The additional performance bonus fees, that’s heavy margin business. So by the time you factor it out yes, I’d say that the Risk Management was a little hot this quarter.
Bob Glasspiegel - Langen McAlenney
Okay. On the tax line, if I use sorry, about this, on page six, if I divide the 17 million federal statutory rate into my calculation of pre-tax that gets to about a 36% rate before we get to the good guys, was that that sort of penny in Brokerage that was a little bit lower that you sort of backed out or because you’re sort of saying 38 to 40 is a normal stat rate.
Doug Howell
Bob, I’d have to retrace your math to see how you’ve gotten there, but that number is intended to be somewhere around 38% of the number, so.
Bob Glasspiegel - Langen McAlenney
Okay. My model says that you had 47 million of aggregate pre-tax earnings.
Actually I can’t find complete pre-tax company-wide model in all your great releases.
Doug Howell
I’ll work on it if you want to go to the next question.
Bob Glasspiegel - Langen McAlenney
And then, we got the 1.7 million, 3.8 of other items. The 1.7 is prior year and the 3.8, other net what’s in that?
Doug Howell
The other net, we resolved some tax positions and because of the mix of our business in certain states in the U.S. as a result of our clean coal production efforts and some other corporate realignments, it reduced our state taxes.
Bob Glasspiegel - Langen McAlenney
Okay. And that 5.5 million isn’t broken out as a good guy on the front page, right, because you only do that for Brokerage and Risk Management?
Doug Howell
Pieces of those numbers are taken out. If that was released through the Brokerage or Risk Management segment then we chisel that out and we put it out as separate line item.
Bob Glasspiegel - Langen McAlenney
So the $0.02 isolated up, but there’s another $0.03 in sort of Corporate I guess?
Doug Howell
Yes, that’s what I said. And if you look at the Corporate segment, there was $0.02 of beat in the Corporate line and $0.01 of beat in the legacy investment line and that comprises the difference.
Bob Glasspiegel - Langen McAlenney
Okay. Last question, is your run rate for financial services for Q4, is that sort of a quarterly run rate into 2013 or is there some seasonality in the pace of that?
Doug Howell
Say your question again, Bob, because you said ‘11 and then you went to ‘13, I thought.
Bob Glasspiegel - Langen McAlenney
No, you said 2, 4, 6 your break-even 2, 4, 6 as sort of the financial services corporate trend line for 2012, so as we go into 2013, is that $0.06 quarterly run rate a good one or is there seasonality in that $0.06?
Doug Howell
I’m not giving any guidance on ‘13 yet, but those numbers that I gave you have no new plans being signed up under long-term contracts.
Bob Glasspiegel - Langen McAlenney
Okay, so it could even go higher than that in future years or lower, I mean, compared to.
Doug Howell
Yes. It could go either way, Bob.
Operator
Our next question is from Brian DiRubbio of Y/CAP Management. Please state your question.
Brian DiRubbio - Y/CAP Management
A couple of questions for you, on Risk Management, Pat, how much of that was from increased claims activity versus new business that you guys brought in?
J. Patrick Gallagher, Jr.
I’m going to throw this to Scott Hudson.
Brian DiRubbio - Y/CAP Management
Okay.
Scott Hudson
A significant percent was related to the claim increases, I mean, we were seeing through the fourth quarter somewhere in the neighborhood of about 2 plus percentage points just in claim count increases. And we’re also seeing marginal increases in rates with existing clients somewhere in the neighborhood of 2 to 2.5%.
So, a lot of that is on the existing book. If you think about the new business, it takes a while that to take hold.
So, even though it was coming throughout the year, we had a good new business year, we won’t see the majority of the effects of that until this coming year.
Brian DiRubbio - Y/CAP Management
Got you. And you have to forgive me.
I’m finding a little bit of a head cold this morning. The 2% claims increases, is that the biggest that you’ve seen in a while, because I mean claims have been sort of flat to down in that business?
Scott Hudson
Well, claim counts were going down through 2008, ‘09, ‘10.
Brian DiRubbio - Y/CAP Management
Yes. So is this the inflection path that you’ve been sort of looking for?
Scott Hudson
Yes.
Brian DiRubbio - Y/CAP Management
Okay.
Doug Howell
And Brian that hangs together. The business insurance came out this week and talk about more frequency in the workers comp line.
J. Patrick Gallagher, Jr.
It’s another one of my anecdotal areas where I look at the economy, Brian.
Brian DiRubbio - Y/CAP Management
Yes.
J. Patrick Gallagher, Jr.
Because one of the big reasons for claim-count drops was the fact that you’re going from three shifts to two to one.
Brian DiRubbio - Y/CAP Management
Got you. That makes a lot of sense.
And then, Doug, as I was going through the release, are we down more comfortable with, I guess, Heath Lamberts contributing to lower overall tax rate in Brokerage?
Doug Howell
It will, yes. So, if you go to top of 6 of 14, we’ve actually moved it down a full percentage point.
We used to give a range of 39 to 41 for that segment. We’re down to 38 to 40.
And as that business starts to contribute more, it will have the impact of bringing the rate down slightly even more maybe in ‘13 or ‘14.
Brian DiRubbio - Y/CAP Management
Got you. So maybe longer out, we can think maybe 37 to 39?
Doug Howell
I’m not willing to go there yet, but you’re welcome to think what you want.
Brian DiRubbio - Y/CAP Management
Got you. And just finally, was there any FX headwinds for you guys in the quarter with the dollar strengthening?
Doug Howell
Nothing of significance.
Operator
Our next question is from Dan Farrell, Sterne Agee. Please state your question.
Dan Farrell - Sterne Agee
Could you just comment on current trends in the employee benefits business and if organic growth is materially different from the overall organic in Brokerage segment and then also just your outlook for that area going forward?
J. Patrick Gallagher, Jr.
Yes, we’re very bullish on the benefits business. Our benefits business has had a higher organic than the PC business even including in the fourth quarter.
I’ve said many times that the new law that we’re all facing now under the healthcare regs is providing us with tremendous amounts of additional work. Our clients are now having to face up to the fact that these regulations are coming into being.
It’s I think putting tremendous pressure on the smaller agents and brokers out there which is helping us with our mergers and acquisitions. And underlying costs in health and welfare accounts are up.
So, our organic there is a little bit stronger than the PC business.
Dan Farrell - Sterne Agee
Okay, great. Thanks.
And then, just another question, just on the clean energy. Doug, when you guys are coming up with your estimates for what these can generate, I’m assuming you have some assumptions for what you think coal price will be versus the other commodities.
And is there any sensitivity that you guys do around the fluctuations? And then, any sort of ranges that we can think about tracking ourselves from the outside looking in?
Doug Howell
There’s two things to think about. Longer term, tax credits can go away if coal prices get too high compared to a reference price.
So, there is a phase out. We’re well below that number at this point.
It’s not a real easy number to track and at some point, I’ll have to figure out a way to be able to provide you guys that information. So, you can just monitor, it’s not like you can pick up a Wall Street Journal and find the reference price.
So there is that sensitivity. But really that doesn’t impact the production of the coal.
That’s a risk for the credit to go away. Do you have a second part of the question?
Dan Farrell - Sterne Agee
No. I think that essentially hit it.
Doug Howell
Yes. I think right now, we believe coal prices are well below any type of phase-out level at this point.
And so we think that we should have a clear site to produce over the next few years.
Operator
Our next question is from the line of Ray Iardella with Macquarie Bank. Please proceed with your question.
Ray Iardella - Macquarie
Quick question, I guess, on the M&A front. I know you guys had mentioned in your prepared remarks that 2012 could be a pretty active year from an M&A standpoint.
And it already seems like you guys are off to a good start, but just curious, I mean, how much cash do you think you have available to do acquisitions in 2012?
Doug Howell
Well, we think that now that we’ve got significant amounts of tax credits coming in, also we think a pretty good proxy for that is half of our reported EBITDA is what we generate. Of course, it could be used for acquisitions.
Maybe 20% is better number.
Ray Iardella - Macquarie
Okay. And then just one other quick question, looking at your balance sheet, it looked like AOCI declined a little bit.
I mean, is there something maybe pension-related? I know you said FX wasn’t a big, big deal in the quarter, and maybe can you guys just remind us about your pension plan and kind of your assumptions there, that would be useful.
Doug Howell
Yes, it’s great. Good question.
And yes, we did have, if you look at the other comprehensive income line in our balance sheet, it’s a negative $47 million. 15 of it relates to FX and the balance of it relates to underfunded pension liability.
The reason why that changed and this is going to impact probably the rest of the world too, is the discount rate assumption. We move down from 5.5% down to 4.5 and that produced basically an underfunded pension by 30 million, which is really kind of peanuts in our environment here.
We froze that plan in 2005, which in retrospect looks like a good move, but that’s the difference that you’re seeing there, Ray.
Ray Iardella - Macquarie
Okay, great. And then return assumptions on the assets.
I mean, did that change year-over-year, or is that something you guys are keeping consistent?
Doug Howell
Not dramatically. The recovery of the equity markets probably took a little pressure off of that line.
The number is 7.5% is our return expectation and I think that’s pretty well in the middle point of the range for what people will be using, again, because of the equity balance in the portfolio.
Operator
(Operator Instructions) Our next question is from Mark Hughes of SunTrust Robinson. Please state your question.
Mark Hughes - SunTrust Robinson Humphrey
Anyway you can shape up for us, perhaps, the other opportunities within the clean coal technology. I think you had talked about, you expect maybe the Chem-Mod to make more of a contribution, but you can’t shape it up right now.
Can you give us a sense of the magnitude of the business that you are pursuing; maybe what’s your historical win rate has been to something to shape it up for us a little better?
Doug Howell
You know, Mark, I think that anything that I gave you on that right now would be subject to such a wide range of possibilities. I’d rather not do it now.
I think I can give you a better answer in our April call. So, I think that I’d rather just wait to see.
We’re a little downstream on that because Chem-Mod, while we managed that company here and that’s why we consolidated even though it’s only 42% owned, the other third-party licensees of that, they report to us on a lag basis and they’re not all that forthcoming in how their pipeline looks because to a certain extent we compete with them because we have other plans that we’re going to put in place. So I really can’t give that to you now until April but we have some cautious optimism on that.
Mark Hughes - SunTrust Robinson Humphrey
Okay. Do you have a number for cash from ops for the full-year?
Doug Howell
Cash generated from operations?
Mark Hughes - SunTrust Robinson Humphrey
Yes, exactly.
Doug Howell
Let me see if I can dig that out. Do you have another question?
Mark Hughes - SunTrust Robinson Humphrey
No. I think that was it.
J. Patrick Gallagher, Jr.
Okay. We’ll dig for that answer and Rob; let’s move on to the next question.
Operator
Our last question is from Scott Heleniak of RBC Capital Markets. Please state your question.
Scott Heleniak - RBC Capital Markets
First question I have was on M&A. Obviously; the entire sector there’s been a lot of consolidation going on.
And I’m just wondering if you’re seeing any newer players in there, banks and private equity and some of the other guys that haven’t been as active coming back in. And if so, what is that doing to multiples in general that are paid for deals?
Are you seeing any kind of big move and so, I would think that the multiple’s obviously going up a little bit?
J. Patrick Gallagher, Jr.
No, actually we’re not seeing a lot of multiple move. You’ve got our usual competitors have a very interesting kind of market out there when you look at M&A.
As I said in my remarks, there is 18,000 agents and brokers or some number like that. We get that number from Hales & Associates in the United States alone.
So, you got to at least to have doubled that globally and we’re active in the acquisition world globally. And most of these businesses are run by baby boomers.
There is probably five very active acquirers and there are others as well. There is some private equity activity, very little activity on the side of the banks with maybe one exception with Wells.
So, really what you’ve got is a huge supply of interested parties. I don’t want to diminish the amount of work this takes.
We’ve got people out working hard every single day and every deal we do, even if it’s a 3 or $4 million deal, is in fact the marriage that’s taken a lot of courting to get it done. So, our people are working very, very hard.
Having said that, what’s interesting about the process is the five main acquirers, we do each of us have very unique personalities as companies and through the process we generally get to a point where that seller has decided where he or she wants to land. And we’re very lucky and very pleased with those people that have decided to join our company.
But that has produced no shortage of opportunities for our competition. So, I look out over the next decade frankly and see just a tremendous amount of consolidation that’s going to occur, both because of the baby boomer age situation, as well as the fact that the buyers, the clients are demanding a higher level of expertise.
And it’s just no longer going to be I think a decade from now, just that relationship purchase is going to be far diminished from what it is today. So, lots and lots of opportunities and no, we’re not seeing a lot of expansion.
Scott Heleniak - RBC Capital Markets
Okay. The next question I had was you mentioned Risk Management, the increase in the claims accounted, up 2%.
And I was wondering, obviously you guys see a lot of the claims activity comes in. I was wondering was there any particular class where you’re seeing frequency uptick more so than others, obviously, workers’ comp in the market, we’ve kind of heard that anecdotally.
Is there anything any particular class where the trend is kind of going much higher?
J. Patrick Gallagher, Jr.
No. The major line of business that we adjust is workers’ compensation, but it is across all client types.
Scott Heleniak - RBC Capital Markets
Okay. And then, I was wondering the $4.6 million amortization write-down from the two acquisitions, I was wondering if you could touch on that a little bit more when those two acquisitions happen, and do you expect any additional write-downs for 2012 at all based on what you see here?
Doug Howell
Okay. First of all, let me go back to Mark’s question.
We had $283 million of cash generated from operations. And then now, let’s go to the 4.6 write-down was two or three deals that we took small impairment charges on their amortization, unamortized intangible.
Probably 3.5 to 4 million of it related to one particular broker that we bought. He is still with us.
He is a tremendous deliverer. They were selling a product, a life insurance product that was dependent on borrowing some leverage from banks.
That availability of lending has dried up for the time being. We expect that product to be back.
It’s a nice product used for estate planning. It’s not viatical.
So, we didn’t meet the recoverability test. So, I’d say this is as much an accounting write-down as it is, it’s not a bad deal.
He just has to wait for lending to become a little looser for him to get back into selling these products.
Scott Heleniak - RBC Capital Markets
Okay. That makes sense.
And then, my last question was just, Pat, you mentioned a comment about some of the clients that you’re seeing around the country feeling better about their businesses. Was there any particular sector, geography where that was true more so this quarter than last quarter?
And any change in customer buying behavior as a result?
J. Patrick Gallagher, Jr.
I think, probably, where I’ve had the most opportunity to interact with clients has been in the Midwest and I think the Midwest has sort of led the improvement. But, we are seeing improvement in a number of our businesses across all of our geographies.
The buying pattern that we are seeing that is important to note is that where we are seeing a spike in pricing and this is particularly a catastrophe-exposed property, clients are buying less cover and that’s what we’ve been saying all along. If this thing spikes as it did in 2001, if we have a violent rate increase environment, clients are going to buy less coverage.
Operator
And we have no further questions, Mr. Gallagher.
J. Patrick Gallagher, Jr.
All right. Then I’d like to make just a few quick wrap-up comments.
Again, thank you, everybody for being with us this morning. I want to just remind all the listeners that we’re very focused on four things strategically.
Number one, organic growth; number two, mergers and acquisitions; number three, productivity and quality; and finally, maintaining what we know is a very unique culture and I want to touch on each of those very briefly. As it relates to organic growth, every single office, every division, every person, everyday is taking care of clients and looking for new ones.
When it comes to mergers and acquisitions, I’ve already mentioned the fact that the pipeline is very full. Most of these are baby boomers, but more importantly, I think it’s the capabilities that we built as a company that are attracting people because they know once they joined Gallagher, they can actually grow their business significantly.
That pipeline is strong. As it relates to productivity and quality, if you go all the way back to 2008, which is essentially what we believe the beginning of the great recession, we’ve built our high quality service centers offshore and we’ve actually increased our margin in this very difficult economic time.
And fourthly, we worked very hard to maintain what we know is a unique culture. This company has something special.
It is the ball team. We’re together.
This culture keeps us together in good times and in tough times, and good times and bad times, we’ve stayed focus on those four strategies that we continue to believe will create growth for our shareholders. We’ve never wavered in that belief and that’s what we’re concentrating on as we go into 2012, which we believe we can build on the success of 2011 very well.
So, we’re looking forward to 2012. We appreciate your being with us this morning.
Thanks very much and have a great day. Thanks, Rob.
Operator
Thank you. This does conclude today’s conference call.
You may disconnect your lines at this time.