May 1, 2013
Executives
J. Patrick Gallagher - Executive Chairman, Chief Executive Officer and President Douglas K.
Howell - Chief Financial Officer James W. Durkin - President Scott R.
Hudson - President of Risk Management Services
Analysts
Eric J. Fraser - Goldman Sachs Group Inc., Research Division Gregory Locraft - Morgan Stanley, Research Division Raymond Iardella - Macquarie Research Brian DiRubbio - Y/Cap Management, LLC Brett Huff - Stephens Inc., Research Division Chris Leikhim Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division Mark D.
Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Operator
Good morning, and welcome to Arthur J. Gallagher & Company's First Quarter 2013 Earnings Conference Call.
[Operator Instructions] 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 & Company.
Mr. Gallagher, you may begin.
J. Patrick Gallagher
Thank you, Melissa. Good morning, everyone, and welcome to our first quarter call.
We appreciate you being with us this morning. Today, I'm joined by Doug Howell, our Chief Financial Officer, as well as the division heads that run our businesses across the world.
2013, as you saw last night's press release, is off to a good start. Last quarter, I mentioned that a number of our actions and efforts undertaken in 2012 should carry over nicely for us in 2013, and we're in fact seeing exactly that.
Brokerage adjusted revenue, up 19%; adjusted EBITDAC, up 28%; EPS, up 22%; margins, up 130 basis points and 4.8% organic growth, really good start in the Brokerage side. Risk Management as well.
Adjusted revenue, up 11%; adjusted EBITDAC, up 13%; earnings per share, up 11%; margins, up 30 basis points with 11% organic growth in the quarter. All of our divisions are contributing across all geographies.
All in all, a great start to the year. So let me add some color to these numbers, and then I'll start with mergers and acquisitions.
We did 4 transactions in the quarter, a little bit of a slowdown from the fourth quarter, which of course, is to be expected after the surge that we had in the fourth quarter of 2012. But I'll say, the reasons people join Gallagher have not changed one bit.
We offer our partners a deep expertise across all disciplines and the ability to operate in a culture that is team-based, focused on servicing clients and selling, just the type of environment that allows us to have 1 plus 1 equal 3, 4, 5 opportunity for our merger partners. Our partners all have choices.
As I do every quarter, I want to personally thank those who have joined us. We're honored to have you as part of our expanding team.
Our pipeline is very robust, and we do expect to have a solid merger and acquisition year. Let me turn to retail property/casualty.
The Council of Insurance Agents & Brokers survey reported that property/casualty rates continue to climb. Average increases in the first quarter for all accounts were reported to be about 5.2%, and we are seeing carriers asking for similar levels of increases and even more in worker's compensation, which in many states, is going to need substantially more rate to get back into a profitable position.
I'd remind you again, this is not a traditional hard market, but rather a continuation of carriers recognizing that in this environment, with no investment returns, they have to make money on underwriting. This is not a balance sheet-driven change.
Carriers are very aware of loss cost inflation and know that increases in their rates are necessary. We're not seeing discipline weaken here.
We continue to believe this is actually a better environment for our customers. All of us would rather help them work through 5% to 10% increases than have a huge leap in prices with significant cuts in coverage.
On the international side, our business had a strong quarter with organic growth approaching double digits. Our acquisitions are coming on board as expected, and as I've said before, the Heath platform is doing exactly what we hoped it would do.
This has given us a great platform to continue to do acquisitions. Our international expansion is very exciting, and it's a bright spot for the company.
Our wholesale business was very strong in the first quarter. Submissions are increasing as the rate environment continues to firm.
Our submissions are strong, and we are binding many of our quoted opportunities. On the benefits front, we are running hard.
The Affordable Health Care Act is keeping us busy with clients, prospects and mergers. In my opinion, many businesses in America are just waking up to the reality that this act is going in place in 2014 and frankly, they have failed to prepare.
Regulations are being issued. We expect thousands of pages of regulations, and clients need to react and they need help.
Our benefit merger and acquisition pipeline is particularly strong and growing as smaller brokers and consultants realize they need our expertise to help their clients deal with this new law. Simply put, the smaller broker consultant cannot keep up.
We have invested in software that helps our clients calculate the cost of changes and in training to help our professionals stay up-to-date and in a private exchange in partnership with liaison. This will help all of our clients with choice, and we know we'll see continued growth through 2013.
Our Risk Management segment, Gallagher Bassett Services, had a fantastic quarter. We had adjusted organic revenue growth of 11%.
Growth was strong in the U.S., U.K. and Australia.
Adjusted EBITDAC was up 13%. We're fully ramped up in South Australia, and new business is off to a good start globally.
We just returned from the RIMS conference, where Gallagher Bassett rolled out our most updated version of our analytics workbench. This product allows our clients to use our RISX-FACS system to spot trends and analyze data in almost an unlimited array of reports customized at the click of a button, all focused on helping our clients get better and better at managing their cost of risk.
We believe these upgrades put GB clearly at the forefront of data analytics in the property/casualty risk management world. So pulling it all together, our combined Brokerage and Risk Management segments, adjusted revenue up 16%, coming in at $606 million; adjusted EBITDAC up 24%, coming in at $108 million; EPS, up 19% to $0.32; and margins improved over 100 basis points.
If the economy holds up, if rates continue to trend up, I expect the rest of 2013 to be another outstanding year. Doug?
Douglas K. Howell
Thanks, Pat, and good morning, everyone. It's nice to be off to a good start, especially given that our first quarter is seasonally our smallest.
Let's start on the first page with Brokerage segment. First is the Heath Lambert integration cost.
We are still on track to wrap up the integration in the third quarter, so you'll see a couple of pennies of integration cost in the second quarter and then about $0.03 to $0.04 in the third quarter, most of which relates to the consolidation costs when we consolidate our London operations into new office space near Lloyd's. But then by the end of the third quarter, we'll be done with integrating Heath.
Moving slightly down to Risk Management. Recall last quarter, we broke out the start-up costs related to our new Australian client.
This quarter, the team hit their start-up targets, so you'll see we received one-time fees to partially compensate for our ramp-up cost. That was good work by the team.
Moving to Page 2, our Brokerage segment. In the organic growth table, they had an excellent organic growth quarter, up 4.8%.
We saw around 4% domestically and over 9%, internationally. On the lower half of Page 2, you'll see tables for our comp and operating expenses.
Please make sure you read the footnotes to those tables because there was some noise between the 2. The punchline is some of our 2012 U.K.
acquisitions run lower comp ratios and higher expense ratios. That said, regardless of the geography, when you turn to the top of Page 3, you'll see that we expanded EBITDAC margins by 130 basis points.
We're really pleased with that expansion here in our first quarter. Moving down to the middle of Page 3 to the Risk Management organic table.
Gallagher Bassett, you heard Pat say, had a terrific quarter, up 11%. But even without our new Australian client coming online, to be up nearly 7% organically shows acceleration in that business, even in an economy that isn't seeing much employment growth.
Turning to the middle of Page 4, you'll see that we also expanded margins in our Risk Management segment. Recall that we are targeting about 16 points of margin, so to be above that is really good work by the team, while they continue to make investments into product enhancements and client service improvements.
All right. Let's move to the bottom of Page 4 to the shortcut table for the Corporate segment.
In our last earnings call, in investor supplement, we forecasted a $0.04 to $0.07 loss for the first quarter. But we actually posted $0.02 of earnings.
Two reasons explain the difference. First, we were able to recognize about $0.02 more of tax credits than we had previously anticipated; and second, in late March, we closed a transaction that resulted in a onetime gain of about $0.05.
We had not contemplated closing that transaction until later in the year. This gain arises because a co-investor lost their appetite for tax-advantaged investment, and we were opportunistic in repurchasing their share of the plants.
Next, turning to Page 5. You'll see that we've evolved our disclosure to make it tabular rather than a page of words.
We hope this provides a more succinct way for you to quickly track the status as we roll out the plants. That table also provides annual aftertax earnings estimates, but realize those are ultimate estimates, and there are many reasons a plant might not run at ultimate levels.
Accordingly, as you build your Corporate segment models, please be sure to use Page 14 of our investor supplement that we post on our website. That page provides our range of estimates for the rest of the year.
When you compare this quarter's Page 14 to what we posted last quarter, you'll note that there is movement between quarters, and we have narrowed our full year range. This results partly because of the earlier recognition of the gain that I just discussed and partly because we have received updated production estimates from our utility partners.
The biggest difference in production estimates from last quarter relates to one utility that is using a few of our plants. They unintentionally purchased some lower grade coal that causes some inefficiencies in their boilers.
So their production estimates have come down. The silver lining is they have decoded the issue, and they believe they could be back, burning the better coal later in the year.
That said, when you really look closely at that table, we remain optimistic that here in 2013, we can generate more than double the amount of cash we made in 2012, which we will, in turn, use to help fund our M&A program. As for capital management, you'll see at the bottom of Page 4 of our earnings release that we have committed to another $200 million of debt, and we expect to close that here in June.
So we are well positioned to favor cash and debt to fund future acquisitions. But don't forget, if M&A activity is near last year's levels or if some transactions are structured as a tax-free exchange, then we will be back to using some shares.
So those are my comments. It's nice to kick off the year with a really good quarter.
Back to you, Pat.
J. Patrick Gallagher
Thank you,, Doug. Melissa, we're ready for questions if you want to open it up.
Operator
[Operator Instructions] Our first question comes from the line of Michael Nannizzi of Goldman Sachs.
Eric J. Fraser - Goldman Sachs Group Inc., Research Division
It's actually Eric Fraser for Mike. First question is on the debt and the M&A pipeline.
I mean do you have extra deals lined up? Are these -- are you targeting more deals in the U.S.
versus the U.K.? And do you have a preference for benefits brokers or kind of straight P&C retail commercial brokers?
J. Patrick Gallagher
Well, Mike, the answer to that's all of the above. We have an appetite for benefits brokers, not a greater appetite than property/casualty, but there's more opportunity there.
As I mentioned in my prepared remarks, we're seeing that the smaller consultants and broker in the United States is recognizing that they really do need some help with this new act. And if they've got clients, literally, over 150 life cases, they're going to need help from someone like ourselves.
And so that pipeline remains very robust. As you know, of the 60 acquisitions we did last year, 30 of them were in the benefit space.
Not all of them very sizable; we're very happy to pick up $2 million, $3 million, $4 million agencies as we go along. That remains very robust.
We have a very, very strong appetite for good partners in the United States. If you look at our investor slides at our website, you'll see 2 slides that we use frequently, one that shows where we are located in the United States and another that shows population centers over 100,000 where we're not.
And we covet those locations across the U.S. And then globally, we're very active.
We've been active, as you know, in the U.K. We've got good activity there.
We've been active in Australia. We've been active in Latin America and in the Caribbean, and those pipelines remain very, very strong.
So all in all, we think we're in a pretty unique position as an acquirer. We're most interested in the people that will join us.
It's not geography -- it's not geographically-driven. We like to be able to add to some of the services and niches that we know that we're strong in.
And it really comes down to the culture and the people. So it's hard to predict when they're going to hit.
They are individual transactions that occur along the way, but we think we're going to have a very good year.
Eric J. Fraser - Goldman Sachs Group Inc., Research Division
So you're confident you're going to be able to put that cash to work?
J. Patrick Gallagher
Yes.
Eric J. Fraser - Goldman Sachs Group Inc., Research Division
Got you. One follow-up on the Risk Management section.
I guess you know, organic growth's a bit higher than it's been in a while. Curious if you can also talk about -- you mentioned the impact of a lost client last quarter.
And what's the outlook for being able to continue to run at a margin that's above your target?
Douglas K. Howell
Well, Gallagher Bassett, yes, last quarter, we mentioned that we did lose one client, and that was why we were a little bit lower on organic. And that's why we said we thought that 2013 would look a little bit more like 2012.
And it's turning out to be that way, to be at 7% organically. The new client is the Australian, one of the WorkCover schemes there that we've picked up.
That's a sizable client. I've said that we think that will add about $5 million of revenue per quarter, above the -- that whatever you pick for an organic number.
So we think that they're very well positioned for growth this year.
Eric J. Fraser - Goldman Sachs Group Inc., Research Division
And just in terms of the margin, this being above -- can you run sustainably at above 16 for the rest of the year?
Douglas K. Howell
We'll have to take a look at that. We've asked the team to hit at least 16 for the year, and I think they'll be able to do that easily.
How much above 16? That all comes down to how much more we want to invest in product enhancements and client-service improvement.
These are -- this is a very well-organized process. And if it looks like our margins are moving up, we will make some more investments.
J. Patrick Gallagher
And Eric, this is Pat. This is a different business than the Brokerage business.
Claims show up every day. You better have people there to handle them.
This is not a business that's going to show great margin expansion. As we grow top line, that means there's big-time claims coming in behind.
Operator
Our next question comes from the line of Greg Locraft with Morgan Stanley.
Gregory Locraft - Morgan Stanley, Research Division
Just wanted to get a couple of clarifying items. One is on the coal division.
Doug, I think you mentioned that there was one person that opted out. Can you give us some color, I mean what's their view of the world versus your view of the world for the outlook in coal, and then maybe a bit about how the accounting works that you guys got the $5 million gain?
Douglas K. Howell
Yes. One of our co-investors, for internal reasons, decided that they no longer had an appetite for tax credits.
So they decided -- it had nothing to do with our plants or what we're doing. It's just they don't want tax credits anymore.
So that's -- they chose to exit their investment. So I think that when you account -- so we were opportunistic in buying that back.
And when you buy that back, there's a step-up in basis with respect to your -- our ownership interest piece. So what you do is you just run some of a fair valuation going forward.
You present value that back at a steep discount, and then you look at how that -- how the enterprise looks as a total fair value, and then you step up your old historical basis to that. And that's what created the gain.
Gregory Locraft - Morgan Stanley, Research Division
Okay. And then just to clarify, their appetite for tax credits, what was precipitating there?
I assume at one point, they went into this and said, "This is a great thing," and then now it's not. And you, obviously, were able to get a good price out of them because of the gain.
I mean what...
Douglas K. Howell
I'm speculating here, but usually when somebody loses their appetite for tax credits, it's 2 reasons: The internal sponsor is no longer with the company, that happens; or they are no longer in a position, tax wise, where they need the tax credit.
Gregory Locraft - Morgan Stanley, Research Division
Okay. And then last, is there -- are there any other kind of partners out there?
What's sort of the -- what's your visibility with regards to others that might go this way? Because it sounds like you guys basically have a right to call or...
Douglas K. Howell
No, we haven't played out -- we actually don't have a right to call. Our other partners actually would love to buy this, these portions of our plants from us.
Gregory Locraft - Morgan Stanley, Research Division
Okay. So you guys stepped into the breach and just took them out of it.
Okay.
Douglas K. Howell
Yes, there was no breach. They just chose to exit.
We just -- listen, they just lost their appetite. That's what it is.
Gregory Locraft - Morgan Stanley, Research Division
Perfect, great. Okay.
Just totally shifting gears, and this is a small thing. But the share count, for some reason, I seem to recall that you guys are, obviously, issuing debt.
You actually did well on the free cash line relative to historical seasonality in the first quarter. Is share count going to still be going up from here?
I seem to -- thought that maybe share creep wasn't going to be occurring anymore just because you're going to use all your cash to buy businesses?
Douglas K. Howell
Yes. We did not use shares in acquisitions, but just the natural increase that happens when the stock price moves from in the 30s to the 40s, you get more dilution on outstanding shares.
So when you look at the treasury stock method of accounting for outstanding shares and then you have option exercises, you will have some creep in the shares that go up. So that's what you're seeing this quarter.
So it's really purely related to options. Then we also have a small employee stock purchase plan that we issue shares to, but that's not the lion's share of it.
Operator
Our next question comes from the line of Ray Iardella with Macquarie.
Raymond Iardella - Macquarie Research
Maybe touching on the M&A topic a little bit differently. Maybe Pat, could you talk about sort of the appetite of Gallagher, sort of reentering the reinsurance Brokerage business in any material way?
J. Patrick Gallagher
No, we don't really have much of an appetite for that, Ray. You're not going to see us go back into big-time competition with Guy Carpenter, Aon, Re Willis.
We do reinsurance and always have even when we exited the heavy treaty stuff. We've always been supportive of our cap, do with [ph] reinsurance, the pools that we do and the programs that we run in London.
So we have reinsurance expertise, but you won't see us reformulating Gallagher Re.
Raymond Iardella - Macquarie Research
Okay, that's helpful. And then maybe, Doug, numbers question.
I mean just thinking about or setting the bar in terms of acquired revenue for the rest of the year, is there any way you can quantify sort of -- no acquisitions were to happen the rest of the year, what the impact might be on the rest of the year's revenues?
Douglas K. Howell
Well, we have such a great carryover from last year from the acquisitions that we did on '13, so I don't think there would be much, much difference in our growth in revenues for this year because just because we closed so many deals in the fourth quarter last year, so this year is pretty good. The impact of next year is easy to quantify.
I mean we just pick -- how much do you think we're going to do for the year, and then most of that will hit the second half this year or into next year. So the actual impact of acquisition rollover, I think that it will still put us into double-digit growth easily for the rest of this year.
Raymond Iardella - Macquarie Research
Okay. And maybe just talk about strategy and how the state exchanges will work on the Retail side and more specifically, I guess, how can Gallagher generate revenue for potential business that might go into the state exchange?
I know it's not a big piece of your employee benefits business, but any thought there could help us out a lot.
J. Patrick Gallagher
Sure, I'll touch on it, and we have Jim Durkin in the room. If I want to throw you the ball, maybe hear Jim as well.
But the exchanges are still up in the air. Some states are forming them on their own.
Some are relying on the federal government. There are private exchanges, as we've done, being created.
Rules are being promulgated. It was originally going to be a matter of choice, now the Feds are saying it looks like it will be one set of choices.
You're going to have clients that take a look at what we refer to as total rewards. So when you get over 100, 150 lives in a group, it's not just about health insurance.
You've got to take a look at everything you're doing to compensate and maintain the relationship you have with your employee base. And let's face it, we always talk -- all of us in most businesses talk about the fact that there's a war for talent.
Every single day, we get paid for the people we put on the playing field. And so we have to make sure that we do a good job of compensating them, rewarding them and covering them with health insurance.
And our clients have the same problems. So the exchanges, I think, will probably suck most of the business from the smaller end of the group business.
We think the 40, 50 life case tends to go that direction, maybe all the way up to 100 lives. When you get over that, we do see the employer maintaining a very active involvement in making sure that the health care cover for the clients are maintained in a way that reflects their total view of compensation.
Jim, do you want to add anything to that?
James W. Durkin
Only thing I would add is that there's been a strong indication by many of the state exchanges of willingness to pay commissions to brokers. They see the value.
They understand that brokers will help them. And so those brokers that, for their customers that might be using those state exchange, there is an opportunity to get a commission.
And then I guess, lastly, remember our model is to provide advice, consulting services. And we're going to get paid for the work we do.
So if we help a customer who makes a decision to move to a state exchange, that's not a onetime decision. They have to look at that each year, and we're going to be there to help them do that.
Plus there are ancillary products that we'll continue to be involved in: the life, the disability, retirement. So there are opportunities to continue the revenue stream.
Operator
[Operator Instructions] Our next question comes from the line of Brian DiRubbio with Yield Capital.
Brian DiRubbio - Y/Cap Management, LLC
I've got 2, 3 questions. First one, Pat, could you give us any color on what the organic growth of the acquired revenue would have been if it was sort of there for the full year?
Because you're acquiring the revenue, so to give a number of what it did in the last 12 months, but that revenue is obviously doing better also. Can you give a sense how well that's growing?
J. Patrick Gallagher
About the same as our general book, Brian.
Brian DiRubbio - Y/Cap Management, LLC
Okay. And for Risk Management, 2 questions there.
Can you give us a breakdown of the organic growth rate versus change in claim counts?
J. Patrick Gallagher
I'll throw that to Scott.
Scott R. Hudson
The -- on the rate itself, you're talking about the fee increase. We're probably -- we're still seeing a little bit of growth.
It's probably just around 2%. And then the claim count growth, would account for the remainder of it.
So it's still not -- it's very competitive, pricing wise. So it's not much above 2%.
It changes a little bit, too, for our larger clients where it's even more competitive, so that may drop as low as 1% to 1.5%.
Brian DiRubbio - Y/Cap Management, LLC
But you are seeing claim counts increasing?
Scott R. Hudson
Claim counts are increasing. Combination of -- if you were to break the claim count growth down in 2 ways, too, it's -- from our existing book of business, it's around probably 1.5% to 2%.
And then the remainder of the growth on claim counts comes from new business.
Brian DiRubbio - Y/Cap Management, LLC
Great. And then just the final question on there.
Are you seeing any signs of customers moving to self-insurance given the rate increases we've been seeing over the last 12 months?
J. Patrick Gallagher
Yes, that's a really strong point, Brian. Thank you for bringing that up.
I mean that's one -- this is our core expertise. What builds our company is our ability to take clients that are in the traditional market and help them mitigate rate increases by assuming certain portions of risk themselves, by bringing Gallagher Bassett in with higher retentions and having them pay the claims in various forms of self-funding.
As a public entity, that might be a risk-sharing pool. In a state, that may be a group captive -- funded and founded in our Artex operation.
It may be just a state worker's compensation program going to self-insurance. But that is always a big driver.
Now that also, Brian, mitigates our commission growth to a degree. So you'd be looking at these 5% and 6% rate increases across the board and wondering why Gallagher is benefiting to the tune of only 1 percentage point.
Well, our job is to mitigate that for our clients. And one key way that we do that is help them enter what we refer to as the alternative market.
Operator
Our next question comes from the line of Brett Huff with Stephens Inc.
Brett Huff - Stephens Inc., Research Division
Two questions. One on margin.
Doug, you had sort of given as a rule of thumb about margin growth relative to organic growth. Any changes to that based on what we've seen again this quarter?
It seems margin expansion, at least, relative for what we expected, is better than we thought.
Douglas K. Howell
Yes. I think that the old rule of thumb was that we needed 3% organic growth in the Brokerage segment showing margin.
We did 4.8% this quarter, and we dropped 130 basis points out of that into the margin. I would say that growth above 3%, you could see kind of 1/3 of that going to the margin line.
I think if you get down to 1% or 2%, we are seeing some inflationary pressures in certain lines. We talked a lot about it at the last call that we had salary inflation.
We've had a little bit of pension inflation. We've had some medical inflation.
The control of our headcount has helped control some of that, but there are other inflationary pressures in our expense line. But by and large, we think that we're well positioned this year, that even with the organic growth above 1% or 2%, we should see some margin expansion.
Brett Huff - Stephens Inc., Research Division
Okay. And then Pat, I think this is more of a question for you.
Can you just comment a little bit on particular verticals in the U.S. that were good or bad?
And then maybe also client sizes, if you see any changes in the organic growth in those and then maybe also geography? Just is there anything notable maybe among those 3 parameters in the U.S.
business organic growth?
J. Patrick Gallagher
Yes. But we continue to be very, very strong in a number of the verticals that we talk about.
So higher education, religious and not-for-profit, construction, real estate, we're all -- and hospitality, all had very good starts to the year. We follow that across other lines, such as directors and officers and professional liability lines.
That was a good start for us for the year. So the verticals are doing well for us, and those are our primary ones.
I mean public entity, we are very, very strong, as I said, higher ed, construction, real estate, hospitality and what have you. All of those are off to a very good start.
I don't have any of the verticals that we report on that I would say are lagging. We're not seeing a decrease in rate across any of those.
We're not seeing a lack of appetite by underwriters in any of those. So we continue to be very focused on that, and get stronger in those verticals every single quarter.
In terms of geography, I think the Midwest seems to be probably strongest in rate. The West Coast seems to probably be weakest.
But when I say weakest, you're probably seeing 90% plus of your accounts in the Midwest and in the East receive some form of rate increase. It's probably closer to 70% in the West Coast, and I really don't know why that is.
And that doesn't tend to break much by size. We're seeing pretty good discipline in the underwriting community across most sizes.
Yes, if you're a real large account taking a good portion of the risk yourself, you're probably going to be able to mitigate these increases a little better than that commercial middle-market account in the Midwest. But by and large, the increases are kind of across-the-board with one exception being the strongest, which is worker's compensation.
The carriers really do recognize that they've got significant problems in that line. And they are taking remedial action.
We're seeing rate increases there approaching 10%, pretty much across the country. So I want to make sure, Brett, did I answer your question?
Brett Huff - Stephens Inc., Research Division
. That's great.
That's exactly what I needed.
Operator
Our next question comes from the line of Chris Leikhim with William Blair.
Chris Leikhim
Just 2 quick questions for you guys. Doug, I just wanted to touch on contingent supplementals quickly.
It looked like they were up modestly for the quarter, but on an organic basis, they're pretty flat. Any guidance for the rest of the year?
Do you expect that trend to continue?
Douglas K. Howell
I think that organically flat to maybe a touch up for the rest of the year. And then we -- when it comes to our acquisitions, we generally get most of that in the first quarter because they're more contingent-based and supplemental, so I would say flat to slightly up from last year.
Chris Leikhim
Okay, great. And then just wanted to dig into the Brokerage segment a little bit on the organic side.
I know from the Spring Meeting that you guys highlighted wholesale and benefits division were doing pretty well. And I might imagine maybe mid to upper single-digit organic.
Is there anything going on in sort of the core domestic P&C Brokerage business that might be a little bit less, or are they all sort of running around that 5% range?
J. Patrick Gallagher
No, the PC U.S. domestic business is running a little less than that.
Douglas K. Howell
It's a little tough to judge in our first quarter. I know it's comparatively the same size, but in our first quarter, you can get some -- one person moving from -- or one client moving from the traditional market into the alternative market can have an impact on our organic just because it's so small.
J. Patrick Gallagher
But benefits are really solid. Benefits are solid.
And then our domestic wholesaling is solid also. It's -- we're seeing nice growth from those also.
Chris Leikhim
Great. And then just one number.
Do you have the end of period share count by any chance?
Douglas K. Howell
Yes, I think it's at the, on the very last page of the press release. Let me pull that out for you.
I think it's a -- outstanding shares are 127 -- or 126.2. I think I have that right.
Operator
[Operator Instructions] Our next question comes from the line of Arash Soleimani with KBW.
Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division
Just a quick question on coal. So once we're at -- fast forward to 2019, 2021, when the tax credits expire.
Obviously, Gallagher then has the interest in these plants. Do they -- are you kind of on the hook for the disposal costs at that point, or what's the process there?
Douglas K. Howell
Yes, the answer to that is twofold. If they convert, which we hope they do, to pure mercury control at that time, which is the reason why they're doing it in the first place is because of environmental control, but those plants would continue to be used.
If they decide that they no longer want to use it at that point, there would be a demolition and disposal, but these are pretty small. You need to realize that, if you recall from any of our presentations, most of these plants are about the size of a semi tractor-trailer, so there's not a ton of machinery to dispose of at that time.
So and there's -- so it's not a big cost at all for us.
Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division
And when you say that, you just mean the utility partners or...
J. Patrick Gallagher
Say your question again?
Arash Soleimani - Stifel, Nicolaus & Co., Inc., Research Division
When you said, if they're still interested in running, did you mean the utility partners?
Douglas K. Howell
Yes, the host utility at that point -- if you believe that the MATS standards, mercury control standards come in, in 2016, they will have to replace our system with some other type of mercury control system or continue to use our system. If they continue to use our system, there would be no disposal with respect to these plants.
We would work on a royalty at that time, and without the benefit of the tax credits. But that's the objective is to commercialize as many of these locations using the Chem-Mod Solution, so that there is an aftertax credit life that continues to generate royalty income for us.
Operator
Our next question comes from the line of Mark Hughes with SunTrust.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
The better growth in international, how much of that is a function of the strength in those operations? Are the markets stronger, or now that you have them in hand for some time, you've been able to improve and so it's more of an internal improvement?
I don't know if you can make that distinction.
J. Patrick Gallagher
I think I can make that distinction. I think in Australia, you have a very strong economy.
And that's helping with economic growth and with just the increase in premium income in the environment, plus we are doing a fantastic job in Australia on new business. Our team is very strong in Perth, Sydney, and I'm talking on the PC side now.
That's been a very, very strong bright spot for us. I can't say enough about what the acquisitions have done for us in the U.K.
in terms of positioning us for great organic growth there, the Heath acquisition in particular. But as you know, we did 4 additional mergers in that space over the past year.
We look to have another 1 probably done -- soon in the U.K. as well.
And those are all very additive to the effort. The economy in the U.K., when you get outside of London, is not very good.
It's probably better than the European continent, which we have virtually no exposure to. But what's happening is the folks we've brought on are just doing an outstanding job of generating new business and new opportunities.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Do you have a particular focus on expanding into other countries? Is that a priority, or is it going to be just -- as the opportunities emerge?
J. Patrick Gallagher
It's both. I think as you saw with the move we made in the fourth quarter with our partners in Latin America, we're excited to now have a platform on Mexico with the Casanueva family that we own 21% of that business, and we'll continue to expand through Latin America.
We have a very good appetite for continued acquisition activity in the U.K. and in Australia.
As you know, we completed the 80% purchase of CGM in the Caribbean, so we feel pretty good about that. And if there were places in the Caribbean that we could do bolt-ons and roll-ins, we'd do that.
So it's both. It's geographically focused.
We like Canada. We like the U.K.
But it is also opportunistic in that the fact we're trading in over 100 countries with independent brokers in our Gallagher Global Alliance. As those families and partners decide that they'd like to take some equity off the table, we're opportunistically looking at that.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
And one final question in the Risk Management business, the underlying claims increases of 1.5% to 2%. Could you give us a little context for how does that look now versus what you were seeing a year ago versus 3 or 4 years ago?
Any cyclical commentary on that number?
J. Patrick Gallagher
Yes. That number is a direct proxy for the economy.
You go back to '08 and we are humming with that number. And clients were doing 3 shifts and things were wonderful.
Crash in '09 comes, and claim counts fell off the table. And they're making their way back slowly.
But 1.5% to 1% is going to be a bit of a proxy for what you're seeing in the U.S. economy.
Mark D. Hughes - SunTrust Robinson Humphrey, Inc., Research Division
Right. So that's not necessarily some separate frequency cycle on worker's comp.
That's more influenced by the economic activity?
J. Patrick Gallagher
Correct.
Douglas K. Howell
Yes, nod yes [ph] .
J. Patrick Gallagher
Great. I think that's our last question.
Melissa, anybody else on the line?
Operator
No, that was our final question, sir.
J. Patrick Gallagher
Just make a closing couple of remarks here. Thanks again, everyone, for being with us this morning.
We appreciate it. Obviously, we're excited about our franchise.
We just have had a great quarter. There's no doubt that every single quarter, and every single month, we're adding to the tools that we provide for our clients to help them deal with their areas of risks.
Just as importantly, it's abundantly clear to the people at this table, that our commitment to our culture and to selling is as strong as ever. In addition, you might have noticed that on March 6, the Ethisphere Institute announced that Arthur J.
Gallagher & Company, for the second year in a row, was recognized as one of the World's Most Ethical Companies. And we're very, very proud of that.
We're excited about the start of the year, and we're looking forward to the rest of 2013. We really do believe we're just getting started.
So thanks for being with us.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.