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Arthur J. Gallagher & Co. (NYSE:AJG)
Q4 2019 Earnings Call
Jan 30, 2020, 5:15 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to Arthur J. Gallagher and Co.'s fourth-quarter 2019 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 discussed on this call or described in the company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website.

It is now my pleasure to introduce J. Patrick Gallagher, chairman, president and CEO of Arthur J. Gallagher & Co. Mr.

Gallagher, you may begin.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thank you very much. Good afternoon. Thank you for joining us for our fourth quarter and full-year 2019 earnings call. With me today is Doug Howell, our chief financial officer, as well as the heads of our operating divisions.

We finished 2019 on a high note. The brokerage and risk management teams delivered outstanding results on all measures. In the quarter, we combined to post 17% growth in revenue, 5.8% all-in organic growth, expanded margins 134 basis points, and we completed 11 mergers during the quarter, representing about $117 million of annualized revenue. This caps off an excellent full year where our combined brokerage and risk management teams posted 14% growth in revenue, 5.6% all-in organic growth, expanded margins 76 basis points, and we completed 49 mergers, representing about $468 million of annualized revenue.

An outstanding quarter, an excellent full year, and I'm more confident today that this momentum will continue in 2020. I want to thank every Gallagher professional for their relentless focus on delivering the very best insurance, brokerage, consulting and risk management services to our customers around the world. Let me peel back our fourth-quarter results a bit more by segment and give some thoughts on why I have reason to believe that 2020 will be as good, if not better than 2019. Our comments today will focus on the four key drivers of our long-term value creation strategy.

Those four are: number one, organic growth, including what we're seeing around the world in terms of rate and exposures; number two, merger and acquisition growth in our current merger pipeline; number three, improving our productivity and quality; and four, what makes all this happen, which is our bedrock culture. Now let's move to our Brokerage segment performance, starting with organic. Fourth-quarter organic growth was 6.1% all in. Base commission and fee growth was a little lower than that due to the repricing of a wholesale program, which we discussed at our December IR day, but contingents performed a bit better than we expected, not an exact offset but close.

Let me break down our organic growth by geography. First, our domestic retail P&C operations were very strong above 6%, and retail benefits were up around 4%. Our domestic wholesale operations, that's our open brokerage, program manager and underwriting business were up about 7%. Outside the U.S., our U.K.

operations posted 6% organic, Canada was up more than 10%, and Australia and New Zealand grew around 6%. PC rates and exposures continue to be a tailwind to our organic growth, with renewal premium change now comfortably above 5%. Let me give you a few noteworthy sound bites for the quarter. Starting in the U.S., our retail PC and wholesale business up about 5.5%.

Property lines are up about 9%, while casualty lines are up about 6%. Workers' Compensation is down a couple of points. Renewal change in our open brokerage wholesale business is the strongest domestically, up about 7%. Moving to the U.K.

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

And finally, Australia is up about 7%. So after trending higher in most geographies for the past two years, I would characterize the PC market as having moved from stable to firm. Not hard, like we saw in the mid-80s and in the early 2000s, but certainly firm. A recent survey of our PC producers suggest that the 2019 rate momentum has continued into 2020.

Further, unemployment remains at historically low levels nearly everywhere and our clients' businesses are expanding in a favorable economic environment. Taken together, these market conditions should continue to provide us with a nice organic growth tailwind. That said, we are still in an environment where our professionals can develop creative solutions that help our clients mitigate or partially mitigate rate increases. In addition, clients will ask us to deliver a risk management program within their budget, that might be flat or up a percent or two.

That means they might opt out of certain coverages, increase deductibles, reduce limits, etc. In other words, not all the rate tailwinds show up in our organic growth. So as I sit here today, I see 2020 brokerage organic growth again in the upper 5% range and might very well tick over 6%, especially if we don't have a deterioration in economic confidence. Now let me talk about brokerage fourth-quarter merger and acquisition growth.

We had another active quarter, completing 11 brokerage acquisitions with average revenues of about $10 million. Our merger and acquisition momentum continues. Already this year, we've announced four tuck-in mergers and also moved to 100% ownership of Capsicum Re. We are excited to be fully together now with the Capsicum team, and I would like to thank all of our new partners for joining us, and I extend a very warm welcome to our growing Gallagher family professionals.

Looking forward, our internal M&A pipeline report shows around $250 million of revenues associated with about 50 term sheets either agreed upon or being prepared. This is down a little bit from the last few quarters, as the first quarter deal activity can be a little slower than later quarters. But I'd still believe that 2020 should be another strong year for our tuck-in merger and acquisition strategy, as we continue to attract entrepreneurial partners that believe in our unique culture and realize that we can be more successful together. Moving to productivity and quality.

Brokerage adjusted EBITDAC margins expanded 151 basis points this quarter, helped by higher contingent commissions and acquisitions. This marks the 33rd consecutive quarter of margin expansion, and is a reflection of all the hard work the brokerage team has done to find efficiencies and increase quality. So to wrap up the Brokerage segment, for the full year, we delivered 15% growth in revenue, 5.8% all-in organic growth, adjusted EBITDAC margin expansion of 75 basis points, and we completed 46 mergers representing about $452 million of annualized revenues. What an outstanding year for our brokerage team.

Next, I would like to move to our Risk Management segment. Fourth-quarter organic growth was a solid 4.7%, inline with the mid-single-digit organic guidance we provided at our December IR day. Underlying the organic results, which saw Workers' Compensation and general liability claim counts growing in the 1% range for the full year. Pricing increases are modest, but new business wins highlight that our highly effective and customized claims' handling capabilities are being recognized as driving better outcomes.

We continue to see carriers outsourcing a portion of their claims operations as a great long-term opportunity for Gallagher Bassett. As we look forward to next year, we estimate 2020 risk management organic will be in the 5% to 7% range. So to wrap up my risk management comments. For the full year, we posted 5% growth in total revenue, 4.4% all-in organic growth, adjusted EBITDAC margin of 17.4%, and we completed three mergers, representing about $16 million of annualized revenue.

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

Our culture has earned us recognition in 2019 as the world's most ethical company, eight consecutive years running. Just last week, we also received a top score of 100% on the Human Rights Campaign Foundation's Corporate Equality Index. This is the second consecutive year we received this honor. As proud as I am of the outstanding performance we had this last quarter, this last year, and this last decade, I'm more proud of the way our culture has stayed true throughout all of that.

We've always been guided by the Gallagher way. And for 92-plus years, we've been building this unique culture. I'm looking forward to seeing our culture thrive in this new decade. OK.

A great quarter and a fantastic year across the board. I'll stop now and turn it over to Doug. Doug?

Doug Howell -- Chief Financial Officer

Thanks, Pat, and good afternoon, everyone. Before I dive into our results, I, too, would like to thank all of our professionals around the world for such a strong finish to a great year. It is especially exciting to report back to back years of more than 5% organic growth, and the environment is right to make that a three-peat here in 2020. When I step back and look at our adjusted results for the quarter, our brokerage segment posted $0.67, our risk management segment $0.09, and our corporate segment a loss of $0.18.

So total adjusted EPS of $0.58. Risk management and the corporate segment were in line with our December investor day expectations, and our brokerage segment came in even better. When you look at the brokerage organic table on Page 5 and the EBITDAC margin table on Page 6, you'll see that strength in our Brokerage segment came from strong organic growth of over 6% and adjusted margin expansion of 151 basis points. Of that 151 basis points, about a third was related to higher contingents, about another third due to seasonality of a couple of recent acquisitions, and the remaining third is margin expansion, we would expect in a mid-5% base commission and fee organic environment.

Having now been through our 2020 budgeting process, it is clear that we're seeing the benefits of our constant focus on improving our productivity, lowering our costs, all the while ensuring that we raise our quality also. It is an environment where rates are increasing -- excuse me, in an environment where rates are increasing, it takes more work by our teams to develop creative solutions, shop the market and guide our clients, that increases our costs somewhat. In addition, we're making substantial investments in hardening our IT environment, building our data and analytics capabilities, investing in marketing and brand awareness, growing our producer ranks and other investments that help us sell more, hire more and acquire more. However, we can offset these rising costs and still expand margins.

Our businesses are proving that scale and our efforts over the last 15 years to standardize and shift work into our offshore centers of excellence, can lead to steady improvements that offset wage increases and inflation and yet still allow us to make very important investments. So when I look at 2020, I see another year like 2019. If we have organic in the upper 5% range, margin should expand 50 to 70 basis points. One other small net.

When you get back to Page 12, you'll see that the impact of minority interest on our brokerage segment EPS is better than our December IR day estimates. On the surface that gives the appearance of a couple of million dollars or a penny or so better, but that's not really the case. You can't see it, but there's a like-for-like unfavorable amount in our base numbers. So that washes out to nothing.

So no impact on EPS. Moving to the risk management segment, on Pages 6 and 7, you heard Pat talk about the solid organic growth and we posted margins above 17%, despite lesser performance revenues, and I think that's really good work by the team this quarter. Looking toward 2020, we're a bit more optimistic about organic, and we're also targeting margins in the upper 17% range. Our risk management team has also seen scale advantages, which is allowing us to provide deeper and more specialized services that deliver better claim outcomes for our customers.

As for the non-GAAP adjustments this quarter, most are very close to what we forecasted during our December IR day. But there was one new item for the fourth quarter. Our full-year 2019 effective tax rate dropped during the fourth quarter when we filed our state tax returns. These filings triggered a benefit primarily due to reinforcement and some changes we made in our legal entity structure.

It's a real drop for the full year and going forward. But we did adjust out the favorable catch-up amounts from earlier quarters. Moving now to the corporate segment on Page 8 of the earnings release. Nothing significant here from our December IR day.

Interest is in line; clean energy, a little better; M&A costs were a little higher, yet corporate costs a little lower. So now let's move to the CFO commentary document we posted on our website. On Page 2, you'll see that we have now provided our first look at 2020 for items related to the brokerage and risk management segments. As an overall comment, we have the capacity to do another $1.5 billion to $1.6 billion of mergers again this year with cash and debt.

But you should know that we don't include any future mergers in any of the estimates we're providing in the CFO commentary document. Our estimates only include mergers that we've closed by today and debt that we have borrowed of as of today. So this means you should start with our estimates for amortization expense, estimated earn-out accretion expense and interest expense, but you must then make an estimate for additional amounts for each of those line items that arise from future M&A. So for example, if we do $1.6 billion of M&A this year, and let's assume that it all happens equally each quarter, call it, $400 million a quarter, you'll see in footnote one that it says amortization should increase about 1% per dollar spent on M&A.

So call that an additional $4 million in the second quarter, $8 million in the third, and $12 million in the fourth. As for earn-out accretion, that should grow about $1 million to $2 million a quarter on that example. And then as for interest expense, we just closed a $575 million round, so our numbers already include interest for that. But if you assume we borrow another, say, $300 million on June 30 that would mean your interest expense estimate should go up by $3 million in the third, and $3 million in the fourth.

Again, these are just examples of illustration. My point is simply to make sure that your assumptions for M&A factor in the non-cash amortization and accretion and also the interest expense. Two other items on Page 2 of the CFO commentary. Non-controlling interest, much lower going forward, especially in the first quarter because we now own 100% of Capsicum.

And you'll see that we lowered our expected tax rate to reflect the tax, the state tax benefit I mentioned earlier. Moving then to Page 3 of the CFO commentary. We've now added the light reddish column, which provides our first look at 2020 quarterly estimates and also updates our full-year estimates that we provided during our December IR day. Two matters to note.

First, when you update your brokerage and risk management segment for a lower tax rate, you'll need to also update for a lower state tax benefit in the corporate segment. We've done that for you in the reddish column. The total company is actually at two to three cent benefit, but there is some geography between segments. Second, our 2020 quarterly compares on comparatives to 2019 will change.

Recall that in early 2019, we sold a non-core brokerage operation. That triggered a large gain, which then caused us to recognize the large amount of credit in the first quarter of '19. We don't have any meaningful sales in process, so we are not anticipating recognizing as many tax credits in the first quarter of 2020. That will also cause all of the 2020 quarters to be proportionally different than 2019.

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

Pat Gallagher -- Chairman, President, and Chief Executive Officer

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

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question is coming from Elyse Greenspan with Wells Fargo. Please state your question.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi. Thanks. Good evening.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Hello, Elyse.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi. My first question is, I guess, starting off with contingents within brokerage, pretty strong this quarter and it seems like that was really what drove the upside on the organic relative to your December expectations. Is that trendable? Or I guess, maybe you could expand on what you're expecting from contingents in 2020 embedded within your upper 5% organic revenue guide?

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Yeah. I think just at the level set, we had 5.5% on base, we had 6.1% or 6%-or-so on supplemental, and contingents were higher than that. It did drive a little bit of the upside because, I think, in December, we were talking about being in the high 5% range, so it did add a little bit. Recall that we did reprice one program that we gave you heads up about, that detracted from that.

As for going forward, we think that our position on contingent is still strong. The issue will be as the program start to have or contracts start to have loss ratio problems, you could see some softness in that in 2020 compared to how strong it was here in 2019. On the other hand, if that's the case, you should see that the kind of the offset in stronger base commissions also.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. And then the compensation expense ratio that trended down nicely this quarter, and probably, I think, for most of the quarters of 2019. Can you just talk about how we should think about savings going forward? I know in the press release, you guys mentioned some headcounts and employee benefit savings as we think about modeling the potential margin improvement in 2020?

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Yeah. I think we have some pretty good success. We had another wave of harvesting some of the gains from our offshore centers of excellence. So we had some headcount reductions.

We watched attrition pretty closely this year. I wouldn't see the same amount of improvement purely in the compensation line. Rather, I think that if we're in the upper 5%, you're going to see margin expansion in that 50 to 70 basis point range.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

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

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Yeah. I said in my comments, about a third of that came -- a third of the 150 basis points did come from the acquisition activity that rolled in in the fourth quarter, a big piece of that is the aviation business. When you look at supplementals, and you'll see a pretty good number there from acquisition that really is coming from a couple of the recent acquisitions that we did mid-year, that came in in the fourth quarter. But -- so 50 basis points of our margin expansion is result of the roll in of acquisitions.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

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

Is that just the larger deals or still like the smaller-sized transactions? Has the multiple just not moved that much on those deals?

Pat Gallagher -- Chairman, President, and Chief Executive Officer

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

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

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. Thanks. I appreciate the color.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Elyse.

Operator

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

Mike Zaremski -- Credit Suisse -- Analyst

Hey. Good evening.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Hey, Mike.

Mike Zaremski -- Credit Suisse -- Analyst

A follow-up to Elyse's question. So, Doug, in terms of the very healthy margin expansion in the brokerage segment, the seasonality from acquisitions, that's permanent. Right? So that's going to persist in 4Q '20 and beyond. Right? I just want to be -- make sure I got that?

Doug Howell -- Chief Financial Officer

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

Mike Zaremski -- Credit Suisse -- Analyst

If those acquisitions, you're saying, are lighter on margin, so should we be expecting some, you're saying some -- a little bit basis points-wise of pressure on the go forward, 1Q, 2Q, 3Q?

Doug Howell -- Chief Financial Officer

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

Mike Zaremski -- Credit Suisse -- Analyst

OK. Got it. And just to clarify, the tax rate guidance, you said that's, at this point, permanent on a go-forward basis?

Doug Howell -- Chief Financial Officer

Yes. That's right.

Mike Zaremski -- Credit Suisse -- Analyst

OK. Got it. And well, thank you for all the color on how to do that M&A math in terms of accretion and whatnot. But -- so I just want to kind of like at a high level, if multiples don't move higher, given your guidance, the amount of EPS accretion you're getting as a percentage of earnings for 2020 versus 2019 should be similar?

Doug Howell -- Chief Financial Officer

Yes. That's right.

Mike Zaremski -- Credit Suisse -- Analyst

OK. Great.

Doug Howell -- Chief Financial Officer

I think if you look at -- I think our whole program from last year, probably added about $0.80 of EBITDA per share, if you look at our program last year. And then you lose a little bit of that on EPS -- not losing, but it detracts it because the amortization of the intangibles, and so maybe that was somewhere around $0.20 to $0.30. So our whole M&A program, if you took it as a one big bucket last year, probably added $0.80 to $0.90 on an EBITDA per share basis and somewhere around $0.30 on an EPS basis.

Mike Zaremski -- Credit Suisse -- Analyst

OK. Got it. Thank you very much.

Doug Howell -- Chief Financial Officer

Thanks, Mike.

Operator

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

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Yeah. Thank you . Good afternoon.

Doug Howell -- Chief Financial Officer

Good afternoon, Mark.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

The risk management business, you have historically wanted to kind of restrain the guidance or kept the number at about 17%. It sounds like you're seeing it come in a little higher. Is that a change in mix, change in philosophy? What is driving that?

Doug Howell -- Chief Financial Officer

I think it's just the fact that they are getting scale advantages. They've done a really great job of restructuring the field adjusting staff and resolution managers into a more of a specialized focus. So it's purely the fact to be able to put specialization and standardization right at the point of contact with the customer, and it's delivering amazing outcomes in terms of the claim outcomes. People are getting back to work faster.

Cost to get them back to work are lower. It's really pretty remarkable the investments that the group has made over the last seven or eight years. So we think that those scale advantages will come through starting this year.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then, I certainly hear your optimism about the 2020. Pat, I'm curious if you could maybe layout a little why you feel so optimistic kind of what is it in this market that you think gives it durability?

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Well, in terms of durability, Mark, I think we said in the prepared comments that this is no mid-'80s to early 2000s, but I do think that there is a recognition by the underwriting community that, in particular, in specific lines, they've got to get this right. Again, and you know this better than I do, you're sitting there with really not much of a return on a huge investment portfolio that the industry has historically used to make sure that they've got a little wiggle room when it comes to combine ratios. And we also are saddled with social inflation toward inflation. So I think there is a really good knowledge of that in the marketplace.

And, frankly, these underwriting companies are being very firm with our people in terms of what they need. They're not willing to put out the same kind of limits at really cheap premium amounts that they were just two, three years ago, they recognize that rates, in particular, in some of the property areas and cat-exposed areas, still need -- it needs bolstering, and I don't see that as something that's going to go away in the short term. So I'm not sitting there and saying, wow, this is like '85. I do think that you get some discipline.

We've talked about that in the past a bit. And I think if that continues, along with our capabilities that continue to grow every quarter. We just get stronger and stronger in the marketplace. Remember, every time we go out to compete, I shouldn't say every time, 90% of the time plus we're competing with somebody smaller than we are.

And the amount of data analytics that we're doing today, the amount of strength in our verticals, just continues to grow literally every month, every quarter, our acquisitions don't just add earnings to the picture. They had terrific talent. These people have built great strong entrepreneurial cultures. They join us, those cultures meld nicely, and we've got a lot to sell.

And I think as customers, in particular, in the upper middle market start to face down, increasing prices, maybe some reduction in coverages, they're more receptive to listening to our professional capabilities, and that adds up to better hit ratios. So when I look at that across the whole board, are there pockets of softness? Sure. Workers' Comp is going to continue to be a place where it's not firming, but at the same time, I just think our capabilities shine in these types of markets.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

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

Doug Howell -- Chief Financial Officer

Yeah. What we did in the -- for the year, we did $3.3 billion of commissions out of -- and fees were $1 billion. So out of the $5 billion of brokerage total revenues, $3.3 billion of it are commissions. So call it 3/5.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Mark.

Operator

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

Meyer Shields -- KBW -- Analyst

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

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Yeah. I mean, I think that they -- well, it's been -- let me just back up a second. I've been really, really pleased. As you know, that was a partnership that we were a partial owner of before we went to the 100% perspective.

It's probably the best de novo start-up I've seen in my 45-year career. These guys have really done an unbelievable job, and it has been something that's been done literally focus by focus. So -- not to get into all the specifics of each individual operation. What was kind of amazing to me in the start-up of this, and Grahame Chilton and I became close friends, as you know, we made a real effort at building out Gallagher Re just 10, 15 years ago, and it was a complete failure.

And one of the reasons was we were behind the eight ball when it came to a huge amounts of analytics. And I think what Grahame and Rupert and their team have found is that at the same time, analytics are important, the whole capability to execute as a broker was something that was kind of diminishing in the marketplace. And they felt that they could take advantage of that by bringing aboard people who really were solid brokers supported by analytics, as opposed to analytics people trying to broke. And I think that's proved out.

So very, very strong in auto. Very, very strong in property. Very, very strong in FAC. And very, very strong in international.

Very strong in cyber. And you see that again as we just continue to build verticals, and that doesn't put us up against our major competitors in terms of their core day in and day out business. And there's just lots and lots of room to grow in that business, so I think it's going to be a great acquisition for us.

Meyer Shields -- KBW -- Analyst

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

Does the renegotiated wholesale contracts have any impact in future quarters? Or is that a one-time hit?

Doug Howell -- Chief Financial Officer

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

Meyer Shields -- KBW -- Analyst

Ok. Fantastic. Thank you so much.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Meyer.

Operator

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

Greg Peters -- Raymond James -- Analyst

Good afternoon.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Hi, Greg.

Greg Peters -- Raymond James -- Analyst

Hey. I just thought I'd follow-up by -- I've been listening to these conference calls and you guys certainly reaffirmed that we're in a strong pricing environment in many lines, except maybe Workers' Comp. I'm curious what you're hearing from your customers? How are they reacting to it? Is it requiring more work from your brokers to place the business? Do you see these customers more willing to switch carriers? Do you see any change in your retention ratios as they have to deal with these higher prices?

Pat Gallagher -- Chairman, President, and Chief Executive Officer

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

And we've been doing that now since 2005, so you've got 14 years of flat to kind of down rates. And when you turn around and say, well, here it is that it's not going to be that way anymore. They're not happy. Now, one of the things you got to do about that, to your question about renewal retention and that type of thing, is we're coaching our team.

By and large, the majority of our team have never really operated in a firming market or a firm market to get out real early, and explain to clients that it's going to be different. So retentions, at this point, are very solid and similar to what we've seen along the way. But make no bones about it, this is the type of market that causes people to think twice the next time the phone rings and someone says, "I'd like to talk to you about your insurance." We've got to be really diligent on that and be, once again, selling to a client, why being with Gallagher provides them with a great difference in their own business. It's not about our business.

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

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

Greg Peters -- Raymond James -- Analyst

And Pat, just as a follow-up to that. So we're hearing from some of the carriers that their retention ratios are dropping, which means that your customers are, in some instances, more willing to consider switching than ever before. Does that, on a very granular basis, does that mean that particular customer is less profitable because you have more work to do? Or how does that boil up? I mean, obviously, you're guiding to margin expansion and wonderful organic revenue growth for '20, but how should I think about that in terms of its effect on your organization?

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Let me try again to take both questions in order. But, number one, let's be real clear about this. And there's no question about it, while we value our relations with our carriers and we view them as partners in helping our clients, we represent our client. Period.

End of statement. We don't represent an insurance company. We represent our client. And that means when we sit down and they're saying, "What do I do about this?" That's one of the benefits about being with Gallagher, is we can bring in the expert, we could show you how to navigate this, and if it means higher retentions, and if it means change in carriers, we'll recommend that.

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

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

Doug Howell -- Chief Financial Officer

And, Greg, one of the things, as you know, over the last 15 years, we've invested in our centers of excellence. The volume of additional quotes, the volume of some more proposals, we have the ability to do all of that work in lower-cost labor locations. So that helps knock the top off the cost escalation that might be there with some additional travel, maybe needing a few more hands domestically working on the accounts. So we have a pretty good safety valve for that, and that's why we can continue to make investments in the business.

And I gave a laundry list of all the things we're doing, yet still show margin expansion. When you look at this quarter, we still add 50, 60, 70 basis points of margin expansion just on our core 5.5% base commission and fee from revenue growth. So without supplementals, without contingents, we're still seeing that kind of margin expansion in the face of rising costs, rising wages, there is inflation out there. And it's because we have the ability to have the use of lower-cost labor locations that really are a machine that can pump out good, high-quality work for our customers without the escalation in cost.

Greg Peters -- Raymond James -- Analyst

Thank you for those answers. I want to stay on the pricing commentary, but I want to pivot to your smart market operation. I think at your Management Day, you said you had approximately 20 carriers on your smart market service. And I'm certain that many of the lines of business that are running through your SmartMarket are the same lines of business that are seeing these changes in price.

And I'm curious if the market, the firming of the market changes the appetite for carriers to be on something like your SmartMarket platform? And maybe you could just use that as an opportunity to just update us on the status of the SmartMarket. Is the outlook for 2020 going to be -- is it going to be a growing business for you? Or is it going to be stable? Is it consistent with it was last year? Some additional color there. Thank you.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thanks. SmartMarket, I think, is one of those examples of both scale and digital and IT capabilities really playing to the strength of an organization that has some size and breadth. For the audience, basically, what this does is it allows carriers that are members of the SmartMarket group to be able to look into a renewal book of business, not by name of account, but by SIC code and by anniversary date and by size, and to say, this is a type of business that we're looking for to be able to tag that account and say, if, in fact, you are planning on marketing it, we'd like to see it. Those companies that have participated in SmartMarket have had superior growth rates to all the other companies that we've traded with on just a general trading basis.

And that's not going to change because it's great intelligence. For all of my career, if you wanted to penetrate Gallagher, number one, it was difficult because we traded geographically from business units. So if you're XYZ insurance company and you want to grow Gallagher you better get in the car and get out to our office and see our people and it's catch-as-catch-can. Some of our folks are here in the office.

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

When producers are running hard and account managers are running hard, they don't really want to hear XYZ's general approach to the marketplace, blah, blah, blah. They all sound the same. Now, what you've got is a targeted approach, just come and see somebody and, say, I can help you on this. And the worse of that is true in our offices, where we might be sitting there pulling our hair out a little bit thinking AIG has just announced they're getting out a surety.

I know the surety markets, but I'm not exactly sure where this one fits. And I've got Chubb coming in today, let me ask him about it. So it's a program that works very well on both sides, and that's not going away. That's just going to get stronger because what happens in this market is people start just over shopping.

And in particular, those folks that have never seen any kind of a firm market before because their renewal is a phone call. Well now, guess what? They're going to sit across for Mr. Tough buyer who ain't happy and he's going to want to know why did you pick this company? How many other quotes did you get? Why did they turn me down? How come you didn't get more quotes? Our folks can sit there and say, "We represent these carriers. We're able to talk to them about what their appetite is, and we went to those that truly have an appetite for your type of risk." Hey, it might be a little bit more money, but the renewing incumbent was up x plus 50.

This we've matched you with someone who really wants you. It's not quite as onerous. It's a way more professional conversation. In the old days, we've said, why do I know I have a good deal, I'd say because I went to three markets.

Here's the best deal. Buy it. That doesn't wash today. So, really, if you think about it, this puts Gallagher in such a strong position against our smaller competitors.

They've got no analytics. They've got no market intelligence. The market's appetites are changing. You get to learn that from conversations in the hallway.

And maybe the principle that has an account that he or she has handled this all these years. You're doing -- you're flying by the seat of your pants. 90% of the time when we go out to compete, that's who we're competing against. I think we're going to do pretty well.

Greg Peters -- Raymond James -- Analyst

Thank you for your answers.

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Greg.

Operator

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

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi. Thanks. One follow-up question. I think we were at your investor day in December.

Doug, you had mentioned that there was the potential for some of the bills to the extent that you guys could generate credits, the clean energy credits beyond the expiration. And I know I think you were keeping some employees on hand at the start of this year in case there was an extension. Do you have any kind of update there as we think about not just the 2009 plants, but also the 2011 one?

Doug Howell -- Chief Financial Officer

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

So we moved to machine. It was a low generating machine from one location into a higher producing location. That preserved a good chunk of the 2009 era production. We do have a handful of facilities that are kind of in shutdown mode right now, waiting for a potential law extension.

If we got the extension, it might add another $5 million to $10 million of earnings, but it's not a substantial amount of earnings to turn those plants back on. That said, where does it stand in the legislative process right now? I don't think we'll see movement on that much before the summer. And really, our objective on that is really to see if we can get an extension, primarily related to the 2011 era plant. So we really do have the summer of '20, we've got the fall session, we've got the lame-duck session, regardless of which way the election goes.

And then you also have into 2021, where you could get an extension on those for another couple of years. So no progress in Washington on any front right now, but maybe we'll have some this summer or this fall.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. Thank you very much.

Doug Howell -- Chief Financial Officer

Thanks, Elyse.

Operator

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

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Hector. Thanks, everyone, for joining us this afternoon. As you can tell, I'm extremely pleased with our 2019 financial performance, and we're excited about our future. Before we wrap up though, I'd like to thank our clients for their continued trust; our 33,000 plus colleagues for their passion, hard work and dedication; and finally, our carrier partners who do play such an integral role in meeting our clients' insurance and risk management needs.

We look forward to speaking with you again at our March 17th IR day in Rolling Meadows. Have a great evening, and thanks for being with us.

Duration: -2 minutes

Call participants:

Pat Gallagher -- Chairman, President, and Chief Executive Officer

Doug Howell -- Chief Financial Officer

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Mike Zaremski -- Credit Suisse -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Meyer Shields -- KBW -- Analyst

Greg Peters -- Raymond James -- Analyst

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