Arthur J. Gallagher & Co. (AJG) 2012 Q3 法說會逐字稿

Good morning, and welcome to Arthur J. Gallagher & Co.' s third-quarter 2012 earnings conference call.

Participants have been placed on a listen-only mode.

Your lines will be opened for questions following the presentation.

Today's call is being recorded.

If you have any objections, you may disconnect at this time.

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

These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call and which are also described in the Company's reports filed with the Securities and Exchange Commission.

Actual results may differ materially from those discussed today.

It is now my pleasure to introduce J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Co.

Mr. Gallagher, you may now begin.

Rob, thank you very much, and good morning, everyone.

Welcome to our third-quarter call.

This morning, I'm joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

For those of you that are out east, we hope your families are safe.

It's clear you've weathered a heck of a monster storm.

For the safety of our people, we did close many of our offices as well.

We are working very hard to get back to our offices to handle the thousands of claims that we know will be filed.

After the safety of our people, servicing our clients is our number one priority.

Hope all of you are well today.

As is our custom, I'll make some remarks about the quarter, and Doug will add additional color, and we'll get pretty quickly to questions and answers.

Again this quarter, I'm very pleased with our results.

Across all of our operating businesses, globally, we're producing growth for our shareholders and getting stronger in our capabilities to serve our clients.

I believe these capabilities are evident in the numbers that we posted with you last night.

Adjusted Brokerage revenues up 14% in the quarter -- 17% year to date with organic growth of 4% is another excellent quarter.

Adjusted EBITDAC in Brokerage up 20% -- 22% year to date, with margins up 141 basis points is also excellent.

Year to date, we've closed 43 acquisitions, bringing in over $170 million of additional revenue to our Company.

We've acquired businesses across all of our operating divisions, including five internationally, and our pipeline continues to be very, very strong.

Our Risk Management segment had revenue growth on an adjusted basis of 5%, EBITDAC was up adjusted 6%, organic growth in our base domestic and international fees was 5%.

When you put the two segments together, our Brokerage and Risk Management together, adjusted revenues grew 12% and adjusted EBITDAC grew 18%.

I could not be prouder of our team.

Our sales culture is strong, we continue to sell new accounts and to keep those accounts we have -- account retention remains nicely in the [mid-90s], which we view as continuing to be very strong -- and everyday, everywhere in the world, our sales teams are explaining why Gallagher is the right risk management partner to help clients deal with this risky world.

Let me touch on a number of the individual operations, and I'll start with the Brokerage segment.

In our property casualty retail area, we continue to see rate increases across most of the lines of coverage and across all geographic locations.

Any rate environment that is flat or a little better is extremely helpful to our growth.

From 2003 through 2011, we saw consistent and persistent rate decreases.

We returned from the CIAB -- that's the Council of Insurance Agents and Brokers -- meeting at the end of last month.

I can tell you that, after many meetings with the management teams of our largest trading partners, it was very apparent -- they know where they are making or losing money, they understand their lost costs are inflating, and they are committed to continuing with rate increases.

We touched just briefly on the economy.

We believe that we are still seeing our clients' businesses improving.

Now, this is a slow, no-hire recovery that we're feeling, and it does feel fragile, but positive audits continue to come through our system and it appears that our clients' businesses are improving.

Our international Brokerage is having a very strong year and a very solid quarter.

As I said last quarter, our Heath acquisition has brought many new opportunities to grow our business.

Internationally, we've closed five acquisitions this year, having a solid retail platform in the UK is working, and we are recruiting new sales talent that we couldn't have attracted before this transaction.

Our global growth is a growing and exciting part of our story.

Our wholesale and MGA businesses had another strong quarter.

Submissions are up, as are the number and the percent of those submissions that are actually becoming orders.

Clearly, business is moving back into the excess and surplus market.

Our benefits business, solid year so far.

We've completed 23 acquisitions for over $50 million in revenue this year.

We believe this is affirmation that smaller benefits brokers are recognizing they need our expertise and modeling capabilities to survive.

In the quarter, we announced the formation of a private exchange in partnership with Liaison.

We believe private exchanges will be an important alternative under the new law and we wanted our clients to know we are committed to providing solutions for their benefits needs.

Whether defined benefits or defined contributions, Gallagher has the capabilities to help.

The new healthcare reform, referred to as Obamacare, creates ever more opportunities for us to help our customers navigate the changes that are under way.

As I mentioned, our merchant acquisition activity is strong, and we've completed 43 acquisitions for a total of $170 million of revenue.

Clearly, this strategy is very important for our growth, and it's a key competence for our team.

We have literally dozens of additional opportunities in our pipeline.

As I do every quarter, I want to stop a moment and thank those great firms who joined us this quarter.

I know you had choices, and I'm proud you chose Gallagher.

Welcome to our growing family.

Let me move to Risk Management.

Another strong financial quarter, organic growth on our base domestic and international fees of 5% continues to be strong.

We've successfully wound down the work we were doing for the New Zealand Earthquake Authority, and we've added another significant account to our Australian business that Doug will mention in his comments.

We successfully launched a number of new tools to our risk facts IT system.

We call this the analytics work bench, which provides a whole host of new analytic tools for clients to better understand and manage their cost to risk.

In the quarter, we also invested in and brought aboard a new Chief Client Officer to continue our pursuit of providing the industry's top and best client experience.

We continue to work very hard to prove to our clients that Gallagher Bassett claim handling will reduce claim costs.

We've mentioned many times on these calls that, at Gallagher, we focus on four strategic areas -- that's organic growth; mergers and acquisitions; productivity; in addition, maintaining our unique culture.

I can tell you our culture is strong.

Our Company works in teams throughout the world, concentrating on helping our most important stakeholder, our clients.

We get up every day, committed to serving and keeping clients, getting new business in the door, improving productivity and margins.

I'm pleased those efforts helped us produce a solid result in the third quarter.

Over to you, Doug.

Thanks, Pat, and good morning, everyone.

As Pat said, best of luck to all of those on the east coast that are suffering from the storm.

Okay, overall it's nice to post another strong quarter.

Let's start on the first page of the earnings release in the Brokerage segment.

You'll see $0.02 of Heath Lambert integration cost and $0.01 of severance, which is right in line with our comments from the last conference call.

The team is doing a great job of integrating our UK operations, and we still believe we are on track to wrap up that process in mid-2013.

So, as a reminder, you'll continue to see $0.02 to $0.03 a quarter of integrations charges until then.

Turning to page 2, another really solid organic growth quarter.

Of note, it's our seventh straight quarter of organic growth in positive territory, which is fantastic after having endured 14 quarters of negative or no organic growth during the great recession.

And, we're particularly pleased that we saw 4% organic in our domestic P&C operations, about 4% organic growth in our domestic benefit operations, and about 4% growth in international.

So, clearly, across the board, nice growth in each of our units.

In terms of supplemental and contingent commissions, they came in right in line with what we said last quarter, when, at that time, we explained that deteriorating loss ratios on a couple wholesaling programs would not pay as much as they did in 2011.

As for the fourth quarter, we're seeing supplemental and contingent commissions about flat with prior year.

Turning to page 3, our Brokerage segment continued to show improvement in our comp ratio and our operating expense ratio, resulting in 141-basis-point improvement in our adjusted EBITDAC margin.

This marks the fifth consecutive quarter of year-over-year margin expansion.

Clearly, that's excellent work by the team.

Moving to the Risk Management segment on page 4, you'll see solid organic growth, continued success in earning performance bonus revenues, and that we wound down most of our work on settling the New Zealand earthquake claims.

As for margin, we're hitting our targeted margin of about 16% and still making important investments into the business.

Two special items to note for the fourth quarter in our Risk Management segment.

First, a reminder that, in 2007, we earned well over $0.01 from the New Zealand earthquake claim settling process, and that won't repeat this year.

Second, we picked up a very large account in Australia, effective January 1, 2013.

Ramp-up costs in the fourth quarter will cost us nearly $0.02 a share, but come 2013, we expect to generate about $20 million in revenues from that client.

So, while there's some ramp-up costs this year, it's a really, really great win for our team down under coming into 2013.

Next, let's turn to page 5 to the Corporate segment.

I'll give you some help on building your fourth quarter models, then I'll give you some early thinking around 2013.

Running down the table on page 5, here's how we're seeing the fourth quarter 2012.

All of these amounts are net of tax.

Assume about $7 million of interest and banking costs in the fourth quarter, about $2 million of acquisition costs, about $3 million to $4 million of Corporate costs, and then assume about $5 million to $9 million of clean energy investment earnings in the fourth quarter.

When you get done, the Corporate segment should show a loss in the fourth quarter of about $0.04 to $0.07.

I know that is somewhat of a wide range, but we simply do not have clear insight into fourth quarter clean energy production levels, and we will also be spending more to ramp up 2013 production.

So, when we look out towards 2013, we suggest that you model the quarterly interest and banking, acquisition, and Corporate costs lines about the same as the fourth quarter of 2012, and that will get you close.

Then, please take a few minutes to read the paragraphs on page 5 about our clean energy investments, and you'll see that we're gaining significant momentum getting idle plants producing.

If you add up the numbers on page 5 for the ultimate production levels, then cushion it a bit for timing, maintenance, and operational tweaking, you'll see that our 2013 earnings from clean energy investments can total $70 million to $90 million in 2013.

If we make that much from the investments, it will more than cover the interest, M&A, and Corporate costs, and in fact, the Corporate segment could post $0.15 to $0.30 per share of earnings for the full year of 2013.

On a quarterly basis, assume the Corporate segment might break -- might get to break even for the first quarter, and then spread the $0.15 to $0.30 across the last three quarters.

Clearly, that's an early and rough estimate, and a wide range, but it should give you a start.

As for capital management, we have a robust M&A pipeline, but we believe our cash position will allow us to do mostly cash deals here in the fourth quarter.

So, those are my comments.

And, just as a wrap-up comment, it's been an excellent nine months on all fronts, and our team is working very hard to close out 2012 strong and get after 2013.

So, those are my comments.

Back to you, Pat.

Thank you.

Rob, we're ready to open the lines for questions and answers.

Hopefully answers.

The call is now open for questions.

(Operator Instructions)

Greg Locraft, Morgan Stanley.

Hi, good morning, guys.

Good morning.

Greg, how are you?

Good, good.

Been a busy few days here, and actually you're the first call for the industry, so I know it's likely much too early to judge, but any thoughts on Sandy and the implications for the industry from your vantage point?

Well, Greg, you hit on it.

It's awfully early, but historically, when we look back at major storms going all the way back to '92 with Andrew, obviously Katrina.

Be giving a presentation down in Florida in a couple weeks, and I did go to the Insurance Information Institute and get the -- some information on the top 10 storms, and Katrina was by far the largest, and then second to that was a storm that was probably came in around $15 billion to $20 billion.

So you got the Northeast, we've talked for years about the fact that a storm that took that track could, in fact, be the biggest storm ever because of the value concentration there is in the Northeast.

Storm surge I know was unbelievably huge, but the winds weren't as rough as they could have been, so I have no dollar amount, and the industry, there's people rattling around throwing numbers out left and right.

I just think it's way too early to tell.

I will tell you from my experience, though, the first numbers you hear as the week unfolds and as next week unfolds, multiply it by two or three.

Okay, great.

Then back to pricing, sounds like at the top of the organizations, the rhetoric is matching what needs to happen, and the industry's more unified than previous cycles.

How do things look from your vantage point into next year on the pricing front?

Some of the data is showing a flattening of pricing power at actually pretty nice levels, and we're lapping last year's increases, but what do you see in the marketplace through next year?

I actually mentioned this to the CEOs of the people we met with at the CIAB.

This is my fourth cycle, and it is the first time in my career that what the CEOs of the insurance companies were saying is actually what the people on the street were seeing.

Typically there's a disconnect there.

It's interesting, I think the managements of the insurance companies today are supplied with much better information.

Their IT systems are solid.

They know where they're making money, where they're losing money, and why.

They're absolutely clear in their knowledge of what have loss costs are doing, and loss costs are up in every instance.

They recognize very clearly that there's no return on their investments that's going to save them.

They have to get their loss ratios in line.

It's an industry that hasn't covered its cost of capital but for a couple years out of the last 30.

They're clear on that, and they recognize that in order to get any kind of ROE, they've got to be driving results in the mid to low 90%s on combined loss ratios.

So I think it is a very positive circumstance.

A year ago, we would sit around and question whether these rate increases could stick given the surplus in the market.

These are not balance sheet problems, and they'll all say that.

We don't have a problem writing risk, we've got the balance sheet.

It's just we're not going to put our capital out and not get a return.

So that resolve, I think quite honestly, Greg, has actually gotten stronger as they've had more success getting the rates they need.

Now, if you take a look at the Workers' Compensation line, it's a disaster and they know that.

They're very clear on where they're making and not making money, so I think you're going to see continued pressure to continue to get 4%, 5%, 6% increases, and it looks like this could continue for quite a while.

Okay, great.

Thanks a lot, guys.

Thanks, Greg.

Brett Huff, Stephens.

Good morning, guys.

Can you talk a little bit about -- your organic growth has been better than your peers' for the last several quarters at least and continues to be so.

Based on what you're seeing, is that you guys taking share, or are you just able to take more advantage of the rate and the exposure increases you're seeing?

Can you just give us your thoughts on that?

I'm not going to comment on any of our competition.

I'm just really pleased with our team.

Our new business is solid.

Retention is very good, and we're out every day chasing new accounts from the top of the organization down to the person in the mail room.

That's what we do, and I think it's paying off.

I also think in our niche marketing approach, where we concentrate our efforts on places where we really understand people's business, that creates better retention and actually better new business than just anybody who's out there just a generalist, and I think culturally we have an advantage.

One of the things we do at this company very, very well is get the best talent we have in the marketplace at point of sale anywhere globally, and the team comes together and does very, very well.

It's not unusual to have someone from London, someone from Houston, someone from Calgary, someone from Oklahoma City all working on an energy account together, and it's very fluid.

I do believe that maybe we're seeing the benefit of utilizing www.salesforce.com and their Chatter product.

It is, in fact, helping us bring our intellectual capital across the world together every day.

You see requests for help on the system all the time, and frankly I just think we've got a culture of getting out and getting new business.

Okay.

Then can you comment again on the -- just in terms of organic growth looking forward, can you give us a sense where you think it will go for 4Q and maybe into 2013, especially given your commentary on rates?

We don't give a lot of guidance.

Doug, you want to comment?

I think we've mentioned that this is our seventh consecutive quarter of organic growth.

The fourth quarter last year was a particularly strong quarter.

If you recall, we had an outstanding benefits quarter, that quarter.

And I think if the carriers continue to push for rate, if the economy doesn't sputter and there's nice flat or up in exposure units, I think that you're going to see a low to mid-single digits-type organic growth for the next few quarters.

Might have some year-over-year compare issues in the fourth quarter because of our fourth quarter last year was so strong, but I don't see this as plus 10% type organic growth environment.

We would be very happy to constantly be stamping out 3%, 4%, 5% organic growth in this environment based on everything we're hearing.

Great, that's what I needed.

Thank you.

Meyer Shields, Stifel Nicolaus.

Good morning.

A couple of (multiple speakers) questions.

I want to look over your shoulders in Gallagher Bassett for a second, are you seeing any inflection in medical cost inflation for Workers' Comp claims or other claims?

We're seeing continued and constant inflation in medical costs inside comp, yes, and that's an industry wide problem.

Right, but it's not getting worse recently.

No, I wouldn't say -- it's continuing to inflate on a pretty consistent basis.

Okay.

That's helpful.

Obviously the amount of M&A has picked up pretty impressively.

Is there any drag on margins initially when that happens?

Meyer, this is Doug.

We see most of our merger partners having margins very consistent with what our larger -- what the overall book of business is showing.

We did have an exception on that with Heath Lambert.

If you recall, that was a margin lagger compared to our other operations, and we've been working hard to improve that, but by and large, most of the deals we're doing have margins very similar to ours.

And that's one of our strategies, we try not to buy turn-arounds, we try not to buy retirements, we try not to buy one trick pony-type agencies.

We want to buy strong agencies and brokers that have a desire to join our niches, to bring expertise to us and then use that to help continue to sell their clients and sell larger clients, too.

Very similar to our margins.

Okay.

And there's no timing issue where expenses come up before the revenues for a recent acquisition?

Not really.

The integration costs on these deals is -- it takes a lot of effort from internal resources, but by and large, our integration costs don't drag us down for more than two or three months on these deals, and they're pretty modest.

Okay.

And I apologize in advance because this is nit picky, but obviously brokerage organic growth did slow a little bit in the quarter.

I was wondering whether there's anything there, or that's just the nature of the business?

I think when it comes to organic growth, I think you're going to see some bouncing around of organic growth.

You saw it in all the other brokers that came out in the market or came out before us, I think that this is a sales process, and this is a retention process, and I think our Business is not a linear business where you're going to see organic growth that's consistently going up 1% every quarter or something like that.

I think we're very pleased with 4% in this environment right now and the hard work that's going on, we'd be very happy with 4%.

If it bounces to 5% one quarter and then down to 3% one quarter, I don't think you can read anything into that.

If you think about our business, that's $400 million worth of business -- volumes this quarter.

One point of organic growth is $4 million.

When you spread that across 300 locations around the country, it gets to that -- that's like 200 locations on a Brokerage side, we're not talking about something that's a systemic risk or a systemic change in the business.

Also remember, Meyer, our job is to mitigate increases.

One of the things we do for our clients is when the increases come in, make sure we've got the best product in the market at the best price, so we're working against those increases in many instances.

That's very helpful.

Thanks so much.

Thank you.

Michael Nannizzi, Goldman Sachs.

Thanks, it's Eric Fraser for Mike.

Quick question about the deals completed in the quarter.

It looks like the share count, as well as the amortization expense, picked up pretty meaningfully this quarter.

Can you talk about the relationship there with the deals or is it something else?

That's exactly what it is.

We did have a lot of activity, share count.

We use shares this -- the share count increase this quarter arises really from three different pieces.

Shares that we used in acquisitions, shares we used in earn outs and then just the natural dilution that's happening because of stock price last year was $27 a share, and this year it's $35, $36.

We had dilution just because of the increase of the share price.

In terms of using shares in acquisitions, we don't expect to use a lot of them in the fourth quarter.

You'll see us use some shares in the first quarter next year, because that's our seasonally by far our smallest quarter.

In terms of the amortization, when you do these small deals like that, a significant portion of the purchase price is allocated towards amortization rather than good will.

We value everyone on an individual basis, so we do produce significantly more amortization from small deals than we would do if we did a very large deal, and a big portion of that goes to good will.

But again, it's non cash, and we think a better metric to look at us on is on an EBITDAC basis.

Sure.

Is the pace of amortization expense this quarter a run rate, or should it come back down, given that you said it's related to purchase price?

I think the best thing to do is to probably look at, and I'll pull it out here while I'm talking to you, if you use our quarterly supplement and go to page 4 of the supplements posted on the website, we give it to you, the Brokerage segment on an adjusted basis.

So that will take out any - if we have some small valuation write-offs or something, but it looks to me like amortization is -- if you go back to the first quarter of 2001, it was $16 million a quarter -- fourth quarter of 2011, pardon me, fourth quarter was $19 million, and now we get $20 million, $22 million, $24 million.

Because of the acquisition activity, it's going to price step up $2 million a quarter if we continue the same level of acquisitions.

Great.

One more on M&A.

You know, now that the pace of international M&A has picked up, if you were to choose between doing a deal overseas versus in the US, how do you think about that cash allocation?

I think we look at it on -- when we look at an international deal, one of the big things we try to look at is what kind of trade can they do with our existing trade operations in London.

Just like we do here in the US, if we have an acquisition target that we think fits nicely in one of our niches, that's a much more attractive acquisition than something that's just going to stand on its own and not trade with other parts of Gallagher.

I don't think that at this point -- you know, we look at every deal and we think the returns both international and domestic are about the same, so at this point, we're not weighting one versus another.

It's important to note, we've done 43 transactions this year, and people look at that and say -- oh, my God, your activity is way up, how can you manage that and what have you.

The Company now has literally dozens and dozens of operations throughout the world who either joined us in through the merger and acquisition process or are run by people who have done transactions.

We have a pipeline that we manage every single month that is a global pipeline.

These 43 transactions, they're long-term efforts to bring people aboard in our Company.

So, we really don't get to a point where we say we're going to emphasize this division this month and this division next quarter, whether it's international or domestic.

We have people we're talking to and courting around the world all the time, and when they're ready to join us, we're ready to make the deal happen.

Great.

Lastly, can you just talk a little bit more about what you're seeing on the exposure side?

Is there any dispersion by account size, and if you are seeing declines, what's driving that?

Well, let me address that, and it's all anecdotal.

I'm not an economist and I don't have any facts, but I do think that when I get a chance to talk to clients, what I'm hearing is that their businesses are improving a bit.

Now, some of that is in areas like construction, interestingly enough.

Where there is a little bit more construction activity going on and our construction offices are doing better this year.

Now better from a few years ago being flat on their back.

Our temporary help businesses are doing extremely well.

Some of our banking businesses are now coming back and doing better.

It seems to be those that have survived the great recession actually have stronger businesses.

I will tell you as I said in my prepared remarks, we're not seeing people hire folks.

There seems to be a real reluctance, I think one of the reasons our temp businesses are doing so well is people are really actually reluctant to convert temporaries to full time.

So this is not -- I'm not saying we're seeing 5% or 6% economic growth, but I do think when you read the New York Times and the Chicago tribune this weekend, it's a 1.5% to 2% growth.

I think that's what we're seeing.

Ray Iardella, Macquarie.

Thanks, good morning.

Good morning.

How are you guys?

One quick question in terms of contingent commissions, how should we think about that for 2013 A, given your year-over-year pressure and loss ratios, and then Sandy impacting the industry?

I think it's probably a little early for us to digest what's going to happen with Sandy, I'll tell you right now.

But I think in terms of overall supplementals and contingents, if the carriers are still getting the rate that they need to do in order to get their returns, I think they're -- they know they need to pay their distribution system, and I think that supplementals and contingents are going to hang in there next year.

It will be interesting to see -- there is starting to be a little bit more push to move from supplementals into contingents.

And remember, if that's the case, we wouldn't be accruing supplementals next year.

It would push into a contingent in January or February of 2014.

By the time we do our January call, I should be able to give you a better feel for that because our teams will have been talking to the carriers and have a better understanding, but I don't see a dramatic shift in contingents or supplementals one way or another next year.

That's helpful.

Lastly, quickly sort of on debt, just curious, how much capacity do you guys believe you have in terms of debt?

Debt to total capital right now is around I think 31% if I'm calculating that correctly, and how do you look at that, debt to EBITDA?

Debt to capital?

Or all of the above?

I think we have $200 million to $300 million of capacity that would be below the industry standard of 1.8, 1.9.

We have about $125 million to $130 million of cash on our balance sheet right now.

In terms of thinking about long-term, we could go to 2.75 times EBITDAC and still be NAIC 2 rated, and so since we use the private placement market for all of our borrowing, there's substantial capacity on that.

That would be $500 million, $600 million, $700 million of debt capacity there.

Right now, I think we're looking at what we want to do with debt.

We'll look at it next spring.

I think rates are favorable right now.

Our M&A pipeline is strong, so that's something we'll take a look at between now and January.

Thanks again for the answers.

Sure.

Scott [Cognac], RBC Capital Markets.

First question I want to touch on was the private exchange that you mentioned there, is that fully online?

Can you talk about the opportunity there long-term, particularly versus some of your competitors?

Yes.

We're very excited about this opportunity.

It's clear that some of our clients are going to move to more of a defined contribution approach to their health insurance, and that individual employees are going to have to shop online for the coverage they want.

The employer will stay very active in that, making sure they vet the types of choices the clients have, and employers really look at this as overall part of their reward package or award package for hiring people.

We think what it does is put us in line to be able to work with those clients who say -- look, I want to be sure that my people have good choices, but I want them to make those choices.

And we think that will be an important part of the market.

Okay.

So, is that actually online right now?

Yes, up and ready to go.

Okay.

Then a quick question about the clean coal guidance that you gave, Doug, next year for the 2013 to $0.15 to $0.30.

Is that going to be mostly driven by higher revenues or costs coming down, or is it a combination of both?

How do we get to the $0.15 to $0.30 given the first quarter is going to be kind of breakeven?

Just to make sure I'm clear, it's $0.15 to $0.30 for the total Corporate Segment.

In the clean energy line, we think we can make $70 million to $90 million based on the plants that we currently have in process of resuming production.

When you read on page 5, there are still six plants that haven't been contemplated in that guidance that we have not -- while we think that we have ear marked a few locations and we're holding them for some utilities, and they're looking at them, almost all the growth -- in fact, all the growth I'm telling you about is coming from just getting idle plants back into production as we find utility partners that want to have a long-term contract with us.

So there's six plants that we're not contemplated in that, in those numbers.

Hopefully in January we'll tell you we have some more utilities interested in those, but almost all the growth we're talking about, in fact, all the growth, is just getting the plants that are currently idle back into long-term production.

Okay.

That's helpful.

And then the only other question I have is -- I don't know if you typically do this, but is there any way you could give some sense of what organic producer count is right now versus the end of the year and how that's changed over the year, whether that's been up a 2% or flattish or where you're seeing that?

I think that we don't actually give information with respect to producer head count, but I can tell you that we do have a growing producer head count population.

One of the key strategies of doing these small tuck-in acquisitions is entirely that, it's that we're trying to get producer count.

So, if you count the acquisition ads for producers, we're up substantially.

Organically, we still are having success attracting producers to come to Gallagher.

We have an extremely stable management team that's in the Brokerage space, Brokerage segment right now.

And we're finding that producers that know how to sell, and if they want to work with our niches, they find a nice home at Gallagher, so we've been successful in recruiting some producers to us also.

Scott, just a week ago, we had what we call our edge training group in, and edge training is all of our what we refer to as externs, people who have joined us through the internship program, and it goes across all of our divisions.

I spoke to them and had lunch with them twice last week, and I'd say we had 150 young people that are just now coming into our industry that have been recruited from places all around.

Whether it's from the insurance industry, or from pharmaceuticals or whatever, we're bring them in, teaching them insurance, putting them back out in the field, and lighting them up, and that's a big part of what we do.

As you might recall, we talked in the summer about having 150 interns, these are usually sophomores and juniors in college that we hope to turn into externs and edge participants, and it's working.

Every year, we're driving new young people in our industry.

We've got people out this week at a number of campuses recruiting, and that's again recruiting for sophomores, so that's kind of a little unusual, but it's something we do culturally very well.

And I think over time, you'll see that be an even bigger effort.

All right.

Sounds like a positive.

Thanks.

Mark Hughes, SunTrust Robinson.

Good morning.

Good morning, Mark.

Compensation expense for next year, anything we should expect, any change in philosophy?

Is there some upward pressure on compensation?

How are you looking at that going into next year?

And Doug, any updates on -- I know you talked in the past about potential for streamlining.

Where are you thinking about that for 2013?

I think that in terms of head count, I think that the teams have -- understand the controlling head count is important in this environment.

Using our offshore centers of excellence in order to provide lower cost labor, the thing is in our DNA now.

We're doing a great job with looking at work that can be pushed into lower labor locations.

I think there is modest wage and inflation pressure out there, but it's not rampant at this point, so I think we can control the inflation on it.

And in terms of productivity gains, we have productivity opportunities within our work force.

We think technology can be a way to improve our productivity.

And then on the operating expense side, we continue to see -- we're continuing to harvest wins out of the real estate -- out of our real estate footprint, but there is also a little inflation.

You're seeing travel inflation, you're seeing airlines and hotels being a little bit up.

So next year as we look out, head count control will be very important, and then continuing to use our off shore centers of excellence.

If we get to, say, the 3% to 5% organic growth?

The compensation line as a percentage of revenue, good opportunity for that to come down?

A little bit.

But not a lot.

I think that I've said all along, if we're at 3% organic growth, don't expect much margin expansion.

We've expanded margins, like I said earlier, five straight quarters now.

And, 140 basis point improvement this quarter is really great work by the team.

I wouldn't expect substantial margin expansion in a 2% to 3% organic growth rate, and even at 4%, we'd be happy to hold margins in there the way they are.

One final question.

The Workers' Comp claims trend in the quarter within Risk Management, did you touch on that?

I did not.

What's the question?

What was the number?

Was it up?

Down?

Sideways?

Well, what we saw from existing operations was about 2.5% growth in terms of claim counts, and year to date were kind of around 4%, but that included new business also.

On an organic basis, is that 2.5 %, is that a good same-store?

That's all organic.

Thank you very much.

Josh Shanker, Deutsch Bank.

Good morning.

Good morning, Josh.

I want to talk about the deal pipeline in the fourth quarter as it relates to the election, or maybe that's just a waste of time conversation?

Well, deal pipeline, we think our deal pipeline is very good.

We say it all the time, it's strong, but it is really strong.

We are more than happy to move quickly for those people that we have known for a long time, but we're not interested in just pushing to get a deal done.

We're not in a hurry to do a bad deal by year end just because the sellers might be worried about capital gains rates changing.

We have a tremendous pipeline right now.

The benefit space is extremely hot right now.

As benefit brokers, as Pat said, are looking to jump on our expertise, so I don't think the election is going to have a big change from where we sit right now one way or another.

Also I'd say if we have someone that's waking up to the change of capital gains rules now, well, that's probably not someone we want to do a transaction with.

As I said, these transactions take a long time.

We spend a lot of time with these people.

We expect them to come here and spend a long time kicking the tires.

They do a considerable amount of due diligence, as we do on their business, so we'll have a number of transactions in the fourth quarter, but these will not be things that were sped up and rushed through the door.

Or to the extent that deals are slowed down, that someone you know and trust that said -- look, we're going to sell our business to you, we're not sure when, but depending on the outcome of the election, that might push us over the edge?

Nope.

We've had virtually no conversation like that.

That has never come up.

All right.

Thank you.

We've had a ton of conversations -- the early part of your phrase there, we have this all the time.

Look, we think you'd probably be the right people to sell to, but we're just not ready.

That just stays in the pipeline and we keep talking to them.

All right.

I appreciate the call.

Thank you.

Sure.

(Operator Instructions)

Chris Leikhim, William Blair.

Hi, good morning.

Good morning.

I wanted to follow-up real quick on the Liaison deal on the exchange side.

Would you guys mind walking through the mechanics, the partnership and sort of how that process worked?

Sure.

I'll throw that to Jim Durkin.

I don't know how familiar you are with Liaison, but they are clearly a leader this space.

We did a lot of due diligence, looked at a number of different partners, and chose them because of their experience because of the fact they are up and running, have been doing this for a while.

What they bring to the table is a deep, deep knowledge and a platform that really helps us in the middle market, which is where a big part of our concentration in terms of our focus is.

It's a partnership, it's not an exclusive partnership.

We will most likely partner with other private insurance exchanges, and the reason for that is that I don't believe one exchange will be able to meet the needs of all of our customers across the country.

I don't know if that adds any insight into it?

Yes, that's helpful.

I just wanted to get some character around the partnership.

Then on the Heath side, I just wanted to know if you guys could talk to sort of the demand environment you're seeing in the UK and what kind of expectations you have for the business in 2013?

Well, the European economy is not what we'd like it to be.

England is probably better than the continent.

But the nice thing about our Business, and the wonderful thing about insurance is you've got to buy it whether you want to or not.

From the demand side, we're seeing consistent renewals and we are seeing organic growth in the Heath book.

It's been a lot of work, we've spent a lot of time on this integration.

The team has done and excellent job, but when you add their natural growth, because they do have a good sales culture in many of the operations outside of the city of London and in London for that matter.

If you add that sales culture -- and we're bringing and awful lot of spike to that as well and our acquisitions and our organic recruiting, we have very big plans continuing to grow that Business.

Great, I appreciate it.

Thank you.

All right.

I think that's what we've got time for, so I have a quick wrap-up comment.

It's good to have three solid quarters behind us in 2012.

Doug mentioned this, if rates continue to firm or hold firming, and the economy holds up, we will perform well in 2012, and we should have darn good momentum going into 2013.

Our team is excited.

We're turned on and we're winning, and we like that.

Thanks for being with us this morning, and all of you out East, best to you and hope things get better quickly.

Thank you, Rob.

This does conclude today's conference call.

You may disconnect your lines at this time.