Good morning, welcome to Arthur J. Gallagher & Co.'s second quarter 2013 earnings conference call. Participants have been placed in a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect your lines 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 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 begin.
Thank you, Brenda, welcome everyone to our second 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 around the world. I'm very pleased with our second quarter and our first six months. For our brokerage segment, on an adjusted basis, revenue in the quarter up 16%, 17% for six months, EBITDAC up 20%, up 23% for six months, EPS up 13% in the quarter, up 16% year-to-date. Margins improved in the quarter by 90 basis points, and we did just short of 6% organic growth. A really great quarter for brokerage and for risk management as well. On an adjusted basis, revenue was up 10%, 11% year-to-date. EBITDAC is up 14% in the quarter, 13% year-to-date.
Earnings per share up 11% and 11% year-to-date. Our margins improved by 50 basis points, and we had 10.4% organic growth in the quarter. When you look at our brokerage and risk management units together, we produced 7% organic growth for the quarter. All in all, a great quarter and a terrific first half of the year. Mergers continue to be an important part of our growth story. For the quarter, we completed five transactions for about $36 million in annualized total revenue. Through June 30th, we've completed nine transactions for about $41 million of annualized revenue. As I mentioned last quarter, the first half of 2013 is a little slower in the M&A front than we were in 2012, but the pipeline is very robust, and we expect to have a number of mergers close in the second half of 2013.
I want to welcome and thank all of our new partners. We're honored to have you join Gallagher. I know you had choices, and I'm proud you chose to join our growing family. Usually in these calls, I like to hit some high points on the four things we work on every single day, which is organic growth, mergers and acquisitions, productivity and margin improvement, and culture. I can tell you that in all four areas, we're firing on all cylinders. Rather than going to detail there, I think our time is better spent drilling into what we're seeing in the rate environment. First, I mentioned earlier that our brokerage segment reported 5.9% organic growth in base commissions and fees in the second quarter. Of that, slightly less than 1% came from rate. The remainder was simply better new business and better retention of existing business.
Our professionals continue to help our clients find ways to mitigate the carrier's request for rate increases by finding creative solutions in the structure of their insurance programs. Less than 1% from rate is consistent with what we've seen for the last 6 quarters. Second, let me give you some flavor from our July renewals in our domestic PC units compared to last year, renewals on the same accounts. These are July 1 renewals. Property compared to July 2012, 55% of our renewals are showing rate increases, 22% renewed about flat, and 22% had slight decreases. In workers' compensation, this is a line that's troubled. No matter how we look at it, carriers are looking for rates to repair the line. Greater than 95% are showing rate increases over last year on July 1st. Casualty other than work comp, compared to July 2012, 60% are showing rate increases.
30% are about flat, and less than 10% are showing any decrease in rate. Let me give you some flavor as to how we see the momentum of rate through 2013 compared to other renewals in the first half. Take, for instance, April 1st renewals versus what we're seeing in July. Obviously, these are not the exact same accounts, but similar accounts. Property compared to the first half, 60%, we are seeing July rates being comparable to earlier in the year. 15% saw further increases, and 25% were slightly down. Workers' comp, compare renewals to the first half, 40% of the July renewals saw further increases, 50% were about comparable, and only 10% are showing any kind of lower increase, but there's still increases in work comp across the board. Anyone that was flat with work comp had great loss experience.
In casualty other than work comp, 20% of the accounts renewed in July had further increases, 60% were comparable, and 17% lower. We are seeing carriers ask for rate increases on most lines of coverage and in most geographies. This is really a great environment for us, and while we're seeing a bit of slowdown in the property area, the rest of the lines continue to have strong momentum. Moving on to our international brokerage front, we continue to see strong organic growth, especially in our London wholesale business, and continued merger opportunities throughout the world. Our wholesale business, Risk Placement Services, continues to see increasing submissions emanating from rate increase requests and new business startups, and we are getting more orders as the standard markets withdraw from some lines that typically would be in the E&S market.
On the benefits side, the Affordable Care Act continues to keep our consultants very busy. Having the employer mandate move back to 2015 has not really slowed the amount of help our clients need. Businesses are realizing that a host of new regulations are going into effect in 2014, and they need our help. We've invested substantially in tools our clients need to comply with the new law, and we know that this business will continue to be a growth business for us throughout all of 2014. On the risk management side, as I said earlier, a great quarter. Our team in Australia continues their strong performance. We've ramped up our business on the work comp program for South Australia, which is providing very nice organic growth. Also, Gallagher Bassett hired a number of experts in analytics and workers' compensation in the quarter, which has bolstered our client service capabilities.
Our growth story continues across all geographies. In every business unit, we continue to see growth and lots and lots of new business opportunities in the future. Doug?
Thanks, Pat, and good morning, everyone. Let's start on the first page with the brokerage segment, which, as you heard Pat say, had another excellent quarter. First is the Heath Lambert integration cost of $0.02, which is in line with what we guided last quarter. Please recall that we expect about $0.03-$0.04 of integration costs in the third quarter, which relates to consolidating much of our combined London operations into new office space. The integration will be done. Second, you'll see a couple of pennies of earn-out related adjustments. Recall these adjustments arise when we change our estimates for the ultimate amount of earn-outs, and those will always be a little bit volatile. Moving down to risk management, a nice clean quarter also with excellent results. Let's flip to the brokerage segment organic growth tables on the lower half of page two.
Another very strong quarter, up 5.9%. We saw about 5.7% domestically and about 6.5% internationally. As Pat said, a little less than 1% from rate, not much from exposure growth. It was really a nice new business and retention performance in the quarter. Moving next to the bottom of page three, you'll see our brokerage segment expanded adjusted EBITDAC margins another 90 basis points. This marks our seventh straight quarter of margin expansion. In fact, I look back, we've expanded margins 14 out of the last 18 quarters. Let me spend a minute more on margin expansion relative to organic growth. Stay on page three, but go to the top to the brokerage compensation table. You'll read in the note that incentive compensation is up 210 basis points in the second quarter. On a year-to-date basis, that equates to incentive comp being up 130 basis points.
Our incentive comp is up through June 30 because our field folks are further along in achieving their objectives, and therefore, they are more likely to reach their bonus targets than they were at this time last year. In fact, last year, many didn't look like they would hit their bogeys until we were well into the fourth quarter. In other words, there's an element of timing here. If you levelize for this timing, we would have posted margin expansion for the quarter and year-to-date of well over 200 basis points. Relative to organic growth in the five-plus percent range, we think that expansion is tremendous work by the team. Let's move to the top of page four to the risk management organic table. Gallagher Bassett had another terrific quarter, up organically over 10%.
Even without our new Australian client, to be up over 7% organically shows nice continued improvement in that business, even in an economy that isn't seeing much employment growth. Also on page four, our risk management segment continues to improve its compensation and operating ratios, resulting in EBITDAC margins 30 basis points above our full-year target of 16%. Looking towards the third and the fourth quarters, we might ramp up some of our investments in product and service enhancements, which would cause us to give a little of that back. Don't model more than 15.8% of margin in those quarters. All right. Let's turn to page five to the shortcut table for our corporate segment. Our clean energy investments also had a good quarter, and accordingly, the corporate segment posted $0.10 of earnings, which was towards the upper end of the range we provided last quarter.
Please note that $0.01 or so of that is timing pulled into the second quarter from the third quarter. Looking forward, we've again provided a range of estimates for the third and fourth quarter on page 14 of the investor supplement that we post on our website. When compared to our last supplement, not much change related to the third quarter after you consider the timing I just discussed. If we look further out to the fourth quarter, we are getting revised production estimates from our utility partners, which are lower than we provided before. We are told these reductions are mostly due to possible routine maintenance outages. Like we've seen before, we are subject to a utility's change in production estimates, which can cause a swing in our earnings estimates.
For example, even a few weeks of difference in forecasted production can swing our results by a couple of $0.01 either way. That said, stepping back, we're really pleased that we're still on track to more than double our clean energy earnings here in 2013. The team is making great progress rolling out and ramping up our remaining plans. This bodes well for even better results in 2014. All right. Those are my comments. It's great to have a strong quarter on all fronts. Back to you, Pat.
Thanks. Brenda, I think we're ready for questions and answers. Hopefully, some answers.
Thank you. The call is now open for questions. If you have a question, please pick up your handset and press star one on your telephone at this time. If you are on speakerphone, please disable that function prior to pressing the star one to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star two. Again, that is star one for questions. One moment while we hold for any questions. Our first question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.
Thank you very much. Excuse my voice. You talked about your producers more likely to be hitting their objectives earlier in the year. It sounds like the rate impact is steady. I think you described in your release that the customers were kind of slowly getting better. What accounts for the better productivity on the part of the broker force?
This is Pat, Mark. Good morning. Hope you feel better. We just had a very solid new business retention first half of the year. The team just did very well.
Yeah, we're not seeing much in the way of exposure growth, but when we did our polling here for the July 1st renewals, more of them than not are saying their business is growing, and very few of them said that there's much contraction in their business, not necessarily on the employment front, but just in general, they're starting to grow. We don't see it yet in our numbers, but exposure units look like they're not decreasing at this point.
Right. Was there any new incentive program in place that accounts, then?
Nope.
No. By the way, the targets we're talking about, it's not just for the production folks, it's for the field management folks also. When you said that it was for producers, it's for all of the field, which would include the management layer also.
Right. How about claims frequency on the risk management side, what's going on in terms of underlying claims in workers' comp?
They're up about 2%-3%.
Okay, great. Thank you.
Thanks, Mark.
Thank you. Our next question is coming from the line of Arash Soleimani with KBW. Please proceed with your question.
Hi, thank you. Just wanted to continue on the organic growth. You mentioned most of that is coming from new business. I just wanted to, I guess, dig into that a bit more. Is that market share gains or what is that exactly stemming from?
Well, Arash, we'll write about 12%-13% new business, depending on the unit, against trailing revenues. We typically then will lose somewhere between 4%-6%, depending, again, on the unit. As long as rate is neutral to up slightly, we will show solid organic growth as long as we continue to have that kind of new business growth. We're a new business machine. I mean, all of us are involved in production every single day. That's what we do. We're involved in helping clients solve problems. We're involved in bringing new clients on. As long as I said that the rate environment stays beneficial to us, we should continue to post solid organic growth.
Okay, great. You had mentioned that, again, exposure unit growth wasn't really causing much in the way of organic growth this quarter. I guess my question there is, once that picks up, and let's assume new business wins and everything stays pretty consistent, should we expect the level of organic then to even expand further at that point, or?
There's a number of things that could impact that, Arash. Yes, I think you could. If we start to get some really solid economic growth that then comes through in exposure units, both in audits for our clients as well as having increased their exposure units going forward on renewals, our team will work very hard to mitigate any increase in cost to our clients. That's what we do. That's why although we're in a rate environment that's up 4% or 5%, you see less than 1% impact in our numbers. By the way, that less than 1% includes exposure units, so it's exposures and rate are producing less than 1% of our organic. If that starts to move nicely, yes, I think you'd see organic expand as well.
Okay, great. Thanks. In terms of the margin expansion, I think you mentioned it's six or seven quarters in a row where they've been expanding. Is that something we should expect also to continue into 2014, or would you say most of the margin gains have already been realized?
Let's go back. I think that this year, if you go back to my commentary in the past, is generally we feel that anything below 3% organic growth, it's difficult to expand margin. When you get above 3%, you can start taking some of that to the bottom line. This year because of the actions that we took at the end of last year, more of that is hitting the bottom line than would be normal going forward. I think that if you model organic growth greater than 3% out in 2014 and beyond, there would be some margin expansion to that, but clearly not 250 basis points of that.
Thanks. Just final question, you had mentioned that the second half of 2013 should be a bit stronger on the M&A front. Is there any, I guess, guidance you can provide there or?
No.
Okay, thank you.
Thanks, Arash.
Our next question is coming from the line of Greg Locraft with Morgan Stanley. Please proceed with your question.
Hi, good morning, guys.
Morning, Greg.
Another great quarter.
Thank you.
Congrats. I wanted to just understand why you think exposures aren't moving up. I mean, obviously the team's killing it.
If we get some rate and we get some exposure, everything's going to continue to accelerate. I'm sort of wondering what's holding back exposure in your opinion, and what would cause that to go higher?
I think the world is afraid to hire people, Greg. I just think that our customers out there are very cautious. The 2008, 2009 downturn was incredibly painful. We had clients in the construction world that were doing $100 million, $200 million of construction a year, and that dropped to $25 and $50. Their companies survived. I also think the Affordable Care Act is going to keep employers doing. You're not going to have 51 employees. That's not going to happen. You'll stop at 48. I think there's a ton of that going on as well. The idea that this Affordable Care Act is somehow going to save us all money. Well, I'm looking at my budget for next year, and I can tell you, we're not going to save any money. It's going to be frightfully expensive.
I just think there's a lot of that going on. People have long memories. They're not going to add folks.
Okay, has exposure been roughly flat for a while, then?
I'd say yes. Greg, actually maybe up a skosh. What we've said in the past, we've seen clients maybe up 1%, one and a half, two. Yes, I'd say it's relatively flattish over the last couple of years.
Okay. I guess, a lot of people were all asking about organic, and organic was great in the quarter, but it doesn't seem like you'll get the tailwinds of price and exposure anytime soon. At least that's not in your base case, it sounds like. It sounds like you're just going to continue to do very well on the new business front.
Well, let me be clear. If we could have a property casualty rate environment that is flat to up 3% or 4% for the rest of my career, I'd sign up for that right now. This is a great environment for Gallagher. We've got tremendous depth of capabilities. Those capabilities, we are very good at teaming on accounts and bringing the best resources to the point of sale. We're not competing with just the larger competitors every day in and day out. We're competing across an entire spectrum of competitors, we are going to win more than they are when we compete with them head-to-head.
Okay, great. Then, one for Doug. If there's one negative in, again, an excellent quarter, it would just be the slippage on the clean energy side. I guess the reason is the production schedule's out of the utilities. I'm just wondering, as CFO, you put out ranges and guidance and whatnot. How do you bracket this? How do you think about it as you put out numbers to us and whatnot? I'm sort of wondering the range of outcomes and possibilities as we think about this line item into next year and beyond.
Well, listen, I can tell you, it's with mixed emotion, if you ask me how I feel about it. I think that I'm ecstatic and extremely happy that we're going to double what we did last year. Am I a little disappointed that the estimates, the guesses of the future that are highly dependent on what's going on at a utility, especially putting in an experimental new technology? Sure, I would love to have the precision of forecasting that we have in other areas in our business. On the other hand, during this roll-out and ramp-up period of all these plans, because we don't have all of them in running at ultimate levels yet, I don't have some of the shock absorbers that I'll have in the future when we have 29 plants that we own less than 50% of.
Any one change in one plant shouldn't alter our estimates significantly. During this ramp-up period, I can understand why it's a little frustrating for you trying to take a guess on what we're going to make in the future. I think you should look back to say, gee, they're well ahead of where they were last year. There's more plants that could come online. Eventually, when we get to a portfolio of 29 of them, the volatility on that should go away, or at least be substantially less. I have mixed emotions about it. I'm ecstatic that we're on track to double, but giving some guidance, I'd love to be able to pick it to within a penny every time, but I don't think that's going to be possible.
Yeah. Okay, great. It seems like, as I just track kind of how the guidance has come in, for the third quarter, you've been able to, with one quarter forward, have an excellent rate of precision on this, and then it gets more fuzzy as you move out. Is that the right read?
Yes.
We should feel real good about the third quarter, a little worse about the fourth, and then who knows what'll happen from there. We're on our own.
Yeah, I think that, right. I think when you look out for 2014, I think that the progress we're making should be better than what we're doing here in 2013. On a quarterly basis, your assessment is right. It's a little bit difficult. If you just step back and look at it, if we get the rest of our plants in and we get the operational tweaking done, we should have a much better 2014 than we do 2013, even.
Okay, great. Again, congrats on another great quarter.
Thanks, Greg.
Thanks, Greg.
Thank you. Our next question comes from the line of Joshua Shanker with Deutsche Bank. Please proceed with your question.
Yeah, looking at obviously the acquisition pipeline, it hasn't been as robust this year as last year. I'm not asking you guys to opine on your stock price, but I'd also like to hear about what you think about the pipeline and the percentage of cash you'd like to be allocating versus stock, given where your stock trades today.
Well, I'll let Doug handle the financial side of that question, Josh, and I'll take the pipeline. We all knew that last year was an extraordinary year for acquisitions. We did 60+ of them. That's one every four working days last year. We knew we were clearing the shelf a bit, and I think that was driven by two things, the Affordable Care Act, again, as well as the tax law changes. We had cleaned the cupboard a bit as we came into this year, but we filled it up again, and we've got a very solid pipeline. As you know, acquisitions, they're a sale. They come at their own pace. You can't say, "I start one in March, I finish it in June." Each one is different. Each one has its own personality, and we've got a great pipeline.
We've got a number of people that are out talking to folks every single day, and we think we'll have a very good second half. Doug, you want to talk about the stock price?
Yeah. In terms of stock price, generally, the stock price isn't an indicator of whether we use stock in an acquisition. In fact, it is always the outcome of how much free cash do we have, how much borrowing capacity, and then we use the rest with stock. Generally, the way you should think about it is that our free cash is first used to pay the dividends, second in order to buy brokers and risk managers. We try to run somewhere around two times EBITDA in debt. We'd borrow up to that, and the rest we'd use in stock in the deals. There are exceptions to that. If a seller wants to do a tax-free exchange, there are requirements of how much stock that you have to give in order for them to protect their tax-free reorg status.
If they want stock, we'll give them stock. There are some sellers that really have a strong desire just to hold our stock, and of course, we'd be happy to have them be in the same boat with us when we're rowing together. The answer to your question is that we have $115 million-$125 million of free cash sitting in our balance sheet right now. The first and second quarters are our smallest cash flow quarters. We generate substantially more cash. In fact, I think we generate about 75%-80% of our cash in the last two quarters. We'll have strong cash flows coming in the second half. We still have some borrowing capacity to keep us at less than two times EBITDA, and the rest we'd use in stock.
If I'm understanding you correctly, if the acquisition pace were to taper, obviously compared to last year, but in general, you would be an all-cash acquirer. You would not use stock if you didn't have to in order to top things off.
That's correct. We really haven't used any stock since about the third quarter of last year.
Okay. That actually comes to my question. I was trying to understand that better. I appreciate the color. Thank you, and congratulations on the quarter.
Thank you, Josh.
Thank you. Our next question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your question.
Thanks. Just quick question, Doug, just following up on your comment about risk management margins in the back half of the year. Can you just talk about the investments you're making and how should we think about the offset of those investments in terms of margin expansion opportunities in 2014?
Listen, I think that if you go back and if you look at the history for risk management, the team has just done a remarkable job with targeting investments that are delivering value to the customers. If you go back last year at this time, they launched into the analytic workbench toolbox that our clients are raving about, the prospects are looking at as being best in class. They did these projects. These are $1 million-$2 million type projects where they go in and they reshape the product and service offering they do for their customers. They have a list of those things that they would like to do, and when they start hitting at the beginning of the year, when we sit down and we say, "Listen, 16 points of margins is where you need to be for the year.
Let's see how we do in the first couple of quarters." Now they're at the point of saying, "We'd like to launch these other improvement projects." If they can do it without margins dropping below 15.8%, they should be able to bring the year in at 16%. That's the way we sit down and do it. It's a continuous cycle of looking for opportunities to invest, but also making sure that we hit our target margin expectations.
Remember, Mike, this is Pat. There's not the same leverage in the claims business as there is in the brokerage business. When they get revenue, they get claims, and they better have the people on board, on deck to handle those claims when they start coming in. There's a lag in time, but it's not a great deal of time. You got to get the bodies on board, trained, and ready to go. As you saw in some of our previous quarters, we had a substantial ramp-up in South Australia. 16 points of margin has been a consistent direction that we've given to the street for literally a decade, and that's our target margin.
Got it. Are there any trends that you see in the market that you think will lead to more outsourcing in terms of claims management or maybe as companies look to try and move down policy size spectrum or ahead of building the infrastructure themselves?
Yes, I think you're hitting on something that we see as a huge opportunity, both from new capital places like Bermuda coming onto shore and needing outsourcing help, as well as from some standard mainline carriers that may want to open in different states, that may want to open with different lines, and they are outsourcing that work to Gallagher Bassett. When you start to take a look at the size of Gallagher Bassett versus some of the insurance companies we trade with, we're actually paying, in some instances, thousands and thousands more claims than they are. We've invested in systems, in people, and expertise. That is probably better outsourced by many insurance companies than it is being handled in-house.
Great. When would we expect, or could we expect to start to see that inflection point in terms of the top line? Is that something that is just a gradual process or just given how much alternative capital has permeated and the movement of carriers from one part of the market to the other, should we start to see some of that really flow through this year? Or are you expecting that to happen kind of more than you thought maybe six months ago?
Well, no, it is happening. That's why we're up 10.4% organically. That's included in the mix.
I got you. That's a big part of that change then.
Yep.
Okay, great. Thank you.
Thank you, Mike.
Thank you. Our next question comes from the line of Robert Glasspiegel with Janney Montgomery Scott. Please proceed with your question.
Good morning, everyone. I'm on Josh's wavelength on acquisitions.
Morning, Bob.
Good morning, Pat. Heath, you said you've got all the hard work behind you, no more integration costs. Where do you stand in your overall U.K. integration? Is there a desire to be bigger in that specific region?
Yes, we're going to be very active in that region. If, as you recall, one of the reasons we were excited about the Heath transaction, which did take us a good 18 months to integrate. There was an awful lot of work there, and the team did great work. Part of that reason for doing that was to give us good retail presence in the U.K. that we can now go bolt on other acquisitions. We did. We did four acquisitions last year and bolted those in. Those were mostly affinity acquisitions, but we bolted them into the Heath platform, and they're going extremely well for us.
How big could U.K. be, or Europe as a region? How much bigger than your current state? What sort of platform you need that you don't have as far as product or?
I'd say right now, Bob, where we're probably weak in the U.K. is what we would do in the U.S. as standard commercial middle market business. The local contractor, the local auto dealer, the grocery firm, that type of thing. We're very good in the London wholesale specialty business. That's grown extremely nicely for us. We're very good in energy and natural resources. That's a global play. We're very good at affinity in the U.K. and MGA and MGU business. We're probably a little light when it comes to just your standard middle market fare.
Okay. Well, good luck at building it out. Thank you.
Thank you, Bob.
Our next question comes from the line of Brett Huff with Stephens Inc. Please proceed with your question.
Thanks. Hey, it's John Campbell in for Brett Huff.
Hey, John.
Hey. Congrats on another great quarter.
Thank you so much.
Back on the brokerage segment, continued nice margin growth there. It sounds like rate is providing some benefits, some degree, as well as just a general uptick in exposure units. Doug, if you could just maybe give a little bit more color on the various pieces of that margin expansion, or just maybe more specifically, just to what degree is cost takeout above and beyond the actions taken last year, a piece of that?
Yeah, I think that the margin expansion you'd have, let's say at 5% organic growth, you'd have a point of natural expansion just because of a larger, more organic growth. When you look at where we're seeing savings opportunities right now, obviously, as we get more productive, we've shifted more work to our offshore centers of excellence, so that's helped us control our headcount here in the U.S. and in the U.K. When it comes to operational savings in the OpEx line, we're seeing some savings from rent. That's probably being offset a little bit more by the travel costs that are going up. Airlines and hotels are going up.
We do have some nice projects that we're working on now that will make us more productive in what we call the middle office and the back office layer. We're really not seeing the results of that yet. We wouldn't see that till 2014 or 2015. Those are efforts that would help us control inflation in our other operating expense line. They're not going to be projects that drop a ton of money to the bottom line, but they could help us with controlling inflation. We're not seeing wage pressures right now except for maybe in some of the IT areas where there's more demand for certain resources there. We are seeing some comp pressure there, but that's not a huge part of our payroll. That's the flavor of where we're seeing margin expansion come from.
Okay, great. Thanks for that additional color. Just as a follow-up, I would say a common theme that we've been seeing in just 2Q earnings just across the market in general is just kind of sluggish international results, particularly out of U.K. If you guys could just maybe talk a little bit about U.K. results in 2Q, if those results were relatively sluggish, to what degree is that priced in?
Well, actually, we have 6.5% growth in our international operations on the brokerage side. Our U.K. operations, in our view, is performing at a level of expectation or higher than expectation, which is a high expectation.
That includes Australia as well.
Yeah, Australia is doing well, too. The transformative Heath acquisition that we did over there has provided some energy in the U.K. It's provided new opportunities for us, our organic growth is 6.5%. We're not seeing sluggish operations coming out of the U.K. We don't have a lot of exposure to mainland Europe. We see tremendous results coming from those folks right now.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your question.
Good morning, everyone. A couple different questions. How did RPS do? Was their growth above or below what the average was for the brokerage?
It was above.
Okay, another good quarter.
Very solid quarter.
What's the rate outlook in surplus lines, property versus casualty, for the rest of the year?
If you take a look, the property market, Adam, is squishy. Cat-exposed stuff in Florida's flatted down. Oklahoma and that region is in a full-on hard market. Regular middle market commercial property's probably flattish to up a bit.
Okay. That's helpful. On the benefits side, I know you've been doing more and more business there. Has the mix been shifting more towards consulting, or is it still predominantly the traditional placement business?
No, I'd say, Adam, over the last decade, that's switched almost 100% to consulting. While we get paid on commission because clients are comfortable with that, we've been completely transparent in that business since ERISA, and it's a consulting play.
Okay. On the healthcare exchange, and I know it's very early stage, but are you seeing any traction for enrollment for next year? Any way you could quantify that would be great.
We don't have any traction at this point. We've seen there's interest, but we don't really have any orders to speak of at this point.
Okay.
We've got a good partner in Liazon. We think we've got a good product offering. It is going to be an important part of the product offering. We will not have one exchange. We'll trade with a lot of exchanges across the country, whether they're run by the state or whether they're private, and it will be part of the mix. At this point in time, it hasn't grabbed a lot of traction.
Okay. Thanks a lot.
Thanks, Adam.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press *1 on your telephone keypad at this time. Our next question comes from the line of Alison Jacobowitz with Bank of America. Please proceed with your question.
Hi. Thanks.
Morning, Alison.
I didn't hear it. Good morning. I don't think I heard it, and I don't know if I ever heard it, and I'm just curious, and I don't know if you can answer it. Do you have a range or something, an outlook of what the clean air facilities could produce if everything was up and running and everything was working perfectly? What kind of earnings that would produce?
Yeah, Alison, I think that if you were to look at page five of the earnings release, over there, we try to provide the ultimate after-tax earnings estimate for the plants that we currently have up and running or on the drawing board. If you add that up, the number gets somewhere around $100 million of after-tax annual profits. We did $33 million last year. We're on target to $67 million-$71 million this year. Now granted, those plants won't all run at ultimate levels. That's what the footnote says there. That gives you a size indicator of how much Gallagher could earn off of those plants. There are other plants that we haven't put in place yet. There's another six of them. I couldn't tell you whether those are going to go into big locations or small locations at this point.
That's why we put, "Not estimable" on there. That's probably a good guidepost. Will we be at that level starting 01/01/2014? I don't know. We'll see. We have a little bit of a lull that happens generally in the summers. As utilities are producing a substantial amount of electricity, they're not so willing to put in new technologies during the summer. We saw this last year, then we had a nice uptick of activity in September and October. Hopefully by October, I'll be able to start giving you some more feel for next year. As of now, I would guess that we're going to be better than the $67 million-$70 million that we did this year.
Thank you.
Thank you, Alison. Any more questions, Brenda?
It seems there are no further questions at this time.
Great.
I'd like to turn the floor back over to Pat Gallagher for closing comments.
Thank you very much. Thanks, everyone, for being with us this morning. We appreciate it. We're very pleased with the two great quarters that we've had this year. The team is very turned on. We're helping our clients. We're selling a lot of new business. We think we're on track for a very strong finish to 2013. Thank you for being with us this morning. We appreciate it. Thank you, Brenda.
Thank you. This does conclude today's conference call. You may disconnect your lines at this time.