Good morning. Welcome to Arthur J. Gallagher & Company'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 & Company. Mr. Gallagher, you may now begin.
Rob, thank you very much. Good morning, everyone. Welcome to our third quarter call. This morning, I'm joined by Doug Howell, 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're 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 will make some remarks about the quarter. 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. Our pipeline continues to be 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. Every day, 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. 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 & 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 loss costs are inflating, and they are committed to continuing with rate increases. Let me touch just briefly on the economy. We believe that we are still seeing our clients' businesses improving. This is a slow, no higher 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 U.K. is working, we are recruiting new sales talent who 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 % of those submissions that are actually becoming orders. 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 Liazon. We believe private exchanges will be an important alternative under the new law, 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 underway. As I mentioned, our merger and acquisition activity is strong. We've completed 43 acquisitions for a total of $170 million of revenue. 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, 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 Commission, 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 RiskFacts IT system. We call this the Analytics Workbench, which provides a whole host of new analytic tools for clients to better understand and manage their cost of 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, and 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 costs 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 U.K. operations, and we still believe we are on track to wrap up that process in mid 2013. As a reminder, you'll continue to see $0.02-$0.03 a quarter of integration charges until then. Turning to page two, 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. 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. 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 three, 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 four. You'll see solid organic growth, continued success in earning performance bonus revenues, and that we've 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 1st, 2013. Ramp-up costs in the fourth quarter will cost us nearly $0.02 a share, come 2013, we expect to generate about $20 million of revenues from that client. While there's some ramp-up costs this year, it's a really great win for our team down under coming into 2013. Let's turn to page five, to the corporate segment. I'll give you some help on building your fourth quarter models, I'll give you some early thinking around 2013. Running down the table on page five, here's how we're seeing the fourth quarter 2012. All of these amounts are net of tax.
Assume about $7 million of interest in banking costs in the fourth quarter, about $2 million of acquisition costs, about $3 million-$4 million of corporate costs, assume about $5 million-$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-$0.07. I know that's somewhat of a wide range, we simply do not have clear insight to fourth quarter clean energy production levels, we'll also be spending more to ramp up 2013 production. When we look out towards 2013, we suggest that you model the quarterly interest in banking, acquisition, and corporate cost lines about the same as the fourth quarter of 2012, that will get you close.
Please take a few minutes to read the paragraphs on page five about our clean energy investments, you'll see that we're gaining significant momentum getting idle plants producing. If you add up the numbers on page five for the ultimate production levels, cushion it a bit for timing, maintenance, and operational tweaking, you'll see that our 2013 earnings from clean energy investments could total $70 million-$90 million in 2013. If we make that much from the investments, it will more than cover the interest, M&A, and corporate costs, in fact, the corporate segment could post $0.15-$0.30 per share of earnings for the full year of 2013. On a quarterly basis, assume the corporate segment might get to break even for the first quarter spread the $0.15-$0.30 across the last three quarters.
Clearly, that's an early and rough estimate and a wide range, it should give you a start. As for capital management, we have a robust M&A pipeline, we believe our cash position will allow us to do mostly cash deals here in the fourth quarter. Those are my comments. Just as a wrap up comment, it's been an excellent nine months on all fronts, our team is working very hard to close out 2012 strong and get after 2013. Those are my comments. Back to you, Pat.
Thank you. Rob, we're ready to open the lines for questions and answers. Hopefully 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're on a speakerphone, please disable that function prior to pressing star one to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star two. Again, that's star one for questions. Our first question is from the line of Greg Locraft of Morgan Stanley. Please proceed with your question.
Hi. Good morning, guys.
Good morning, Greg. How are you?
Good. Actually you're the first call for the industry, I know it's likely much too early to judge, any thoughts on Sandy and the implications for the industry from your vantage point?
Well, Greg, you hit on it. It's awfully early, Historically, when we look back at major storms, going all the way back to 1992 with Andrew and obviously Katrina. I'll be giving a presentation down in Florida in a couple of weeks, I did go to the Insurance Information Institute and get some information on the top 10 storms. Katrina was by far the largest. Second to that was a storm that probably came in at around $15 billion-$20 billion. You've 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 that there is in the Northeast. The storm surge I know was unbelievably huge, the winds weren't as rough as they could have been.
I have no dollar amount, 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 that you hear as the week unfolds and as next week unfolds, multiply it by two or three.
Okay, great. Back to kind of pricing. Sounds like at the top of the organizations, the rhetoric is matching what needs to happening, the industry is 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 kind of a flattening of pricing power at actually pretty nice levels, We're lapping last year's increases. What do you see in the marketplace through next year?
I actually mentioned this to the CEOs of the people we've met with at the CIAB. This is my fourth cycle, and it's 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 that 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 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 of 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 90s on combined loss ratios. I think it's a very positive circumstance. About 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. 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. They know that. They're very clear on where they're making and not making money. I think you're going to see continued pressure to continue to get 4%, 5%, 6% increases, and it looks like that could continue for quite a while.
Okay, great. Thanks a lot, guys.
Thanks, Greg.
Our next question is from the line of Brett Huff of Stephens Inc.. Please proceed with your question.
Good morning, guys.
Good morning, Brett.
Hi, Brett.
Can you talk a little bit about your organic growth has been better than your peers kind of for the last several quarters, at least, and continues to be so. Based on what you're seeing, is that you guys taking share? Are you just able to take more advantage of the rate and the exposure unit increases you're seeing? Can you just give us your thoughts on that?
Yeah. I mean, 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, very good. We're out every day chasing new accounts from the top of the organization down to the person in the mail room. I mean, that's what we do. I think it's paying off. I also think that 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 as just a generalist. I think culturally, we have an advantage. One of the things that we do at this company 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 well.
It's not unusual to have someone from London, someone from Houston, someone from Calgary, and someone from Oklahoma City all working on an energy account together. It's very fluid. I do believe that maybe we're seeing the benefit of utilizing Salesforce 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. Frankly, I just think we've got a culture of getting out and getting new business.
Okay. Can you comment again on the, just in terms of organic growth looking forward, can you give us a sense of where you think it'll go for 4Q and maybe into 2013, especially given your commentary on rates?
Yeah, we don't give a lot of guidance. Doug, you want to comment?
I think that we mentioned that this is our seventh consecutive quarter of organic growth. The fourth quarter of last year was a particularly strong quarter. If you recall, we had an outstanding benefits quarter that quarter. I think that 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. You might have some year-over-year compare issues in the fourth quarter because our fourth quarter last year was so strong. I don't see this as a +10% type of 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.
Thanks.
Thanks, Brad.
Thank you. Our next question is from the line of Meyer Shields of Stifel Nicolaus. Please proceed with your question.
Thanks. Good morning. A couple of maybe-
Morning, Meyer.
background questions. Oh, good morning. I'm sorry. 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. That's an industry-wide problem.
Right. It's not getting worse recently.
No, I wouldn't say it's continuing to inflate on a pretty consistent basis.
Okay. No, that's helpful. Obviously, the amount of M&A has ticked 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 the overall book of business is showing. We did have an exception on that with Heath Lambert. If you recall, that was a margin laggard compared to our other operations, and we've been working hard to improve that. By and large, most of the deals that we're doing have margins very similar to ours. That's one of our strategies. We try not to buy turnarounds. 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 use that to help continue to sell their clients and sell larger clients too. Very similar to our margins.
Okay. There's no timing issue where expenses come up before the revenues for a recent acquisition?
Not really. The integration cost 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.
I apologize in advance because this is nitpicky. 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.
When it comes to organic growth, 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. 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 that 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 down to 3% for one quarter, I don't think you can read anything into that. If you think about our business, that's $400 million worth of volume this quarter.
One point of organic growth is $4 million. When you spread that across 300 locations around the country, I guess that'd be like 200 locations on the brokerage side. We're not talking about something that's a systemic risk or a systemic change in the business.
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 that we've got the best product in the market at the best price. We're working against those increases in many instances.
Okay. That's very helpful. Thanks so much.
Thank you. Our next question is from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your question.
Hi, thanks. It's Eric Fraser for Mike. Good morning.
Morning, Eric.
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?
Well, that's exactly what it is.
Yeah, we did have a lot of activity. Share count, we use shares this quarter. The share count increase this quarter arises really from three different pieces. Shares that we used in acquisitions, shares that we used in our earn-outs, and then just the natural dilution that's happening because the stock price last year was $27 a share, and this year it was $35, $36. We had dilution just because of the increase of the share price. In terms of using shares and 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 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 goodwill.
I think we value everyone on an individual basis. 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 goodwill. Again, it's non-cash, and we think a better metric to look at us on is on an EBITDAC basis.
Sure. Is this pace of amortization expense this quarter a run rate, or should it come back down given that you said 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 you go to page four of the supplements posted on the website, we give it to you, the brokerage segment, on an adjusted basis. That'll take out any, if we have some small valuation write-offs or something. It looks to me like amortization, 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, now we get $20, $22, $24. Because of the acquisition activity, it's going to probably step up $2 million a quarter, if we continue the same level of acquisitions.
Great. One more on M&A. Now that the pace of international M&A has picked up, if you were to choose between doing a deal overseas versus in the U.S., how do you think about that cash allocation?
When we look at an international deal, one of the big things that we try to look at is what kind of trade can they do with our existing operations in London, just like we do here in the U.S. 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, we look at every deal, and we think the returns, both international and domestic, are about the same. At this point, we're not weighting one versus another.
No, I think 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, and how can you manage that?" What have you. The company now has literally dozens and dozens of operations throughout the world who either joined us 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. 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've got 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.
Okay, great. Just 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? If you are seeing declines, what's driving that?
Well, let me address that, and it's all anecdotal, all right? I'm not an economist, and I don't have any facts. 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 health 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 health businesses are doing so well is that people are really actually reluctant to convert temporaries to full time. I'm not saying that we're seeing 5% and 6% economic growth, but I do think when you read The New York Times, Chicago Tribune this weekend, and it's a 1.5%-2% growth, I think that's what we're seeing.
Okay, great. Thanks.
Thanks, Eric.
Our next question is from the line of Ray Iardella with Macquarie. Please proceed with your question.
Thanks, good morning.
Good morning.
Hey, how are you guys? One quick question in terms of contingent commissions. How should we think about that, I think, for 2013, I guess, A, given, I guess, year-over-year pressure and loss ratios, Sandy, I guess, impacting the industry?
I think that it's probably a little early for us to digest what's going to happen with Sandy. I'll tell you that right now. 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 know that they need to pay their distribution system, 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. Remember, if that's the case, we wouldn't be accruing supplementals next year. It would push into a contingent in January, February of 2014.
By the time we do our January call, I should be able to give you a better feel for that, because I think our teams will have been talking to the carriers and have a better understanding. I don't see a dramatic shift in contingents or supplementals one way or another next year.
Okay. No, that's helpful. Lastly, just quickly sort of on debt. Just curious, how much capacity do you guys believe you have in terms of debt? I mean, debt to total capital right now is around, I think, 31%, if I'm calculating that correctly. How do you look at that, debt to EBITDA, debt to capital, or sort of all the above?
I think that we have $200 million-$300 million of capacity that would be kind of below the industry standard of 1.8, 1.9. I think that we have about $125 million-$130 million of cash on our balance sheet right now. In terms of thinking about long term, we could go to 2.75x EBITDAC and still be NAIC 2 rated. Since we use the private placement market for most of our, or 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, and we'll look at it next spring. I think rates are pretty favorable right now. I think our M&A pipeline is strong. So that's something we'll take a look at between now and January.
Okay. Thanks again for all the answers.
Sure.
Thank you. Our next question is from the line of Scott Seltz with RBC Capital Markets. Please proceed with your question.
Hi, good morning.
Good morning.
First question I wanted to touch on was just the private exchange that you mentioned there. Is that fully online? Can you talk about kind of the opportunity there long term, particularly versus some of your competitors?
Yeah, 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 that they want. The employer will stay very active in that, making sure they vet the types of choices that the clients have. 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." We think it'll be an important part of the market.
Okay. Is that actually online right now?
Yep.
Is it
Up and ready to go.
Just a quick question about the clean coal guidance that you gave, Doug, next year for the 2013 to $0.15-$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-$0.30, given the first quarter is going to be kind of break-even?
Just to make sure I'm clear, it's $0.15-$0.30 for the total corporate segment.
Right.
In the clean energy line, we think we can make $70 million-$90 million based on the plants that we currently have in process of resuming production. When you read on page five, there are still six plants that haven't been contemplated in that guidance. While we think that we have earmarked a few locations, and we're holding them for some utilities, and they're looking at them. All the growth that 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. There's six plants that were not contemplated in those numbers that hopefully in January, we'll tell you that we've got some more utilities interested in those.
Almost all the growth we're talking about, all the growth, is just getting the plants that are currently idle back into long-term production.
That's helpful. The only other question I have was the, I don't know if you typically do this, but is there any way you could give some sense of what the 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 couple % or flattish or where you're seeing that?
Well, I think that we don't actually give information with respect to producer headcount, but I can tell you that we do have a growing producer headcount population. One of the key strategies of doing these small tuck-in acquisitions is entirely that, is we're trying to get producer count. If you count the acquisition adds 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. 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. 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.
Edge training is all of our, what we refer to as externs, people that 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 bringing them in, teaching them insurance, putting them back out into the field and lighting them up.
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 into our industry. We've got people out this week at a number of campuses recruiting, and that's again, recruiting for sophomores. That's kind of a little unusual, but it's something that we do culturally very well. I think over time, you'll see that even be a bigger effort.
All right. Sounds like a positive. Thanks.
Thank you. Our next question is from the line of Mark Hughes of SunTrust Robinson. Please proceed with your question.
Yeah, thank you. Good morning.
Good morning, Mark.
Corporate or 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 going into next year? Doug, any updates on the-- I know you've talked in the past about the potential for streamlining. Where are you thinking about that for 2013?
I think that in terms of headcount, I think that the teams understand that controlling headcount is important in this environment. Using our offshore centers of excellence in order to provide a lower cost labor 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 that we can control the inflation on it. In terms of productivity gains, we have productivity opportunities within our workforce, we think technology can be a way to improve our productivity. Then on the operating expense side, we're continuing to harvest wins out of our real estate footprint. There is also a little inflation. You're seeing travel inflation.
You're seeing airlines and hotels being a little bit up. Next year, as we look out, headcount control will be very important and then continuing to use our offshore centers of excellence.
If we get, say, the 3% to 5% organic growth, the compensation line as a percentage of revenue, good opportunity for that to come down?
Yeah, 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. 140 basis point improvement this quarter is really great work by the team. I wouldn't expect substantial margin expansion in a 2%-3% organic growth rate. 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. Year to date, we're kind of around 4%, that would include new business also.
Right. On an organic basis, is that the 2.5%, is that a good same store?
Yeah, that's all organic.
Yeah. Okay. All right, great. Thank you very much.
Thank you. Our next question is from the line of Joshua Shanker of Deutsche Bank. Please proceed with your question.
Yeah, good morning, everyone.
Morning, Josh.
Morning. I want to talk about deal pipeline 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's very good.
Yeah.
We say it all the time, it's strong. It is really strong. We are more than happy to move quickly for those people that we have known for a long time. 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. 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've got 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 lot of time kicking the tires. They do a considerable amount of due diligence as we do on their business. 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.
Well, to the extent that deals are slowed down, that someone who you know and trust said, "Look, we're going to sell our business to you. We're not sure when, 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.
Okay.
We've had a ton of conversations. The earlier part of your phrase there, we have this all the time. "Look, we think that you'd probably be the right people to sell to, but we're just not ready." That just stays in the pipeline, we keep talking to them.
All right. I appreciate the call. Thank you.
Sure.
Thank you. As a reminder, if you have a question, you may press star one. Once again, that's star one for questions. Our next question is from the line of Adam Klauber of William Blair. Please proceed with your question.
Hi, good morning.
Good morning.
Just wanted to follow up real quick on the Liazon deal on the exchange side. Would you guys mind just walking through the mechanics of the partnership and sort of how that process would work?
Sure. I'll throw that to Jim Durkin.
I don't know how familiar you are with Liazon, but they are clearly a leader in this space. We did a lot of due diligence, looked at a number of different partners and chose them because of their experience, because the fact that they are up and running, have been doing this for a while. What they bring to the table is a 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.
No, that's helpful. I just wanted to get some character around the partnership. On the Heath side, I just wanted to know if you guys could talk to sort of the demand environment that Heath's seeing in the U.K. and sort of what kind of expectations you have for the business in 2013.
The European economy is not what we'd like it to be. England's probably better than the Continent. The nice thing about our business and the wonderful thing about insurance is you got to buy it whether you want to or not. From a 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 an excellent job.
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 an awful lot of spike to that as well, and our acquisitions and our organic recruiting, we've got very big plans continuing to grow that business.
Okay, great. I appreciate it. Thank you.
All right. I think that's what we've got time for, so I've got just 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. All of you out east best to you and hope things get better quickly. Thank you, Rob.
Thank you. This does conclude today's conference call. You may disconnect your lines at this time.