Oct 26, 2011
Executives
J. Patrick Gallagher, Jr.
– Chairman, President, Chief Executive Officer Doug Howell – Chief Financial Officer
Analysts
Vincent DeAugustino – Stifel Nicolaus Ray Iardella – Macquarie Bank Keith Walsh – Citigroup Bob Glasspiegel – Langen McAlenney Dan Farrell – Sterne Agee Brian DiRubbio – Y/CAP Management Sarah DeWitt – Barclays Capital Scott Heleniak – RBC Capital Markets Mark Hughes – SunTrust
Operator
Good morning, and welcome to Arthur J. Gallagher & Company’s Third Quarter 2011 Earnings Conference Call.
Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation.
(Operator Instructions) And as a reminder, 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 described in the company’s reports filed with the Securities and Exchange Commission.
Actual results may differ materially from those discussed today. It is now my pleasure to introduce J.
Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company.
Mr. Gallagher, you may begin.
J. Patrick Gallagher, Jr. – Chairman, President, Chief Executive Officer
Thank you, Rob and welcome everyone. Thank you for joining us this morning for our third quarter conference call.
We appreciate you being on the line today. Today I’m joined by Doug Howell, our Chief Financial Officer as well as the operating heads of our operating divisions.
I’m very pleased with our third quarter results. You will typically read the press release I won’t do that as well, but those of you who would have seen the first paragraph I think our results from the quarter are outstanding.
In our calls I typically try to focus my comments on the four strategic areas that we’re focused on and those are organic growth, mergers and acquisitions, productivity and maintaining our culture, but today most of my comments I think I’d rather spend on organic growth and mergers and acquisitions. This is the third quarter we’ve been in positive organic territory, I am pleased with that.
Our total company organic that’s combining the brokerage risk management segments commissions, fees and supplementals was up 5.2% and let me give you a little flavor on that. Brokerage grew at 2.6% and risk management grew at 12.9% even if you exclude the temporary surge that came about because of the risk management claims that rose from New Zealand earthquake, risk management grew organically 8% and the total company grew 4%.
I think that’s excellent work by our team and it just shows that our sales and client service cultures are alive and well. Everyone in the company knows that good things happen when you take care of our clients and nothing happens until somebody rings the cash register.
I will give you a little further breakdown on the Brokerage segment, the 2.6% here is what we are seeing. Our U.S.
retail PC operations grew slightly below that average. Our U.S.
retail employee benefits operations grew slightly above that average and our U.S. and international wholesalers in MGA, MGUs who is slightly above that average with domestic being a little bit stronger than international.
The drivers of those results were solid blocking and tackling. Number one new business levels held steady with 2010 and secondly our client retentions are actually running better than they did in 2010.
These combined to overcome about a 2% to 3% negative impact from rates and exposures, which if you look back a year frankly is only a slight improvement over what we saw in the quarter in 2010. Let me breakdown risk management organic excluding the New Zealand earthquake claims.
Our domestic business grew about 5.5%, half of that relates to increased claim counts from net new business sales. A slight increase in claim counts from existing customers and the balance comes from getting rate increases.
Internationally, we grew nearly 19%, most of all that relates to new business growth in Australia and the U.K. GB’s international operations are really a bright spot.
Let me look forward and comment a bit on rates. As per the rate environment, it is encouraging to see that the CIB Agent Survey Report showed about 1% average increase in rate across all lines for the quarter, on that at this time of year we spent a lot of time with our insurance carriers, and the mode this year is decidedly different than a year ago.
We see them getting tighter rate cuts, they are looking for rate increases all of the CEOs are talking about that. It’s still going to take some time in my opinion to see that trickle down to the street level, but it sure would be nice to stop run and up and down escalator for the first time in eight years.
As per exposures, I’ve also spent a lot of time over the last few weeks with many of our clients across various parts of the country. I’m just not hearing from them that the recent economic turmoil has further damaged their businesses.
They seem to have reached a level of employment and activity that can keep them going in this environment. So as we finish the year we are not planning for increased exposure units, but we are also not planning to see a decrease.
As per new business there are lots of opportunities across the whole organization. The environment of PC and benefit sales is becoming much, much more complex, customers are increasingly expecting industry specific expertise and technical expertise and assembling their insurance and benefits programs.
Years ago you will recall we organized ourselves around industry niches, and during the soft market we’ve continued to invest in systems and tools to help our producers win. Just take a look at one example, if you look this new healthcare law for example.
It’s just too complex and technical for small firms to handle, especially if they are simply relying on a relationship to carry that day with their clients, Gallagher provides our producers with the best tools and resources in the industry and can master those resources around the country and the world that are exactly what the customer needs, when and where they need it. Let me comment on our merger acquisition activity.
Year-to-date, we have done 21 mergers for about $235 million of annualized revenue. This already betters our previous best year ever which was 2008, we did a $166 million that year.
Much of this of course relates to the acquisition of Heath Lambert in the U.K. and as I always do I want to welcome all our new colleagues, we really believe it together our future is bright.
So look forward near term we have some really nice opportunities in process right now that we hope to close in the fourth quarter and most of these are U.S. domestic agencies.
As for 2012 our pipeline is stronger than ever and there are several converging factors that we believe will contribute to robust activity next year. First, the first year push capital gains rates are said to expire that naturally causes increase interest from some sellers.
Secondly as I mentioned the need for technical resources is expanding, smaller shops are realizing that they need systems and tools to compete. They are great sales and service folks, but the needs on the technical side are growing fast and they just can’t invest enough to keep pace.
And thirdly most agency owners are baby boomers and they are looking for the right partner to monetize their life’s work. So when it comes to competitive landscape there are more than enough opportunities to keep all the strategic acquirers busy for years to come.
So as I’ve said at the offset, I’m pleased with this quarter, glad to have it in the books and Doug why don’t you give further color.
Doug Howell – Chief Financial Officer
Thanks, Pat and good morning everyone. Today, I am going to flip though the earnings release and give you some color on a few items.
Okay, on the first page looking at the Brokerage segment as anticipated we had $0.03 of Heath integration cost in the quarter which was offset by $0.03 of earn out adjustments mostly related to the 2009 Liberty deal. As for Heath well only a few months old we believe the integration is right on track.
Last quarter we provided a table in our earnings release showing that net of integration cost that will run through 2013, keep should about breakeven here in 2011, contribute about $20 of EBITDAC in 2012 and contribute about $30 million EBITDAC in 2013. As per Liberty recall that, this was a completely different deal than our typical mergers, because there were so many unknowns when we did the deal back in 2009 we put nearly 70% of the maximum purchase price on a three year earn-out.
Over the last few quarters, as we approached the final six months of the earn-out period that runs out in March of 2012, we have been right sizing the business which causes some downward adjustments in our estimated earn-out payment. None of these adjustments should be viewed as meaning the deal is not performing rather it’s just adjusting the accounting estimate which had a really wide $120 million range.
As we sit here today, it’s contributing annualized EBITDAC of about $20 million to $22 million and because of the elastic earn-out, we still end up paying about four times for the deal. Moving to the risk management numbers, you'll see that we had about $0.03 of charges related to integrating GAB Robins and adjusting our existing workforce.
We are wrapping up the integration process over the next couple of weeks, so expect only about a penny of integration cost in the fourth quarter. By all measures it turned out to be a terrific deal.
Including net integration cost we paid about $24 million for $45 of revenues which contributes about $9 million of annual EBITDAC. That’s what we thought when we did the deal and the team did a fantastic job delivering the expected results.
Moving to the middle of the third page, likely discussed last quarter, you'll read how the Heath operations won a lower comp ratio, a higher operating expense ratio and overall we’ll run a lower EBITDAC margin than the broader brokerage segment until sometime in 2013 when we complete the integration process. Accordingly, we’ve added a line in the table to show you our adjusted EBITDAC margins with and without heat.
You'll see that we held margins this quarter and are actually 20 basis points up year-to-date. Holding margins in a low organic environment is right in line with what we've been saying for several quarters.
At the bottom of page three, you’ll see risk management’s organic growth. We continue to provide and we have for over a year a separate line showing the New Zealand earthquake claims.
While we expect the current rate to continue through much of 2012, by 2013 it will start to run down quickly. Accordingly, as you build your longer-term models, please make sure you factor that into your projections and know that it contributes about 15% margin.
Turning to page four on the corporate segment, you’ll see that we posted third quarter results exactly as we told you in our July earnings release conference call. Looking forward to the fourth quarter of 2011, just to assume a repeat of the third quarter and you’ll get close.
As for 2012 you’ll read that our clean energy investments are making steady progress. The 12 2009 era plants were up and running and 6, 2011 era plants will be placed in service by year-end and should be running that expected level sometime in early 2002.
So, if all 18 of these plants produce as we expect in 2012 the clean energy line might report about $11 million to $12 million of quarterly net after-tax earnings. If you assume interest M&A cost and other corporate costs will continue at the current run rate, the clean energy line would offset those costs.
That would mean our corporate segment could do a bit better than breakeven for full year 2012. And remember whatever we save in taxes will give us more cash to use in our M&A strategy.
Okay, for my last comment, more house-keeping. It’s a reminder that our first quarter is seasonally our smallest and once again, I really encourage you to convert your models to closely follow our financial supplement that we post on our website.
Please make sure you’re using the historical adjusted numbers as your baseline for projecting future results. Otherwise you run the risk of projecting to off some one-timers.
Okay. Pat those are my comments.
It’s really nice to have a solid and really good quarter. I’m looking forward to a strong finish to 2011 and a strong 2012.
J. Patrick Gallagher, Jr. – Chairman, President, Chief Executive Officer
Rob, this is Pat, we’ll go ahead and open it open for questions and answers.
Operator
Thank you. The call is now open for questions.
(Operator Instructions) Thank you. Our first question is from Vincent DeAugustino with Stifel, Nicolaus.
Please go ahead with your question.
Vincent DeAugustino – Stifel Nicolaus
Good morning.
J. Patrick Gallagher, Jr.
Morning, Vince.
Vincent DeAugustino – Stifel Nicolaus
Looking back I guess to the last hard market, would you say that today’s rate story looks a little like 1999 did or is that not exactly accurate?
Doug Howell
No, it’s – my feeling is it’s more like 2000.
Vincent DeAugustino – Stifel Nicolaus
Okay.
Doug Howell
If you recall before 9/11, since we were saying 1%, 2%, 3% increases, people were starting to say that we were coming to – they were at a point where they knew they were going to bleed. This environment is different this time for one really key reason.
There is no investment return at all. So, the first half of the year posting a 110.5 combined is that these CEOs really do understand that that’s trouble.
Vincent DeAugustino – Stifel Nicolaus
Okay. And then I guess just a one follow up.
We’ve heard that Willis might be getting back into the M&A game and then I’m guessing that that really won’t have much impact on you M&A pipeline, but I’m curious if you would think that having other buyer out there in addition to some new private equity start-up action, do you think that has any influence over deal pricing out there today?
J. Patrick Gallagher, Jr.
No, I don’t think so I mean we’ve seen people coming in and out of the market over the years and there is just so much supply out there, Vince. And as I said in my comments the preponderance of these agencies especially in the United States, but even around the world are owned by baby boomers and so there is going to be an awful lot of activity and I think that’s why you are seeing private activity and others coming in to the business, there’s great opportunities.
Vincent DeAugustino – Stifel Nicolaus
Great. Thank you very much.
Operator
Thank you. Our next question is coming from Ray Iardella with Macquarie Bank.
Please state your question.
Ray Iardella – Macquarie Bank
Good morning, guys.
J. Patrick Gallagher, Jr.
Good morning.
Doug Howell
Good morning, Ray.
Ray Iardella – Macquarie Bank
So, I guess in terms of a margin, you guys did a pretty good job keep the margin in tact this quarter, but can you maybe remind us what you guys need as far as organic revenue growth is concern to expand margins?
Doug Howell
Yes. All right, thanks for the question.
We’ve said and we continue to say that a few in a organic environment in the brokerage segment that’s 2% or less, don’t expect margin expansion from us. If we get to three or four you might see a little bit five or more you should see more margin expansion at that point.
But in this environment there are enough inflationary pressures, there is enough – slight wage pressures out there, therefore 2% or less, don’t expect any margin expansion and holding a content will be good work.
Ray Iardella – Macquarie Bank
Got it. And then I guess in terms of the risk management business, I think you’re target there or at least you may stated in the past it was 15%, but the past seven quarters you guys have posted 15% or better margin in that business.
I mean should we start thinking about that as a slightly better margin business or is the 15% still kind of your long term target?
Doug Howell
I think we feel that 16% would be outstanding, 15% would be great hard work, so between 15% and 16% is where we’d like to run that business at this point.
Ray Iardella – Macquarie Bank
Okay, great. And then one last one if I can sneak it in, I guess in terms of M&A I know with will assumption again pricing you guys kind of feel won’t really be changed.
But can you maybe talk about is there any difference in pricing between the employ benefits business versus just more P&C focused agents.
Doug Howell
Basically (indiscernible) over both of them. I mean the benefit business has natural organic growth built in it to a certain extent, because there is constant rate increases in that business, but – so it might be a slight better but not that much.
Ray Iardella – Macquarie Bank
Okay, thanks.
Doug Howell
Thanks, Rick.
Operator
Thank you. Our next question is from the line of Keith Walsh of Citigroup.
Please take your question.
Keith Walsh – Citigroup
Hi. Good morning guys.
How are you?
J. Patrick Gallagher, Jr.
Good, Keith. Good morning.
Keith Walsh – Citigroup
Good. I guess Pat, first for you just thinking about exposures, do you think on one-one renewals will get a maybe a catch up on exposures from corporations that have maybe been a little more conservative over the last couple of years, if could you just talk to that a little bit?
J. Patrick Gallagher, Jr.
Yes, I think we will Keith. I think what you’re seeing is that we’re done now in my opinion with the return premium phase of the cycle of the recession.
Yes, clients have been very conservative at renewal if they are expecting to have their sales go from $50 million to a $100 million. They’re going to maybe say that the sales are going to go from $50 million to $60 million.
So I think we’ll start to see additional premiums and those then – once there is an AP then those exposures do flow into the renewal.
Keith Walsh – Citigroup
Okay and then secondly, I guess for Doug. Just what’s the view on contingents, I guess, you’ve had about $35 million year-to-date.
As combined ratios and the industry continue to tick up, what sort of the sensitivity to that as we think about the next year?
Doug Howell
Yes. Thanks, Keith.
I think it’s important for everybody to watch those lines. I think if the contingent environment and the supplemental environment as the carriers become more concern with profitability in their books they are going to work – we’re going to have to work really hard to hold those things to where they are and so I wouldn’t expect much substantial increase from those, but if we can hold them steady in this environment, I think that would be good work.
Keith Walsh – Citigroup
I guess just a follow up on that, I mean, I’m not thinking to increase, I’m thinking – I’m worried about decrease especially on the contingents if combined ratios go up. So is there any rule of thumb about sensitivity, we should be thinking about there?
And then I guess, the follow up on one of your comments, are your supplementals tied to profitability as well? I was under the impression that they were not.
J. Patrick Gallagher, Jr.
No, but what they are allowed to do Keith is the supplementals are set annually and the carriers that agreed with the regulators to use supplementals are allowed to look back as they set the supplemental rate for the upcoming year. Once that rate is set, then we can accrue those supplementals simply against premium because it has nothing really do to with profitability.
Having said that, if they are not seeing growth and slash profitability on their look back, negotiating those same supplemental rates gets more difficult. And Doug is right, and Keith I can’t give you a rule of thumb.
I can’t say if combine loss and expense ratio go to 115 then you can see contingents come down by 50% because this is important income to our branch operations and they will fight hard with those insurance companies to make sure they keep their remuneration.
Keith Walsh – Citigroup
Okay. Thanks a lot guys.
J. Patrick Gallagher, Jr.
Thanks, Keith.
Operator
Thank you. Our next question is from the line of Bob Glasspiegel with Langen McAlenney.
Please take your question.
Bob Glasspiegel – Langen McAlenney
Good morning. I’d like to start with Doug on the clean-energy.
If we go through your commentary and add up the numbers just assuming my math is right, you’ve gone from a $7 million to $11 million after-tax range post Q2 and guidance for 2012 to $11.5 million to $12.5 million range. So you’ve sort of increased the earnings, you’ve tightened the range and you also eliminated the hedges that were awarded in the second quarter when you said have not generated approval and if they are running at full levels you took those out.
So, from all that combined can we read that you’re more confident about what this can do next year or am I over analyzing?
Doug Howell
That’s how you should read it. Also just to show why we’re more confident today.
Since the last time we had our call in July we have received all the necessary regulatory permits on all of the 2009 era plants that we had been operated under temporary emission permits. So we’ve got – those are in place and running.
So, the top paragraph on that page those have received all the regulatory permits. With respect to the new full operations that will use six plants, we have received the necessary permanent at regulatory permits already from the states where those are running and we didn’t start the process until we had received those permanent permits.
So yes, we are more comfortable that the permitting process is in place for those 18 plants at this point.
Bob Glasspiegel – Langen McAlenney
And how you define early 2012, is that include first quarter or we talking second quarter with the…?
Doug Howell
I’m hoping for sometime in the first quarter.
Bob Glasspiegel – Langen McAlenney
Okay. So there’ll be the piece of that going into first quarter you’re saying.
Doug Howell
Yes.
Bob Glasspiegel – Langen McAlenney
Hopefully?
Doug Howell
Yes.
Bob Glasspiegel – Langen McAlenney
Okay. Pat, I got to make you work, is the historian, I remember the last cycle and I think the cycle before you and management team warned us that we’ve been running this company really tight and when we get a pricing recovery, we got to spend a lot of the improved revenues to sort of fill in holes where we’ve been running tied-on raises and hiring.
Is that how we should think this cycle or do you think you want to run the thing leaner and show the margins earlier this time around?
J. Patrick Gallagher, Jr.
I think we probably did a latter part. I mean I think we had some early good opportunities in the last cycle.
We’re always recruiting producers. I don’t think we have the opportunity to recruit at the level that we did in 2001.
But you’re right I mean when you take a look historically, your recollection of that is accurate, I think as we come into this. The other thing is I will tell you and I know this sounds, I’m not at present sensing a V-shape cycle turn to see.
When you’re thinking about your models and like, it doesn’t feel. Now we get a catastrophe like we did in 9/11 something like that could change.
But to me right now it feels like certain parts of the country and certain lines of coverage are going to get hard. Similar to what we saw after Andrew and other property catastrophes Katrina, where the property market got very difficult but the other lines didn’t.
So, right now property is very tough for instance in Oklahoma. Workers comp is getting tough in Illinois and California, and workers comp as a line, I think across the country is going to get tight.
D&O is still soft. So, if that happens you could see a time here.
The CEOs of the insurance companies that I talked to today are different in their outlook and their discussion then they were in 2000.
Bob Glasspiegel – Langen McAlenney
One lat question for you Pat. There is perception out there that AIG has changed its spots as its going public a second time and is now more focused on underwriting than volume and they’ve been public of stating that as an objective.
Do you see them much in your markets or are you more underneath them and…
J. Patrick Gallagher, Jr.
Yes. AIG is one of our most significant trading partners and I think it’s fair to say that it’s not just AIG, literally in the past month and a half I think Jim Gault and myself and (indiscernible) others, there are primarily 25 CEOs and leadership teams of insurance companies.
As we get ready to do our planning for next year. They are all talking about needing to pay much more attention to underwriting.
They know that their accident year loss ratios aren’t good. They know they’re not getting any investment income and they recognize that they’re going to have to get some rate or they’re going to be really in trouble.
Bob Glasspiegel – Langen McAlenney
Thank you.
J. Patrick Gallagher, Jr.
Thanks, Bob.
Doug Howell
Thanks Bob.
Operator
Thank you. Our next question is from the line of Dan Farrell of Sterne Agee.
Pleas state your question.
Dan Farrell – Sterne Agee
Thank you and good morning.
J. Patrick Gallagher, Jr.
Good morning, Dan.
Dan Farrell – Sterne Agee
We’re still in the early stages of heat plan about your presence there but could you maybe comment if you seen any early changes in your sort of deal pipeline there now that you have a bigger presence build out.
J. Patrick Gallagher, Jr.
Yes. Dan, I think it’s really, really – its actually been incredible.
Two things first off, the people who joined coming out of private equity ownership are ecstatic to be part of a company that’s in this business, is going to stay in this business, understands the business and wants to build it out. The second thing that has happened in just four months, the number of teams and other deals that are approaching us is far bigger than we imagined when we did the deal.
Now we are going slow. We’re not going to just start running all over England, buying firms and like.
We’re good at tuck-in acquisitions. We know what to do.
But first order business has bed this team down and make sure that the business runs the way we laid out in our press release last quarter and that’s what we’re attending to right now.
Dan Farrell – Sterne Agee
Great thanks. And then just one quick question on tax rate, I think in the past you got to sort of 39% to 41% within the segments.
Is the international expansion, would that have some incremental downward movement in the tax rate overtime?
Doug Howell
Yes, Dan. I think the – as the mix becomes slightly more international which have a little bit lower tax rates, you would see a slight reduction and we’ve said still 39% to 41%.
I’m not ready to go to 38% to 40% quite yet, but you will see some of that as we get more business internationally.
Dan Farrell – Sterne Agee
Okay. Thank you, guys.
Doug Howell
Thanks, Dan.
Operator
Thank you. Our next question is from the line of Brian DiRubbio of Y/CAP Management.
Please state your question.
Brian DiRubbio – Y/CAP Management
Good morning guys. How are you doing?
J. Patrick Gallagher, Jr.
Brian, how are you?
Brian DiRubbio – Y/CAP Management
Okay. I guess you guys are hoping for flat tax actually.
J. Patrick Gallagher, Jr.
Sure. That would be okay.
Brian DiRubbio – Y/CAP Management
Yes.
J. Patrick Gallagher, Jr.
Good Brian.
Brian DiRubbio – Y/CAP Management
Couple of questions. First off, as I look at your acquisition activity over the last 12 months, excluding GAB Robins, Bushong a little bit, it looks like you picked up around $275 million of revenues on the brokerage side.
How should we think about that revenue base growing within the first year that you acquired. So that growth is not in your organic growth number but that’s not going to be a static number over the ensuing 12 months.
Do you understand what I’m trying to get out. Is that growing sort of inline with your organic growth?
J. Patrick Gallagher, Jr.
Yes, it is. I mean we expect those operations, even though we don’t include it in our organic calculations until it’s been with us for a year.
It’s – we do expect them to grow. It does take an organization a little bit of time to adjust to the new environment, but generally they’re very excited about joining us and they’re running out and targeting those clients for the exact reason why they merger with us.
They see our resources, our technical capability, our niche expertise as a way to get into those customers or those targets that they’ve been looking out for years and so they go after it. And I think the culture here at Gallagher will cause people to rally behind those new mergers to the greatest extent that we can to help them be successful and that’s the perfect type of merger partner.
The person that comes in grabs one of our niche leaders and goes out and targets those customers that they have been wanting to call on for years.
Brian DiRubbio – Y/CAP Management
Got you. So, maybe fair to say – maybe half of the organic growth rate for that first year.
J. Patrick Gallagher, Jr.
Yeah, I’ve really haven’t measured it, but we’re not seeing them fall-off. Let me put it that way.
Brian DiRubbio – Y/CAP Management
Got you. Just it’s become a large number now and I just want to make sure that we’re capturing that.
Second question on the Gallagher Bassett side, Pat, what are you seeing in terms of that business growth? Is it people moving more to self insurance or is it finally we’re seeing increased claim activity that we’ve been waiting for over the last two years?
J. Patrick Gallagher, Jr.
I think you’re seeing three things that I’d commented on. One, we are seeing increased claim activity on our renewal book.
The second thing is that we’re finding more opportunities to work on behalf of insurance companies on an outsourced basis. And thirdly, I think you are seeing people continue to move into the alternative market, not at the rate that you’d see in a hard market but as clients grow their business, their focus on that risk management, that cost of risk?
Doug Howell
Yes. I think the other thing just pile on that Brian, with where comp ratios heading – where comp cost getting ready to go north, I think that you are going to see more people looking at the alternative market.
You’ve got a really nice risk that was in the bundled market or back in the standard market and they’re looking at big rate increases coming up, that tend to fuel more opportunities. And the other thing too as the number of competitors that we have out there continues to consolidate down.
There is just – when it comes to who can do this work, Gallagher Bassett three years in a row winning the Reader’s Choice award from business insurance. That’s a hell of endorsement when it comes down to what these guys can do out there and there is few of them that to compete with everyday.
Brian DiRubbio – Y/CAP Management
Got you. And then final question with the success that you had with the GAB Robins acquisition integration, do you see more opportunities for M&A in that division?
J. Patrick Gallagher, Jr.
I think Brian, the answer to that is we have looked at other ones but we’re interested in companies that can bring us additional resources and capabilities and spread out our offering to our existing clients, not just to pick up books of business of the clients. To be real honest with you, we have such a great team with time, we’ll take him away from them rather not buy them.
Doug Howell
The other thing too Brian is one thing we don’t want to do is buy a TPA out there and then had to go out and raise prices and often times you'll find that the pricing that has been offered by some of these people for sale just doesn’t math up.
Brian DiRubbio – Y/CAP Management
Got you. Thanks a lot guys.
I appreciate it.
J. Patrick Gallagher, Jr.
Thanks, Brian.
Doug Howell
Thanks, Brian.
Operator
Thank you. (Operator Instructions) Our next question this morning is from the line of Sarah DeWitt of Barclays Capital.
Please state your question.
Sarah DeWitt – Barclays Capital
Hi. Good morning.
J. Patrick Gallagher, Jr.
Good morning, Sarah.
Sarah DeWitt – Barclays Capital
Based on your comments about P&C pricing improving and exposure stabilizing, when do you think we could see brokerage organic growth accelerate and how much of is incremental dollar from higher prices fall to the bottom line?
J. Patrick Gallagher, Jr.
Let me take the one I see accelerating because that’s a very difficult one to pick. And again I commented it earlier I don’t think we’re going to see a solid B shaped move in the market, I could be wrong.
But, when I think about where we sort of sit, if we got 1% to 2% organic growth from the economy and we didn’t have the headwinds that we faced in the rate cutting environment and actually got something on the order of 2% to 3% to 4% rate increases and then our organic sales I mean we’re an organic new business machine. There is a time when the rates start getting cut and when the recession does started to turn around that you could be nicely over 5% organic on a continuing basis.
Add to that the acquisition activity that we’ve got and it’s a pretty compelling story for the future and Doug you can talk a little over the margin.
Doug Howell
Yes, the thing to think about when it comes to margin on the brokerage business is that incremental sales if it doesn’t produce a significant amount of service work and another (indiscernible) changing numbers on a policy. And if you believe that we can move our commission structure hold those rates that, you get 60% of that number fall into the bottom line.
To get into a huge surge maybe it’s more like 50% if it’s just a nice creep up you might get more like 65%, but really 25% to 30% goes to the producer on the street and the rest of it comes to the house and I believe that now that we have our offshore centers of excellence and lot of our new tools that we have invested in during the soft market. We have the ability to control headcount expansion or if we do have to expand workforce we can do that at in a lower labor location.
So, I think we are pretty well positioned coming into this cycle.
Sarah DeWitt – Barclays Capital
Okay, great. Thanks.
And then just on the clean call, what are the risks to achieving that $10 million to $12 million of after-tax earnings per quarter. Or are you confident that you can achieve in 2012?
Doug Howell
Well, there is lots – I put this way, there is lots of risk with coal and I’d really encourage you to read all of our SEC filings where we talk about the risk ad nauseum. But here is something that you have to think about.
First and foremost our objective when we do these things is to get our money back out of the – get our CapEx out as fast as possible. Although it doesn’t come off the books because we depreciate them over 10 years, most of these plans return our CapEx within a quarter or two of running.
So, after that then it’s all money we’re kind of playing on the government’s money at that point. The risk that can face it, tax law legislation change, utility deciding that does not want to burn the refine fuel.
It decides it might displace coal with natural gas, you could have disruptions in supply chain of delivering the materials. You could have a change in the tax law, emissions laws.
There – anything when it comes to producing a refined coal you have to think about manufacturing and what can go wrong in the manufacturing process. And all those factors will influence us.
That said we did this for 10 years under the Section 29 program. We have been running without a hiccup since late 2009 on our other plants, other than just shutting them down to get regulatory – permanent regulatory permits and then start to do a backup.
So, there is a refined process – there is a defined process of creating refined fuel, the utilities have been incentive to burnet. So, all partners are aligned in this.
We don’t control these partnerships after they’re up and running, so it takes unanimous discussion with all partners involved in order to make changes in it. But we think we’re pretty experienced in this, so the risk factors are there, but if they change I’ll certainly let you know.
Sarah DeWitt – Barclays Capital
Okay, great. Thanks for the answer.
J. Patrick Gallagher, Jr.
Great, Sarah.
Operator
Thank you. Our next question is coming from the line of Scott Heleniak with RBC Capital Markets.
Please state your question.
Scott Heleniak – RBC Capital Markets
Thanks. Good morning.
J. Patrick Gallagher, Jr.
Good Morning, Scott.
Scott Heleniak – RBC Capital Markets
Just had a couple of quick questions. First, it sounds like you’re pretty upbeat for M&A, I’m just wondering if do you still have appetite for another larger size deal, kind of like Liberty and Heath and Robin’s once you’ve done, or should we expect to see more of the kind of smaller bolt-on deals for 2012 based on what you know now?
Doug Howell
Well, Scott, first of all if you take a look at business insurance, in the top 100 agents and brokers in – we always said that there is about 18,000 agents and brokers in the United States. But to get in the top 100, you had to do $18 million of total revenue.
So, the preponderance of the opportunities out there are going to be under $20 million. Having said that, I think the team has performed incredibly well on three large deals so far, Liberty, GAP, and now Heath and I’m really proud of what the team is doing in the England with the Heath deal and I’m sure that’s going to work out very-very well.
So, if there were another larger deal in that top 100 in the United States or a larger deal outside the United States, we wouldn’t be bashful about trying to go for it. But in the meantime, what you’re going to see is the threes, fours and fives, we click off every quarter are going to be on the smaller end.
Scott Heleniak – RBC Capital Markets
Okay. And then just kind of a broad question about what you are seeing on the pricing environment just by account size, small versus medium versus larger.
I know you guys don’t do as much large account businesses as some firms, but just wondering if you are seeing any kind of nearing of differential of rate changes for those lines and are you seeing some of the competition that’s may be been little more aggressive being less aggressive over the past couple of months. Just any kind of broad commentary there?
J. Patrick Gallagher, Jr.
Yes. I think my comments were probably follow the CIAB survey.
I was in a production meeting here this week here locally and a very large account that we’re working on did go for a discount as our new piece of business to one of the big multi-line carriers. But by and large the team reports that on the smaller accounts, it’s pretty non-negotiable.
There is going to be some rate increases, they get that midsized account which is really our bread and butter. That’s looking flat, again, a really great account that hasn’t been out in the market that get shopped as new business to someone else it would get cut.
But when you get to the larger accounts, flattish is more what they feel like right now.
Scott Heleniak – RBC Capital Markets
All right. Thanks for that.
J. Patrick Gallagher, Jr.
Thanks, Scott.
Operator
Thank you. Our next question is from the line of Richard Mortell, Piper Jaffray.
Please take your question.
Richard Mortell – Piper Jaffray
Hi, good morning. On the exposure side, can you give some breakout of what you are seeing with the clients in the U.S particularly any pockets of strength or weakness by geography?
J. Patrick Gallagher, Jr.
Say it again Richard, I missed the question.
Richard Mortell – Piper Jaffray
Sure. Are you seeing any pockets of strength or weakness by geography in the U.S.
on a regional basis?
J. Patrick Gallagher, Jr.
And you’re talking about pockets of strength in the economy or the rate, which one?
Richard Mortell – Piper Jaffray
Economy, just generally, exposure of economy.
J. Patrick Gallagher, Jr.
Yes let me, again, I am not economist and this is just my personal observations. But I believe the Midwest is in a better spot than the East Coast I believe that the Midwest is in a better spot in Florida and California.
Having said that in the last eight weeks, I traveled pretty extensively throughout the United States and I’ve met customers that range from $150 million manufacturers, a guy locally here whose business dropped off 50% at the beginning of the recession, he’s essentially got that business back. He’s shifted customers, he’s made up – he’s come up with new products.
But he feels pretty good, family business and he feels pretty good about where the business is right now. I was with a temporary health firm towards the end of this summer.
This is a business that’s mostly Midwest based. They were up 30% a month over the course of the summer.
We produce an account just this past week locally again that’s a conveyer manufacturer. Their chip and conveyer belts like, you can’t believe, they running three shifts.
Now I realized that’s my little subset is not the deal but I also tell you I was at a key client meeting at Gallagher Bassett’s in Los Vegas two weeks ago. The place was packed, was packed.
Waves of people coming down the miles I’m going to leave on Friday, I’ve thinking where are all these people getting the money to begin with. So those are the client end reactions I’ve had over the last three months many more, I could go into and they’ve been in Hughson and in Dallas and in Denver and in Chicago and New York.
And I’m just saying that I think our customers are quietly more optimistic than what you read about in the news paper.
Richard Mortell – Piper Jaffray
All right. Okay thanks guys.
That’s helpful. And then you talked about this a little bit before, but on the workers comp claim for (indiscernible) side, I think you were up 2% last quarter.
It sounds like that’s trending up again in this quarter, but can you give an exact number for that?
Doug Howell
At this quarter, it’s more like 5%.
Richard Mortell – Piper Jaffray
Okay, so you’ve seen a pretty big pick up there.
Doug Howell
Yes.
Richard Mortell – Piper Jaffray
Okay. That is all I have thank you.
Doug Howell
Thanks, Richard.
Operator
Thank you. Our next question is from the line of Mark Hughes of SunTrust.
Please state your question.
Mark Hughes – SunTrust
Thank you. With the Heath in the other acquisitions you have done over the last year it’s added pretty materially to the share account and amortization.
Are those deals accretive to earnings at this point and maybe Heath specifically that you’ve got sense in integration costs, but aside from that was it accretive, dilutive to EPS?
Doug Howell
Further, we didn’t use any shares in the Heath deal that was entirely a cash deal. So it’s by definition accretive.
I think that when you look at the – when you add in the integration costs what breaking even on that on an EBITDA basis and we’re probably flat to losing a penny because of the amortization after that. So in terms of how we look at it, we think that it’ll be about breakeven in 2012.
The first – 2012 it will break even on a after – on a pretax basis and an after tax basis, but later in 2013 it should be accretive even after the amortization.
Mark Hughes – SunTrust
Right. And then when you look…
J. Patrick Gallagher, Jr.
Even after amortization and integration costs.
Mark Hughes – SunTrust
Right, and if you look at the other acquisitions you’ve done quite a lot lately. Is it fair to say there on an aggregate basis accretive or they’re still ramping up?
J. Patrick Gallagher, Jr.
Yes, those deals are always accretive for us.
Mark Hughes – SunTrust
Yes. Okay.
J. Patrick Gallagher, Jr.
Then actually in our third quarter we did 70% and 30% stock. So we are starting to use more cash in the deals than stock.
Mark Hughes – SunTrust
Yes. In the last hard market, Pat what was your experience, if rates do start to move up more rapidly, does that slow down the M&A process.
J. Patrick Gallagher, Jr.
It can slow it down a bit and part of that is distraction. A hard market, if you get a solid hard market like we’ve got in 2011, it is all hands on deck.
I mean, it is very difficult. First of all you’ve got eight years of recruits that have never gone and told the client they are going to see rate increases.
They are not only going out and telling them they are going to see a rate increase, they are telling them that they might not have insurance, what they have is going to have holes in it and it’s going to cost to look ton more. Interestingly enough, while that happen lost business actually subsides, new business does not grow as quickly as it was because people are hunkering down, but with rate increases flowing through the P&L you get some substantial jumps in your revenue and your profitability.
It’s a very much of a heavy activity. There still will be mergers and acquisitions.
People will still go through that, but they also know that, as rates are running, their values are running up and so they’ll try to pick a time when it’s absolutely opportune to sell.
Mark Hughes – SunTrust
Right. Thank you.
J. Patrick Gallagher, Jr.
Thanks Mark.
Operator
Thank you. Our last question is from the line of Ray Iardella with Macquarie Capital.
Please state your question.
Ray Iardella – Macquarie Capital
Yes. I just had a quick question I guess regarding the dividend, what – is there a particular time of the year that the Board discusses any changes to dividend policy?
J. Patrick Gallagher, Jr.
January.
Doug Howell
We do it in January.
Ray Iardella – Macquarie Capital
Okay. Great, thank you.
J. Patrick Gallagher, Jr.
Thanks, Ray.
Doug Howell
Thank, Ray.
J. Patrick Gallagher, Jr.
I think that’s it Rob in terms of questions?
Operator
Yes, sir. That’s correct.
J. Patrick Gallagher, Jr. – Chairman, President, Chief Executive Officer
I’m going to make few comments and I’m going to close here. Again, thanks everybody for being here and thanks for the thoughtful questions, we appreciate it.
I think that our platform for growth domestically and internationally has literally never being stronger. Our merger pipeline is robust and all of our divisions are back to contributing to organic growth, which I’m thrilled about.
So, a good quarter and I do feel good about going into the fourth quarter. In the fourth quarter we’re going to pass a milestone that we’re all very proud of.
We’ll surpass $2 billion in revenues. We did our first billion in 2002, which was 75 years after my grandfather started this business.
$2 billion comes nine years later. So that’s pretty exciting for us.
We’re all kind of pumped up about it and we think 2012 should also shape up to be another growth year. So, thank you for being with us this morning and Rob that concludes our call.
Operator
Thank you, sir. This concludes today’s teleconference.
You may now disconnect your lines at this time. Thank you for your participation.