Oct 31, 2012
Executives
J. Patrick Gallagher, Jr.
– Chairman, President and CEO Douglas K. Howell – Chief Financial Officer James W.
Durkin – Corporate Vice President
Analysts
Greg Locraft – Morgan Stanley Brett Huff – Stevens Incorporated Meyer Shields – Stifel Nicolaus Mark Hughes – SunTrust Robinson Humphrey Josh Shanker – Deutsche Bank Chris Lakim – William Blair Eric Fraser – Goldman Sachs Ray Iardella – Macquarie Scott Heleniak – RBC Capital Markets
Operator
Good morning and 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 and Company.
Mr. Gallagher, you may begin.
Patrick Gallagher, Jr.
Rob, thank you very much, and 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 division.
For those of you that are out east, we hope your families are safe that’s cleared your weather 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 we filed after the safety of our people servicing our clients is our number one priority.
So hope all of you are well today. As our customer make some remarks about the quarter and Doug will add additional color and we’ll get pretty quickly to questions-and-answers.
Again this quarter I’m very pleased with our results, across all of our operating businesses globally we’re producing growth for our shareholders and getting stronger in our capabilities to serve our clients. I believe these capabilities are evident in the numbers that we posted with you last night.
Adjusted brokerage revenue is up 14% in the quarter, 17% year-to-date with organic growth of 4% is another excellent quarter. Adjusted EBITDAC in the brokerage up 20%, 22% year-to-date with margins up by 141 basis points is also excellent, year-to-date we’ve closed 43 acquisitions bringing in over a $170 million of additional revenue to our company.
We’ve acquired businesses across all of our operating divisions five internationally and our pipeline continues to be very, very strong. Our risk management segment had revenue growth on 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 proud of our team, our sales culture is strong. We continued to sell new accounts and to keep those accounts we have.
Account retention remains nicely in the mid 90s which we view as continuing to be very strong and everyday everywhere in the world our sales teams are explaining why Gallagher is the right risk management partner to help client’s deal with this risky world. Let me touch on a number of the individual operations and I’ll start with the brokerage segment.
In our property casualty retail area we continue to see rate increases across most of the lines of coverage in 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 return from the CIAB that’s the Council of Insurance Agents and Brokerage 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’re making or losing money, they understand their loss costs are inflating and they are committed to continuing the rate increases.
Let me touch just briefly on the economy, we believe that we are still seeing our clients businesses improving. Now this is a slow no higher recovery that we’re feeling and it does feel fragile that positive audits continue to come through our system and it appears that our clients businesses are improving.
Our international brokerage is having a very strong year and a very solid quarter, as I said last quarter, our Heath acquisition has brought many new opportunities to grow our business. Internationally we’ve closed five acquisitions this year, having a solid retail platform in the UK is working and we’re recruiting new sales talent that we couldn’t have attracted before this transaction.
Our global growth is a growing and exciting part of our story. Our wholesale and NGA business had another strong quarter, submissions are up as are the number and the percent of those submissions that are actually becoming orders.
Clearly business is moving back into the access and surplus market. Our benefits business solid year so far we’ve completed 23 acquisitions for over $50 million of revenue this year.
We believe this is affirmation that’s small benefits brokers are recognizing, they need our expertise and modeling capabilities to survive. In the quarter we announced the formation of a private exchange and partnership with liaison, we believed private exchanges will be an important alternative under the new law and we wanted our clients to know we are committed to providing solutions for their benefits needs, whether to find benefits or to find contributions, Gallagher has the capabilities to help.
The new Healthcare Reform referred to as Obamacare creates ever more opportunities us to help our customers navigate the changes that are underway. As I mentioned our merger and acquisition activity is strong and we’ve completed 43 acquisitions for a total of a $170 million of revenue, clearly this strategy is very important for our growth and it’s a key component for our team.
We’ve literally dozens of additional opportunities in our pipeline. As I do every quarter, I want to stop a moment and thank those great firms who joined us this quarter, I know you had choices and I’m proud you chose Gallagher, welcome to our growing family.
Let me move to risk management, another strong financial quarter, organic growth on our base, domestic and international fees of 5% continue to be strong. We’ve successfully wand down the work we were doing for the New Zealand earthquake authority and we’ve added another significant account to our Australian business that Doug will mention in his comments.
We successfully launched a number of new tools to our risk facts IT system, we call this the analytics workbench which provides a whole host of new analytic tools for clients to better understand and manage their cost to risk. In the quarter we also invested in and brought a board a new Chief Client Officer to continue our pursuit and 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 a Gallagher we focus on four strategic areas and so 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 and helping our most important stakeholder our clients. We get up everyday 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.
Douglas Howell
Thanks, Pat, and good morning everyone. And as Pat said, best of luck to all of those in 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 two sense of Heath Lambert integration cost and a penny of severance which is right inline with our comments from the last conference call.
The team is doing a great job of integrating our UK operations and we still believe we are on track to rap up that process in mid 2013. So as a reminder, you’ll continue to see $0.02 to $0.03 a quarter of integration charges until then.
Turning to page two, another really solid organic growth quarter, I’ve note, it’s our seventh straight quarter of organic growth in positive territory which is fantastic after having endured 14 quarters of negative or no organic growth during the great recession. And we’re particularly pleased that we saw a 4% organic in our domestic P&C operations about 4% organic growth in our domestic benefit operations and about 4% growth in international, so clearly across the board nice growth in each of our units.
In terms of supplemental and contingent commissions they came in right inline with what we said last quarter and at that time we explained that deteriorating loss ratios on a couple whole selling 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 the prior year.
Turning to page three, our brokerage segment continued to show improvement in our comp ratio and our operating expense ratio, resulting in a 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 and earning performance bonus revenues and that we’ve longed down most of our work on settling the New Zealand earthquake claims.
As for margin, we are heading 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 a penny from the New Zealand earthquake claim settling process and that won’t repeat this year.
And second, we picked up a very large account in Australia effective January 1st 2013. Ramp up cost in the fourth quarter will costs us really $0.02 of share but from 2013 we expect to generate about $20 million of revenues from that client.
So while just to ramp up cost this year it’s a really, really great win for our team down under coming into 2013. Next, let’s turn to page five to the corporate segment.
I’ll give you some help on building your fourth quarter models then I’ll give you some early thinking around 2013. Running down the table on page five, here is how we’re seeing the fourth quarter 2012, all of these amounts of are net of tax.
Assume about $7 million of interest and banking costs in the fourth quarter. About $2 million of acquisition costs, about $3 million to $4 million of corporate cost and then assume about $5 to $9 million of clean energy investment earnings in the fourth quarter.
When you get done, the corporate segment should show a loss in the fourth quarter of about $0.04 to $0.07, I know that’s somewhat of a wide range but we simply do not have clear insight of fourth quarter clean energy production levels and we also be spending more to ramp up 2013 production. So 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 and now will get you close.
Then please take a few minutes to read the paragraphs on page five about our clean energy investments and you’ll see that we’re gaining significant momentum getting idle plants producing. If you add up the numbers on page five for the ultimate production levels, then cushion it a bit for timing, maintenance and operational tweaking, you’ll see that our 2013 earnings from clean energy investments can total $70 million to $90 million in 2013.
If we make that much from the investments, it will more than cover the interest M&A and corporate costs and in fact of corporate segment could post $0.15 to $0.30 per share of earnings for the full year of 2013. On a quarterly basis, assume that the corporate segment might break, might get to break even for the first quarter and then spread the $0.15 to $0.30 across the last three quarters.
Clearly that’s an early and rough estimate in a wide range but it should give you a start. As for capital management, we have a robust M&A pipeline but we believe our cash position will allow us to do mostly cash deals that are here in the fourth quarter.
So those are my comments and just as a rap up comment, it’s been an excellent nine month on all front and our team is working very hard to close out 2012 strong and get after 2013. So those are my comments, back to you Pat.
Patrick Gallagher, Jr.
Thank you. Rob, we’re ready to open the lines for questions-and-answers.
Operator
(Operator Instructions) Our first question is from the line Greg Locraft of Morgan Stanley. Please proceed with your question.
Greg Locraft – Morgan Stanley
Hi, good morning guys.
Patrick Gallagher, Jr.
Good morning. Greg, how are you?
Greg Locraft – Morgan Stanley
Good, good. It’s been a busy few days here and actually you’re the first call for the industry, so I know it’s likely much early to judge, but any thoughts on Sandy and the implications for the industry from your vantage point?
Patrick Gallagher, Jr.
Well Greg, you hit on it. It’s awfully early but historically when we look back at major storms going all the way back to ‘92 with Andrew obviously Katrina, I’ll be giving a presentation down in Florida in a couple of weeks and I did go to the insurance information institute and get some information on the top 10 storms and Katrina was by far the largest.
And then, second to that was a storm that was probably came in been around 15 billion to 20 billion. So you got the northeast, we’ve talked for years about the fact that a storm that took that track could in fact be the biggest storm ever because the value concentration that there in the northeast.
Storm surge I know was unbelievably huge, but the winds weren’t as rough as it could have been. So I have no dollar amount and the industry, there is people rattling around through all numbers all left and right and 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 that is next week unfolds, multiply it by two or three.
Greg Locraft – Morgan Stanley
Okay, great. And then back to kind of pricing, sounds like at the top of the organizations the rhetoric is matching what needs to happening and the industry is more unified than previous cycles.
Can you – how does things look from your vantage point into next year on the pricing front? There is – some of the data is showing kind of a flattening of pricing power at actually pretty nice levels and we’re lapping last year’s increases, but what do you see in the marketplace through next year?
Patrick Gallagher, Jr.
I actually mentioned this to the CEOs of the people we 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 is a disconnect there and 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 lost costs are doing.
And lost costs are up in every instance. They recognize very clearly that there is no return on their investments that’s going on safe and then they have to have – 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 in order to get any kind of ROE. They’ve got to be driving results in the mid to low 90s on combined loss ratio.
So 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 right risk.
We’ve got the balance sheet. It’s just we’re not going to put our capital out and not get a return.
And so that resolve I think quite honestly, Greg, has actually got stronger as they’ve had more success getting the rates they need. Now if you take a look at the worker’s compensation line, it’s a disaster.
And they know that, they’ve been very clear on where they’re making and not making money. So I think you’re going to see continued pressure to continue to get 4%, 5%, 6% increases and it looks like that could continue for quite a while.
Greg Locraft – Morgan Stanley
Okay, great. Thanks a lot guys.
Douglas Howell
Thanks Greg.
Operator
Our next question is from the line of Brett Huff of Stevens Incorporated. Please proceed with your question.
Brett Huff – Stevens Incorporated
Good morning guys.
Patrick Gallagher, Jr.
Good morning Brett.
Douglas Howell
Hi, Brett.
Brett Huff – Stevens Incorporated
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 or are you just able to take more advantage of the rate and the exposure that might increase your scene.
You just give us your thoughts on that.
Patrick Gallagher, Jr.
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 and we’re out everyday chasing new accounts from the top of the organization down to the person in the mailroom.
I mean that’s what we do. And 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 anybody who is out there is just a generalist. And I think culturally we have an advantage, I mean one of the things that we do at this company very, very well is get the best talent we have in the marketplace at point of sale anywhere globally and the team comes together and does very, very well.
It’s not unusual to have someone from London, someone from Houston, someone from Calgary and someone from Oklahoma City all work it on an energy account together and it’s very fluent. So I do believe that maybe we’re seeing the benefit of utilizing salesforce.com and their chatter product.
It is in fact helping us bring our intellectual capital across the world together every day, you see request for help and the system all the time and frankly I just think we’ve got a culture of getting out and getting new business.
Brett Huff – Stevens Incorporated
Okay. And then can you comment again on the, in terms of the organic growth looking forward, can you give us a sense of where you think it’ll go for 4Q and maybe end of ‘13 especially given your commentary on rates?
Patrick Gallagher, Jr.
We don’t give a lot of guidance, Doug, do you want to comment?
Douglas Howell
I think that we mentioned though this is our seventh consecutive quarter of organic growth. The fourth quarter of last year was a particularly strong quarter and if you recall, we had an outstanding benefits quarter that quarter.
And I think if the careers continue to push for rate if the economy doesn’t sputter and there is nights 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. It might have some year-over-year compare issues in the fourth quarter because of our fourth quarter last year was so strong.
But I don’t see this is a plus 10% type in 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.
Brett Huff – Stevens Incorporated
Great. That’s what I needed.
Thank you.
Douglas Howell
Thanks.
Patrick Gallagher, Jr.
Thanks Brett.
Operator
Thank you. Our next question is from the line of Meyer Shields with Stifel Nicolaus.
Please proceed with your question.
Meyer Shields – Stifel Nicolaus
Thanks. Good morning.
A couple of background question.
Patrick Gallagher, Jr.
Good morning Meyer.
Meyer Shields – Stifel Nicolaus
Good morning, I’m sorry. I want to look over your shoulders in Gallagher Bassett for a second.
Are you seeing any inflexion in medical cost inflation for workers’ comp claims or other claims?
Patrick Gallagher, Jr.
We’re seeing continued and constant inflation in medical cost and insight comp, yes. That’s an industry-wide problem.
Meyer Shields – Stifel Nicolaus
Right. That’s not getting worse recently.
Patrick Gallagher, Jr.
No, I wouldn’t say – it’s continuing to inflate on a pretty consistent basis.
Meyer Shields – Stifel Nicolaus
Okay. That’s helpful.
Obviously the amount of M&A has picked up pretty impressively. Is there any drag on margins initially when that happens?
Douglas Howell
Meyer, this is Doug. We see most of our merger partners having margins very consistent with what our larger, what the overall book of business is showing.
We did have an exception on that with Heath Lambert if you call that was margin lager compare that our other operations and we’ve been working hard to improve that but by and large most of the deals that we’re doing have margins very similar to ours and 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 then – and use that to help continue to sell their clients and sell larger clients too, so very similar to our margins.
Meyer Shields – Stifel Nicolaus
Okay. And there is no timing issue where expenses come up before the revenue is for a recent acquisition.
Douglas Howell
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.
Meyer Shields – Stifel Nicolaus
Okay. And I apologize in advance because this is need to keep it, but obviously brokerage organic growth did slow a little bit in the quarter.
I was wondering whether there is anything aware of that just the niche with business.
Patrick Gallagher, Jr.
I think that when it comes to organic growth I think that 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 are came out before us.
I think that this is the sales process and this is a retention and I think our business is not a linear business where you’re going to see organic growth that’s consistently going up 1% every quarter or something like that. I think that we’re very pleased with 4% in this environment right now and the hard work that’s going on that we’d be very happy with 4%.
And if it bounces with 5% to one quarter and down to 3% for one quarter, I don’t think you can read anything into that. And if you think about our business that’s $400 million worth of business this quarter – 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 less 100 – like 200 locations on a brokerage side. We’re not talking about something that’s a systemic risk or a systemic change in the business.
Douglas Howell
Also remember Meyer our job is to mitigate increases. One of the things we do for our clients is when the increases come in make sure that we’ve got the best product in the market at the best price.
So we’re working against those increases in many instances.
Meyer Shields – Stifel Nicolaus
Okay. That’s very helpful.
Thanks so much.
Operator
Thank you. Our next question is from the line of Michael Nannizzi with Goldman Sachs.
Please proceed with your question.
Eric Fraser – Goldman Sachs
Hi, thanks. It’s Eric Fraser for Mike.
Good morning.
Patrick Gallagher, Jr.
Good morning Eric.
Eric Fraser – Goldman Sachs
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?
Patrick Gallagher, Jr.
Well it’s exactly what it is.
Douglas Howell
Yeah, we did have a lot of activity. Share count, we use shares this – the share count increased 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 it was $35, $36, so we had dilution just because of the increase of the share price.
In terms of using shares in acquisitions, we don’t expect to use a lot of them in the fourth quarter. You’ll see us use some shares in the first quarter next year because that’s our seasonally by far our smallest quarter.
In terms of the amortization, we – 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. So we do produce significantly more amortization from small deals than we would do if we did a very large deal on a big portion of that goes to goodwill.
But again, its non-cash and we think a better metric to look at us on an EBITAC basis.
Eric Fraser – Goldman Sachs
Sure. Is the pace of amortization expense this quarter, a run rate or is it a comeback down given that it related to purchase price?
Douglas Howell
I think the best thing to do is to probably look at, I’ll pull it out here and I’m talking to you, if you use our quarterly supplement and you go to page four of the supplements post on the website, we give it you the brokerage segment on an adjusted basis so that’ll take out any, if we have some small valuation write-offs or something, but it looks to me like amortization is, if you go back to the first quarter of 2001 it was $16 million a quarter, fourth quarter of 2011 pardon me, fourth quarter was $19 million and then now we get $20 million, $22 million, $24 million because of the acquisition activity it’s going to priced up $2 million a quarter if we continue at the same level of acquisitions.
Eric Fraser – Goldman Sachs
Great. One more on M&A, now that the pace of the international M&A has picked up, if you had to choose between doing a deal overseas versus in the U.S., how do you think about that that cash allocation?
Douglas Howell
Well I think that we look at it on, when we look at 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 that’s nicely in one of our niches, that’s a much more attractive acquisition and then something that’s just going to stand on its own and not trade with other parts of Gallagher.
I don’t think that that at this point, we look at every deal and we think the returns both international and domestic were about the same. So at this point, we’re not waiving one versus another.
Patrick Gallagher, Jr.
Now I think it’s important now that we’ve done 43 transactions this year and people look at that and say, oh my god your activity is way up and how could 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. And so we have a pipeline that we manage every single month that is a global pipeline that these 43 transactions are, they’re long-term efforts to bring people aboard in our company.
So we really don’t get to a point where we say we’re going to emphasize this division this month and this division next quarter whether it’s international or domestic. We’ve got people who are talking to and coding around the world all the time and when they’re ready to join us, we’re ready to make the deal happen.
Eric Fraser – Goldman Sachs
Okay, great. And then 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.
And if you are seeing declines, what’s driving that?
Patrick Gallagher, Jr.
Well let me address that and it’s all anecdotal all right, so I don’t have – I’m not an economist and I don’t have any facts, but I do think that when I get a chance to talk to clients what I’m hearing is that their businesses are improving a bit. Now some of that is in areas like construction interestingly enough where there is a little bit more construction activity going on and our construction offices are doing better this year.
Now better from a few years ago, being flat on their back, our temporary health businesses are doing extremely well. As 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 hire folks, there seems to be a real reluctance people are – I think one of the reasons our top health businesses are doing so well is that people are really actually reluctant to convert temporaries to full-time.
So this is not – 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 that’s 1.5% to 2% growth, I think that’s what we’re seeing.
Eric Fraser – Goldman Sachs
Okay, great. Thanks.
Douglas Howell
Thanks Eric.
Operator
Our next question comes is from the line of Ray Iardella with Macquarie. Please proceed with your question.
Ray Iardella – Macquarie
Thanks and good morning.
Patrick Gallagher, Jr.
Hi Ray.
Ray Iardella – Macquarie
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 your view on (inaudible) and then Sandy I guess impacting the industry.
Douglas Howell
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, but I think in terms of overall supplementals and contingents’ of the careers are still getting the rate that they’re – that they need to do in order to get their distribution system and I think that supplementals and contingents are going to hang in there next year.
It will be interesting to see there is starting to be a little bit more push to move from supplementals into contingents and remember if that’s the case, we wouldn’t be accruing supplementals next year it would push into a contingent in January, February of 2014. So 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 have been talking to the careers and have a better understanding, but I don’t see a dramatic shift in contingents or supplementals one way or another next year.
Ray Iardella – Macquarie
Okay, now that’s helpful. And then lastly just quickly sort of 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 calculated that correctly and how do you look at that debt to EBITA, debt to capital or sort of all the above?
Douglas Howell
I think that we have $200 million to $300 million capacity that would be kind of below the industry standard of 18, 19. I think that we have about $125 million to $130 million of cash on our balance sheet right now.
In terms of thinking about long-term, we did go to 2.75 times EBITAC and still be NAIC 2 rated and since we use the private placement market for most of our – for all of our borrowing, there is substantial capacity on that. That would be $500 million to $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 in I think the rates are pretty favorable right now. I think our M&A pipeline is strong and so it’s something that we’ll take a look at between now and January.
Ray Iardella – Macquarie
Okay, thanks again for all the answers.
Patrick Gallagher, Jr.
Sure.
Operator
Thank you. Our next question is from the line of Scott Heleniak with RBC Capital Markets.
Please proceed with your question.
Scott Heleniak – RBC Capital Markets
Hi, good morning.
Patrick Gallagher, Jr.
Good morning.
Scott Heleniak – RBC Capital Markets
First question I wanted to touch on was just the private exchange that you mentioned there, is that – so is that fully in line. Can you talk about kind of the opportunity there long-term particularly versus some of your competitors?
Patrick Gallagher, Jr.
Yeah, we’re very, 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. And employers really look at this as overall part of their reward package or reward package for hiring people.
So we think what it does is put us in line to be able to work with those clients and say look I really, I want to be sure that my people have good choices but I want them to make those choices. And we think it’ll be an important part of the market.
Scott Heleniak – RBC Capital Markets
Okay. So is that actually online right now?
Patrick Gallagher, Jr.
Yeah, up and ready to go.
Scott Heleniak – RBC Capital Markets
Okay. And then I just, sort of quick question about the clean coal guidance that you gave, Doug, next year for the 2013 to 2015 to $0.30.
Is that going to be mostly driven by higher revenues or cost coming down or is it a combination of both? How do we get to that $0.15 to $0.30 given the first quarter is going to be counter breakeven?
Douglas Howell
Well just to make sure I’m clear, it’s $0.15 to $0.30 for the total corporate segment in the clean energy line we think we can make $70 million and $90 million based on the plants that we currently have in process of resuming production. So when you read on page five, there are still six plants that haven’t been contemplated in that guidance that we have not, while we think that we have year marked to few locations and we’re holding them for some utilities and they’re looking at them, almost all the growth – in fact all the growth 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. So there will be, there is six plants that we’re not contemplated in that those numbers that hopefully in January we’ll tell you that we’ve got some more utilities interest with them, but almost all the growth that we’re talking about is just get – in fact all the growth just getting the plants that are currently ideal back into long-term production.
Scott Heleniak – RBC Capital Markets
Okay, that’s helpful. And then the 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, well that’s been up couple of percent or flash or what are you seeing that?
Douglas Howell
Well I think that we don’t actually give information with respect to producer at 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 acquisition is entirely that, there is a work trying to get producer count.
So if you count the acquisition adds for producers were 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 right – brokerage segment right now, and we’re finding that producers that know how to sell and if they want to work with our niches they find a nice home at Gallagher. So we’ve been successful in recruiting some producers to us also.
Patrick Gallagher, Jr.
Scott, just a week ago we had what we call our edge training group in, and edge training is all of our what we refer to is externs, people that have joined us through the internship program and it goes across all of our divisions. I spoke to them and I had lunch with them twice last week and I’d say we had a 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 light them up, and that’s a big part of what we do.
As you might recall, we talked in the summer about having a 150 interns, these are usually sophomores and juniors in college that we hope to turn into externs and edge participants, and it’s working. So 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 so that’s kind of a little unusual, but it’s something we do culturally very, very well.
And I think over time you’ll see that even be a bigger effort.
Scott Heleniak – RBC Capital Markets
All right, sounds like positive. Thanks.
Operator
Thank you. Our next question is from the line of Mark Hughes, SunTrust Robinson.
Please proceed with your question.
Mark Hughes – SunTrust Robinson Humphrey
Yeah thank you, good morning.
Patrick Gallagher, Jr.
Good morning, Mark.
Douglas Howell
Good morning, Mark.
Mark Hughes – SunTrust Robinson Humphrey
Corporate compensation expense for next year, anything we should expect, any change in philosophy, is there some upward pressure on compensation, how you’re looking that going into the next year and Doug, any updates on – I know you’ve talked in the past about potential for stream lining, where are you thinking about that for 2013?
Douglas Howell
Well I think that in terms of headcount I think that the teams understand the controlling headcount is important in this environment using our offshore centers of excellent in order to provide a lower cost labor thing as in our D&A now, we’re doing a great job with looking at work that can be pushing to lower labor locations. I think there is modest wage inflation pressure out there but not – it’s not ramped at this point.
So I think that we can’t control the inflation on it. And in terms of productivity gains, we have productivity opportunities within our workforce, we think technology can be a way to improve our productivity.
And then on the operating expense side we continue to see, continuing to harvest winds out of the real estate, out of a real estate footprint but there is also a little inflation you’re seeing travel inflation, you’re seeing airlines and hotels being a little bit up. So next year as we look out, headcount control would be very important and then it’s continuing to use our offshore centers of excellence.
Mark Hughes – SunTrust Robinson Humphrey
So if we get to say that 3% to 5% organic growth the compensation line as a percentage of revenue is a good opportunity for that to come down?
Douglas Howell
Little bit but not a lot, I think that I’ve said all along. If we’re at 3% organic growth don’t expect much margin expansion.
We’ve expanded margins like I said earlier five straight quarters now and 140 basis point improvement and this quarter is really great work by the team. I wouldn’t expect substantial margin expansion in a 2% to 3% organic growth rate and even at 4% we’d be happy to hold margins in there the way they are.
Mark Hughes – SunTrust Robinson Humphrey
One final question, the workers comp claims trend in the quarter within risk management, did you touch on that?
Patrick Gallagher, Jr.
I did not. What’s the question?
Mark Hughes – SunTrust Robinson Humphrey
What was the number? Was it up, down, sideways?
Douglas Howell
Well, what we saw from existing operations was about 2.5% growth in terms of claim counts and year-to-date we’re kind of around 4% but that include new business also.
Mark Hughes – SunTrust Robinson Humphrey
Right. So on an organic basis is that 2.5% is that a good same store?
Douglas Howell
Yeah that’s all organic.
Mark Hughes – SunTrust Robinson Humphrey
Yeah okay. All right great, thank you very much.
Operator
Thank you. Our next question is from the line of Josh Shanker of Deutsche Bank.
Please proceed with your question.
Josh Shanker – Deutsche Bank
Yeah. Good morning everyone.
Douglas Howell
Good morning, Josh.
Josh Shanker – Deutsche Bank
Good morning. I want to talk about deal pipeline in the fourth quarter as it relates to the election or maybe that’s just a waste of time conversation.
Douglas Howell
Well, deal pipeline – we think our deal pipeline is very good I mean there is, I mean we say it all the time it’s strong but it is really strong. We are more than happy to move quickly for those people that we’ve known for long time but we’re not interested in just pushing to get a deal done.
We’re not in an 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 not, they looked us as benefit brokers as Pat said are looking to jump on our expertise. So I don’t think the election is going to have a big change from where we sit right now one way or another.
Patrick Gallagher, Jr.
And then 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.
And so we’ll have a number of transactions in the fourth quarter but these will not be things that we’re spat up and rush through the door.
Josh Shanker – Deutsche Bank
Well, or to the extents that they feel there is slow down that someone you know in trust said, look, we’re going to sell our business to you, we’re not sure when but if depending on the election that might push us over the edge.
Patrick Gallagher, Jr.
No, we’ve had virtually no conversation like that, that has never come up.
Josh Shanker – Deutsche Bank
Okay.
Patrick Gallagher, Jr.
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 and we keep talking to them.
Josh Shanker – Deutsche Bank
All right, I appreciate the call, thank you.
Patrick Gallagher, Jr.
Sure.
Operator
Thank you. (Operator Instructions) Our next question is from the line of Chris Lakim of William Blair.
Please proceed with your question.
Chris Lakim – William Blair
Hi, good morning.
Patrick Gallagher, Jr.
Good morning.
Douglas Howell
Good morning.
Chris Lakim – William Blair
Just wanted to follow-up real quick on the deal on the exchange side, would you guys mind of just walking through the mechanics the partnership and sort of how that process works?
Patrick Gallagher, Jr.
Sure, I’ll throw that to Jim Durkin.
James Durkin
I don’t know how familiar you are with liaison but they are clearly a leader in this space. We did a lot of due diligence, looked at a number of different partners and shows 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, 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 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.
Chris Lakim – William Blair
Yeah, no that’s helpful. Yeah I just wanted to get some character around the partnership.
And then on the Heath side, I just wanted to know if you guys could talk to sort of the demand environment that Heath seeing in the UK and sort of what kind of expectations you have for the business in 2013?
Patrick Gallagher, Jr.
Well the European economy is not what we’d like it to be, England is probably better than the continent but the nice thing about our business and the wonderful thing about insurance is you got to buy it whether you want to or not. So 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 and team has done an excellent job but when you add their natural growth because they do have a good sales culture in many of the operations outside of the city of London and in London for that matter. If you add that sales cultured and we’re bringing an awful lot of spec to that as well and our acquisitions and our organic recruiting we’ve got very big plans continuing to grow that business.
Chris Lakim – William Blair
Okay great, I appreciate it. Thank you.
Patrick Gallagher, Jr.
All right. I think that’s what we’ve got time for, so I’ve got just a quick rap 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 done good momentum going into 2013.
Our team is excited, in return to that and we’re winning and we like that. So thanks for being with us this morning and all of you out east, best to you and hope things get better quickly.
Thank you, Rob.
Operator
Thank you. This does conclude today’s conference call.
You may disconnect your lines at this time.