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7/26/2019
Good afternoon and welcome to Arthur J. Gallagher and Company's second quarter 2019 earnings conference call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded and if you have any objections, you may disconnect at this time. Some of the comments made during this 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 discussed on this call or described in the Company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today and the Company undertakes no obligation to update these statements. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials in the investor relations section of the Company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher and Company. Mr. Gallagher, you may begin.
Thank you, Mike. Good afternoon, everyone. Thank you for joining us for our second quarter 2019 earnings call. With me today is Doug Howell, our CFO, as well as the heads of our operating divisions. Today, as we do each quarter, Doug and I are going to report on the four key components of our strategy to drive shareholder value. Number one, organic growth. Number two, growing through mergers and acquisitions. Number three, improving our productivity and quality. And number four, maintaining our unique culture. Once again, the team delivered on all four of our strategic priorities and I couldn't be more pleased. We really do have some terrific momentum. Let me give you some second quarter financial highlights for our combined core brokerage and risk management segments. 12% growth in revenues, .3% all in organic growth, adjusted EVAC margin expansion of 49 basis points, and we completed 13 mergers with about $195 million of estimated annualized revenues. Just another outstanding quarter for the team. Let me break down our results by segment. Our brokerage segment second quarter organic was .8% all in. There was some geography change between base and supplementals in the quarter, so think of base organic more like .9% and organic for contingents and supplementals combined of about 4.5%, a really nice quarter. All of our divisions globally contributed. Our domestic retail brokerage operations had a great quarter with organic of about 5%. PCA operations were slightly better than that and our benefits operations a bit below. Our U.S. wholesale and program business had an excellent base organic quarter, posting more than 5% with contingents and supplemental revenue growth above that. Internationally, our brokerage operations combined to post about 8% organic on very broad-based strength in the U.K., Canada, Australia, and New Zealand. Just fantastic results wherever I look in our business. Moving on to the rate environment, our internal data and our internal midyear rate survey are indicating a trend of increasing property casualty pricing. Almost 75% of our producers surveyed indicated rates increased during second quarter renewals, calling it approaching about 5%, with international a bit higher and domestic a bit below that. What caught my attention though is that about 15% of our surveyed producers indicated they were seeing rates of more than 10%. Very few indicated that level of increase last year. Let me give you some more detail by geography. I'll start in the U.S. Rate overall is up about 4% in our retail operations with the greatest increases across commercial auto, property and umbrella. Most other casualty lines are flat to up a few points while workers' compensation rates remain in negative territory down about 3%. Staying in the U.S., pure rate within our wholesale operations, RPS, is up 5% to 6% with price increases in low double digits for many property-related lines, especially on large or loss-impacted accounts. Additionally, medical malpractice, general liability, and umbrella are experiencing average price increases of about 5% while comp, casualty, and some professional lines are closer to flat. Let me move to the U.K. Overall pricing is up about 5%, however a different environment in retail and our specialty operations. U.K. retail pricing is up about 3% while pricing is increasing in our U.K. wholesale operations by almost 8%. Carriers seem to be pushing for more rate in casualty-oriented lines such as DNO and ENO and general liability in addition to the property. In Canada, pricing is up .5% with property, auto, and medical malpractice practice rate increases in the high single digits. Most other casualty lines are closer to flat. And finally, in Australia and New Zealand, pricing is up around 7%, which is very similar to what we have been seeing for the past two years. So to sum it up, around the world, property casualty rates are up close to 5% and exposures are still growing. This is when we excel. Our talented production staff is fully engaged helping clients and prospects mitigate the challenges of an increasing rate environment. Next, let me talk about brokerage, merger, and acquisition growth. In the quarter, we completed 13 brokerage acquisitions, which should add about $195 million of estimated annualized revenue. I was in the UK just three weeks ago and was able to meet with our new Stackhouse Poland and Aerospace colleagues. I couldn't be more excited about them joining our team. Together, these two mergers account for about 75% of acquired revenues this quarter and give us a top-notch UK high net worth business and make us an industry leader in aerospace brokerage overnight. The other 11 mergers average about $5 million in annual revenues, which is more consistent with our historical tuck-in merger and acquisition strategy. I would like to thank all of our new partners for joining us and I extend a very warm welcome to our growing Gallagher family of professionals. As I look at our merger and acquisition pipeline, I see more than $400 million of revenue associated with about 50 term sheets either agreed upon or being prepared. None of these 50 brokerage mergers have more than $40 million of annual revenues. We know that not all these transactions will close, but it illustrates our pipeline is still very strong and full of small tuck-in opportunities run by entrepreneurs with excellent sales skills and client relationships. Next, I would like to move to our risk management segment. Second quarter organic growth was 3%. In line with the estimate we provided at our investor day in June, recall we posted over 10% last year in the second quarter, so it made for a difficult comparison this year, but still very respectable. In the U.S., claim counts are increasing year over year as our clients' businesses grow. Call claim counts up about 2%. Our expanded specialty offerings are generating encouraging new business leads and wins, while our insurance carrier business continues its positive momentum. In fact, last year alone we paid out claims totaling over $1.5 billion on behalf of our insurance carrier clients. Growth in these areas has been driven by investments in analytics and innovative technologies that are delivering positive claim outcomes for our clients. Outside the U.S., growth was strong in the U.K. while Australia was weaker due to lower performance bonus fees, which can be lumpy from year to year. Looking forward, we are expecting stronger organic growth in the second half of 2019 due to some new client wins, and we think organic for the full year should be in the mid single-digit range. Lastly, I'd like to touch on Gallagher's unique culture. Our culture is really about our colleagues and the rock-solid foundation they form based on every interaction we have with clients, with underwriters, and with each other across divisions and around the world. Our culture makes our franchise distinctive, and it's why we are constantly looking for the right people to join us, whether through new hires, mergers and acquisitions, or internship program. Next month, we will conclude our 54th year of the Gallagher summer internship program. This rigorous two-month program for nearly 500 young men and women is an essential investment in our future to ensure our unique culture thrives for many years to come. Okay, a great first half, which bodes well for another excellent year. I'll stop now and turn it over to Doug. Doug?
Thanks, Pat, and good afternoon, everyone. As Pat said, another really excellent quarter of top and bottom line results. Combined with a terrific first quarter, it puts us in a great spot halfway through the year. Today, I'll amplify a few comments that Pat made from the earnings release. I'll move to the CFO commentary document that we post on our website, and I'll conclude with my usual comments on cash and M&A. All right, to the brokerage segment, organic growth on page three of the earnings release. A great quarter at upper 5%, nearly 6%. As we look forward, we see it more like 5% than 6% as we had a really strong third quarter last year. So that creates a tough compare this year. As for brokerage margin, for the quarter, we delivered about 50 basis points of adjusted margin expansion. Looking forward, that seems about right in this environment. Organic of 5% should yield about 50 basis points. Risk management, we posted 3% organic growth and .5% adjusted margins this quarter. That's right in line with what we forecasted our June IR day. And great performance by the team, especially considering the second quarter of 2018, as Pat said, we posted over 10% organic and .6% in adjusted margins. Looking towards the second half of our risk management segment, we're seeing organic over 5% and margins still north of 17%. As for the corporate segment, turn to the table at the top of page seven of the earnings release. Relative to the midpoint of the range we provided our June IR day, interest expense came in a little lower due to stronger cash flows, clean energy earnings a little higher. I'll add some flavor to that when we get to the CFO commentary. Acquisition expense a little higher due to the JLT aviation transaction. And in corporate expenses, about $3 million lower due to three items. A one-time refund of some ex-pack taxes. We had an FX adjustment and a little more tax benefit due to option exercises. Each about a million dollars. Let's turn now to the CFO commentary document, like we said, that's found on our IR website. Go to page two. Relative to the estimates we gave at our June IR day, most of the items pretty much so in line, except for the non-cash items. That's amortization and depreciation coming in a touch better. That's simply because we were just a little conservative when we were making our initial estimates on the aviation business that had closed just 12 days earlier on June 1st. Next, turn to page three. Again, we're in the CFO commentary document. Looking out towards the third and the fourth quarter, our estimates for interest, M&A costs, and corporate expenses are still consistent with what we provided in June. As for clean energy, while we posted better than our midpoint estimates in the second quarter, we're widening our range for the next couple quarters. There's three reasons for that. We're not seeing the extreme weather like we had last year. One host utility had a fire taking the plant offline for several months, and we are feeling the impact of lower natural gas prices. So there is a lower side scenario leading us to drop the lower end of the range by about $5 million. That said, we're still on track to produce over $200 million of tax credits this year, and at June 30, we have nearly $950 million of carry forward credits. So we are clearly in a terrific position to have very low cash taxes paid well into the mid to late 2020s. One operational comment before we get to cash and M&A. You'll see in our earnings release that we took about a $7.2 million or 4 cent after tax charge for severance this quarter. We're seeing some real opportunities to bring efficiencies and productivity lift to our back office support layers. We've started a transformation journey similar to what we did with our middle office layers. Centralization, standardization, automation, and further use of our centers of excellence all focused on lowering costs and improving quality. The charge we took this quarter is the first step in that transformation journey. I'll have a more detailed update on our September IR day, but needless to say, we are excited about some early views of the opportunity. And finally, as for cash and M&A, at June 30, we have about $250 million of available cash on our balance sheet. That plus expected free cash flow for the remainder of the year and some more debt should bring our full year M&A capacity to around about $1.5 billion before using any stock. So okay, those are my comments. A truly excellent quarter, a truly excellent first half. We're in a great spot for another successful year. Back to you, Pat. Thanks,
Doug. And Mike, you want to open it up for questions?
Thank you. Call is now open for questions. If you have a question, please pick up your handset and press star one on your telephone at this time. If you are on a speakerphone, please disable that function prior to pressing star one to ensure optimum sound quality. You may remove yourself from the queue at any point by pressing star two. And again, it's star one for questions. Thank you. And our first question comes from the line of Mike Zuremski with Credit Suisse. You may proceed. Hey, good afternoon. First
question, Pat, in terms of your commentary and the earnings lease about your internal survey suggested rates are approaching 5%. Maybe you can comment, where was that last quarter? And you also said right after that, that around half the survey producers see rates moving higher. Maybe you could comment on do they have a good track record for forecasting? And another one on the same topic is maybe you can remind us of your sensitivity to higher pricing in terms of the fee versus commission, kind of what the beta hits your organic.
Okay, well, that's a lot of questions, Mike. Let me jump in and try to get through them and do my best. First of all, I think it was 15% of those surveys said they're seeing rates move even higher than the 5%. So figure that rates are approaching that 5% number with workers comp being soft in the meantime. But remember, and I put this in my prepared remarks, our job is to mitigate that. That's what we do for our clients. So if you take a look at our results for the quarter, all in exposure units and rate contributed about 2% to organic. Now that is up a point. Historically, and even through the first quarter, we would have told you it was closer to 1%. So we did get a 1% additional lift from exposures and rate. In terms of accounts moving back and forth between commissions and fees and what that does to the P&L, you'll recall that since 2006, with our friends, the attorneys generals, we've been transparent, in particular here in the United States. So everybody that's buying from us knows exactly what we're making, and they can choose to either pay us by fee or they can choose to pay us by commission and a good 80% plus choose to use the commission vehicle and do allow us to take supplementals and contingents. Of course, they're very profitable, but having the base commissions and fees up about 5.9%, fees or benefits in closer to 5% is still good work for the team. So tell me, did I get half of them?
It was about 3% in the first quarter. We didn't survey them, but that's probably where we
were. Okay, got it. You got it. And then just lastly, when we think about if your survey producers are right and rates keep moving north, I think us from the outside are going to start thinking about putting in some more margin improvement into our estimates, our forecasts. Do you think there's a governor on how much margins can improve because maybe there's initiatives you guys want to further invest in to take advantage of the great market environment currently? Maybe touch on that.
Thanks. Well, I think there is wage inflation, Mike. So I think that if we can grow 5% and put 50 basis points of that onto the bottom line, I think that's pretty good in this environment. We have lots of investment initiatives that we have here in the company between data, between our sales management tools, between developing our interns as our niche strategies, our marketing that we're doing to create a brand. We think that we can run ourselves with 50 basis points of margin expansion if we're hitting that 5%.
The other thing too, Mike, as I said in my remarks, our people go out every day and try to figure out with their clients how to make sure that these rate increases don't hit them. Now, first of all, let me comment on hard market, soft market. 5% increase is no hard market. You got to go all the way back to 2001 to see what a real hard market looks like. So 5% you're sitting across from a client that's getting a reduction on their workers' compensation. They can tweak their deductibles up. They can drop the line to cover. There's a bunch of things they can do to mitigate the impact of that. So while I'm pleased that we have a bit of a tailwind, I would not get extra bullish on the rate environment.
Thank you. Thank you. And our next question comes from the line of the Lease Greenspan with Wells Fargo. Please state your question.
Thanks. Good evening. My first question, you guys posted .8% organic growth in the first half of the year. I know you guys kind of set the bogey at 5. Doug, in your comments, I know you alluded to a tough comp in the third quarter, but then the comp, obviously you guys had a good year last year, does get a little bit better in fourth quarter. So should we think about that kind of evening out and should the 5.8 kind of be where the full year could end up for 2019?
Yeah, I think so. I think between five and 5.8.
Okay, great. And then in terms of the CFO commentary, I know you guys, you added this quarter in terms of above 5% organic growth, 50 basis points of margin expansion. I'm assuming that's just, you know, you guys are printing above 5. I just wanted to know the thought process behind adding that disclosure. And then you did mention taking a severance-related charge this quarter. Is that for, you know, the savings there, is that for reinvestment or is that something that maybe could help get that, you know, margin, you know, above the 50 basis point target?
All right, a couple questions in there. We had just a little bit of, Lisa's referring to kind of about a third of the way down in the CFO commentary on page two, that we just, you know, we've always said that it's tough to expand margins if you have organic less than 3%. You'll get a little bit between three and four and into the fours. And then maybe if we hit 5%, we'll get 50 basis points of margin expansion. It's what I've been saying in our IR days for the last couple quarters. So we just thought we'd put it in writing there. It doesn't signal anything more or less than just putting it in writing what we've been saying. The second half of your question is in terms of the opportunity for us to take a little severance this quarter and maybe restructure some of our positions. That does show us an opportunity, but it's more of a long-term play, at least. I think we've got raises coming up in the second and a half of the year, so that will help that. But I still think with, you know, with 7 million of severance, it's, you know, 200 to 300 total people related to that, this isn't a big move on the margin at this time.
Okay, great. And then also on the CFO commentary, in terms of the acquisitions roll forward on page five, it seems like for the deals you closed in the second quarter, and I'm assuming that's really stemming from Stackhouse Poland and JLT, less of them come into the third quarter in terms of revenue and more into the fourth quarter. I know we don't have the Q1 and the Q2 of next year, but is there something seasonally with either JLT or Stackhouse Poland that would make them have less revenue in the third quarter versus some other quarters of the year?
Yeah, JLT is heavily weighted into the fourth quarter.
Okay. Okay. Thank you very much. Thanks, Elise.
Thank you. And our next question comes from the line of Ryan Tunis with Autonomous Research. Please proceed with your question.
Hey, thanks. Good evening. I guess my first one is I was actually a little bit surprised to have that only half of your surveyed producers see rates moving higher in the second half of 19. Oh,
no, no, no. Let me get back to my prepared remarks because... Let me find it here.
Yeah, I don't think we said that, Mike. I just think somebody else repeated it. 75
% of our producers surveyed indicated rates increased during the second quarter renewals at approaching about 5%. But what caught my attention is that about 15% of our surveyed producers indicated they were seeing rates of more than 10%. So that would be people in tougher geographies with bigger property schedules. And a few indicated... Nobody indicated that last year.
Yeah, so there's 90% of survey results,
though. Okay, understood. I guess I wanted to come back a little bit more to some of the offsets, though, to the better pricing. What percentage of your clients are you seeing either, I guess, buying down on insurance in response to the higher rates or just increasing deductibles?
Yeah, I'd say most of them are looking at how do I get this thing back to flat? That's kind of the marching orders that were being given. So come to me with ideas. I don't want to pay 5% to 7% and certainly don't want to pay north of 10% on property. So what suggestions do you have? Now, in some instances, there's not much you can do, which is why some of it will flow through and why we see about 2% hitting the books right now. There's not much if you've got already a very high deductible for property and the property is going to go up 7% or 8%. You're not going to get much savings taking your deductible up another 100 grand. It's the bigger part of the exposure that they want the rate on and they're going to get it. I can't give you a percentage of which of our clients drop cover, but we do try to keep an eye on terms and costs. And by and large, our people are doing a really good job of, number one, getting out and explaining that the pricing dynamic is a little bit different. And number two, I'll be back to you with suggestions.
Gotcha. And then I was hoping you could go into a little bit more detail on what you're seeing competitively, I guess, in Work with Comp. Clearly pricing is down, but I'm trying to understand if that's because there's more underwriters that are trying to write more of it or if it's just because you've had so much good experience over the past few years. It's just the impact of that flowing through, I guess, on the pricing side.
I think you hit right on it. It's been a successful line across the United States. They want more of it. When you want more of it and you're pricing off against your competitors, one tactic you're going to have to use is to reduce price. Now, they're seeing some favorable loss cost development, I think.
Thank you.
Yeah, thank you.
Thank you. And our next question comes from the line of Josh Schenker with Deutsche Bank. Please proceed with your question.
Good evening, everybody. Hi, Josh. Hi there. You know, you and your publicly-trained competitors' stocks are materially more expensive now than they were at the beginning of the year. I understand there's a difference between the public market and the private market, but I'm wondering if your potential acquisition targets see that and demand a higher cost to acquire their businesses, or are prices for acquisitions generally consistent with where they were six, seven months ago?
Well, first of all, I don't know if I'd say that our stock is expensive. It certainly had a nice round-up. No,
on a number of... You can just... It's up 30%, you know?
Yeah. But we like it like that. So I think that we are seeing pricing move up a little bit. Our tuck-in acquisitions, you know, we're still doing in the eights, the low eights. And then if you throw in a little bit larger ones, they're pushing our total multiple up to about 10. That's still, you know, a four-plus turn on our trading multiple. So we still think it creates great shareholder for us to go out and merge with a lot of folks. So I think that, yeah, you are seeing pricing up over the last three or four years. Is there a material change in the last seven months, which I think was your specific question? I don't really see that.
But I will tell you what is changing, which is interesting, and I think it feeds right into our pipeline. The difference between a private transaction to perpetuate your agency, and most of our acquisitions are smaller, five, six, seven, eight million dollars. And what you can get by selling to a strategic is getting to be like a 50% differential, which is taking owners and saying, really, if I'm going to perpetuate to my younger teammates, I'm going to take a 50% haircut? I don't think so. So I think that's bringing a lot more potential sellers to the table. And up as well. And I think the advisors out there are saying, look, we haven't seen multiples at this height, especially for a large deal, in a long, long time. The banks did this 20 years ago. But you might want to move while the opportunity is there, which is, again, good for us. That makes our pipeline longer. We can be very discerning. We only want, look, 90% of our due diligence on culture. We only want people that are going to fit from day one. And we've got lots of opportunities to look.
And if we look out at the pipeline, I guess, going back maybe three or four years ago, you changed your methodology. You were issuing a lot of stock, and you said, we're no longer going to issue stock without buying it back. Is there a chance that a good acquisition come along that you'd be willing to issue stock for at this point? Or are you still saying, you know what, we've made a commitment to shareholders, and we want to keep the share account where it is?
Yeah, I think to clarify that, I think since 2016, when we actually have had such ample cash flows and the ability to borrow on that, that I think we've only issued a total of a net 2 million shares. So less than 1% of our shares, I'll say, in the last four plus years. So yes, you're right. We have issued a total of $1.5 million of deals this year without issuing stock. But I don't think that we would hesitate to use a little stock in an acquisition. If we get down to the end of the year, and we need to do $100 million or $200 million of stock, or first quarter next year, we'd probably do that. I mean, if you're still buying in that eight times range on the smaller deals, and we issue some shares directly to the sellers, I think that's still good value creation. But we are working very hard to not use shares, but we haven't had to.
Okay. Thank you for the answers. Good luck in the remainder of the year. Thank you.
And before our next question, I would just like to remind any participants who would like to ask a question for today's call, it would be star one on your telephone keypad. Our next question comes from the line of Yaron Kinnar with Goldman Sachs.
Please turn it over to Yaron. Good afternoon, everybody. My first question is around risk management. So I think the last couple of years we see some favorable seasonality margins in the third quarter. Are those recurring? Is there recurring seasonality there, or should we think about maybe flatter seasonality?
I think the thing that impacted the most is our performance bonus revenues, and some of those do not.
And then, this may be a silly question here, but as we look at supplemental and contingent commissions, are the margins for the two roughly aligned, or are they different?
Generally, we do not see a lot of difference. Anything that we do with the supplements and contingent is usually how we compensate the field leadership levels. So there is not a big difference between those two. We want to execute the right contract with our underwriters. If they want to do a supplemental, we will do a supplemental. If they want to do a contingent, we will do a contingent. So we try not to differentiate too terribly much on that.
Got it. And then, final quick one. What is the rationale for choosing private placements over public debt?
At this point, we just have not had to access the public market. I do not know if there is a long history of rationale in that, but I think that the first time we did our first private placement in 2007, they said you might have one or two left in it. And here we are 12 years later, and there seems to be plenty of capacity for it.
Okay. Got it. Thank you.
Thank you. And our next question comes from the line of Paul Newsome with Sandler O'Neill. Please proceed with your question.
Good afternoon. Thanks for the call, guys. I was wondering if you could look at it a little bit the market environment. I think of sort of hard markets as being mostly characterized by a lot of more shopping behavior and carrier level retention is changing. Are you seeing that in your book? Are you having, are your customers asking you to shop and spreadsheet more, or is that not necessarily the
case? Oh, no, that is the case. That is right. I think what you have got is you have got the good salespeople out way in advance, letting customers know that things are a little different than they were a year ago. Customers then turn around and say, what is your mitigation strategy? And the dialogue you have with them is, well, there is a couple of things. We really like the relationship with XYZ carrier. We are going to talk to them about your good account and why it should not be necessarily changed in terms of rate. But there is also others that are very competitive, and part of the job of a broker is to shop the account for you.
We do see retention coming down. Listen, I have not read every single insurance carrier's release that have come out, but I think their retentions are down just a little bit, which would show there is movement. In our case, that gives us a great opportunity for us to go in with our customers and for those prospects that we do not have to demonstrate that we have some creative ways in order to help mitigate what is facing them. Remember,
too, this is when Doug hit on it very well not too long ago. This is when the capabilities shine. So we know that 90% of the time when we compete in the marketplace, we are competing with somebody smaller than we are. So something on the order of 10% of the time, the four big, bigger players are butting heads a bit. Now when you have got to mitigate some increases, you want to look at your balance and what have you, now our capabilities really play well. We have got much better data analytics than any of the small guys. We have got much better carrier relations. We have got a broader set of carriers that we are very well related with. That is hard for that little guy to come in and pick your pocket. So it is a good environment for us. Our skills get to show off.
And I guess similarly, last couple of hard markets I saw, you saw changes in commission levels as well. Carriers trying not always succeeding but at least trying to reduce commission levels for the...
That is true. That happens. But let me be really clear. This is really important, guys. Do not overemphasize this as a hard market. This is not a hard market. We are getting our accounts quoted. We are not having accounts canceled in a wholesale fashion. We are working through a little bit of increase here. I have been saying for the last decade, you take me up two, down three, up four, down two. That is not a hard market. If you go back to 2001, our organic growth was 19% and the market rates were up an average of over 20. And many accounts never could get the cover they wanted. They could not fill out their lines. That was a hard market. So let us not get crazy here looking at this as a hard market.
I could not agree more. But thank you very much. Thanks, Paul.
Thank you. And our next question comes from the line of Meyer Shields with KBW. Please proceed with your question. Thanks. I have a question on your commentary. You talk about having difficult comps, let us say last year or in some coming quarters. I am not sure I understand why having high organic growth in a preceding year's quarter makes it harder to maintain the same organic growth going forward. Is there something impermanent about the revenues in the high organic quarters?
Yeah. I think one of the things to look at is that about 40% of our business is actually not annual renewable type policies. We do have surety bonds, construction programs, et cetera, where you might get some lumpy, you know, or, you know, it is base commissions and fees, but those are not recurring revenues. So we do not have 100% of our book of business that are you would think about as the standard commercial policy that renews every year. So last year, if you have a little bit of a, you know, you hit well on a bunch of surety bonds, they might not be back for three or four years. So that does influence. And when you are talking about a point on a billion, you are talking about $10 million bucks in total. So you can have a tough compare if you have 30 or 40 good hits in a quarter, you will have a little lumpiness still in our revenues.
Okay. That is tremendously helpful. That
is all there is to
it. Okay. No, that clarifies it. I really appreciate it. I have asked this a bunch of times in the past. Is the sort of recurring rate decrease story in workers' competition having any impact at all in terms of clients looking to retain more of their workers' comp exposure?
No. We are talking a little bit, you know, when you are talking about down 3%, that is not a huge change.
No. And people do not move in and out of self-insurance that often. So if you have got a large retention and you have got a TPA or Gallagher-Bass that is paying your claims and you find out that overall you can get a 3% reduction if you go back to a first-hour policy, you are still, you are way down the road. You are at the deep end of the pool and you are not going back to the other one.
Okay. Perfect. Thank you so much. Thanks, Mayor. Thank you. As a final reminder for anyone who would like to pull in to ask a question for today's conference, it is star one on your telephone keypad. And with that, it looks like our last question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.
Yes, thank you. Good afternoon. Hi, Mark. Did you say that RPS is up 6% organically in the quarter?
I think that is what the number was, yes. 5 to 6%.
Would you anticipate if rates continue to go up, would you see more activity in the, perhaps in the ENS for one and maybe that might push that growth a little higher?
Yes. Yes, I think you could. And that is part of the mitigation strategy. You might have a large portfolio property with maybe one market right now and you get down the road, it might be better to layer that thing and then you are going to be in the wholesale market. And yes, I think, and our team at RPS is very good at that stuff.
And then a final question on the fourth quarter contribution from acquisitions. It looks like there is an outside contribution then. Is the margin impact also more outsized? Is that high margin stuff than Q4?
There would be a slight, on that incremental revenue, yes, you would see a slightly higher margin on that just because of the seasonality. But I don't know if it moved the entire billion or billion one that we post in the fourth quarter.
Very good. Thank you.
Thank you, Mark. Mike, I've got a few just wrap up comments here. Thank you again for being with us this afternoon. In closing, I'm extremely pleased with our 2019 performance thus far and the team is poised to deliver another strong finish to the year. We look forward to speaking with you again at our IR day in September. Thank you for being with us this afternoon. Have a great rest of the evening.
Thank you. This does conclude today's conference call. You may disconnect your lines at this time.