Arthur J. Gallagher & Co. (AJG) Q3 2019 Earnings Call Transcript

Arthur J. Gallagher & Co. (AJG 1.04%)
Q3 2019 Earnings Call
Oct 24, 2019, 5:15 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s third-quarter 2019 earnings conference call. [Operator instructions] 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 security 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 Patrick Gallagher, chairman, president, and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Thank you, Devan. Good afternoon. Thank you for joining us for our third-quarter 2019 earnings call. With me today is Doug Howell, our chief financial officer; as well as the heads of our operating divisions.

Let me just start by saying we had another excellent quarter. Our combined brokerage and risk management segments delivered 13% growth in revenues, 5.8% all-in organic growth; adjusted EBITDAC margin expansion of 66 basis points, and we completed 14 merges with about $85 million of estimated annualized revenues. Just a terrific quarter by the team. Today, Doug and I are going to spend our time focused on four key components of our strategy to drive shareholder value.

First, organic growth. I'll review organic by geography, comment on the pricing environment, and give you some insight regarding exposures. Second, growing through mergers and acquisitions. Third, productivity and quality.

Doug will hit this topic after my remarks. And fourth, maintaining our unique culture. OK, to organic. Let me start with the brokerage segment.

Third-quarter organic was 5.8% all-in, which is similar to our organic performance through the first six months of 2019. I'm very pleased that all of our divisions globally contributed to this result. For example, our domestic retail PC operations had another strong quarter, with organic of about 5%. Our wholesale operations had an excellent quarter, posting about 6.5% organic.

This includes over 10% in our domestic open brokerage operations. Our benefits operations also have a strong showing this quarter, posting base organic of about 4.5%. And then internationally, our retail brokerage operations combined to post 7% organic, with Canada more than 10%, Australia and New Zealand up about 6%, and the U.K. up 5%.

Another really strong quarter of production by the team. Let me move to the rate environment. We've been hearing a consistent message, whether it's from our carrier partners at the CIAB and the WSIA conferences, or from our global leaders during our strategic planning sessions. Rates continue to increase across nearly all areas of the market.

Our own internal data also points to an increasing PC rate environment, with global PC pricing up about 5%, which is a bit stronger than what we saw in our mid-year internal pricing survey. Let me break down what we are seeing. I'll start in the U.S. Rate overall is up around 5% in our retail operations, with workers' compensation the all-in line not showing incremental pricing strength relative to the second quarter.

Within our domestic wholesale brokerage operations, pricing is approaching 6%. Moving to the U.K. U.K. retail pricing is up over 3%, a touch higher than the second quarter.

And our U.K. wholesale operations pricing is approaching double digits across many lines. In Canada, pricing is up around 8%, with property increases more than 10%. And finally, in Australia and New Zealand, pricing is up around 5 to 6%, about a point lower than what we have been seeing over the previous two years, but still a substantial increase.

Moving to exposures. In early October, we surveyed our producers, specifically asking questions related to their clients' payroll and exposure units. Over 75% said their customers' payrolls and exposure units grew during the third quarter. And more than 95% of these respondents said they were seeing similar or stronger client exposure growth as they begin working on 2020 renewals.

This is consistent with the results from our May 2019 benefits benchmarking survey, where more than 70% of the 3,900 employers believe that their revenue would be increasing over the next two years. So when I look around the world, PC rates and exposures continue to move higher. This is an environment, in which our talented production staff excels by delivering the best insurance risk management and benefits consulting advice, by leveraging our vast array of resources and capabilities. As I sit here today, I see our fourth-quarter organic nicely in the mid-5% range.

Next, let me talk about our brokerage merger and acquisition growth. In the quarter, we completed 11 tuck-in brokerage acquisitions, with estimated annualized revenue of $70 million. I would like to thank all of our new partners for joining us, and I extend a very warm welcome to our growing family of professionals. The Brokerage team has had a very busy M&A year completing 35 mergers, with more than $330 million of annualized revenues during the first nine months.

Adding to that, we have already announced a number of mergers in October, which should add an additional $90 million of annualized revenue. This is on top of our M&A pipeline report that shows $400 million of revenue associated with about 50 term sheets, either agreed-upon or being prepared. While not all these transactions in the pipeline will ultimately close, as I look around the world, it's clear that our tuck-in merger opportunities remain very robust. Next, I would like to move to our risk management segment.

Third-quarter organic growth was 5.7%, with similar results in both our U.S. and international operations. The growth we are experiencing is also broad-based by client type, including large commercial, public sector, alternative markets and insurance carrier clients. Our investments in innovative products, like the award-winning mobile app GB Go, combined with expertise by product and industry continued to set Gallagher Bassett apart from the competition.

Looking forward, we see mid-single-digit organic growth in the fourth quarter. In terms of mergers and acquisitions, we completed three risk management acquisitions this quarter at an annualized revenue of about $15 million. These acquisitions provide us with incremental capabilities and services that will benefit our clients in Australia, the U.K., Europe, and the U.S. I'd like to extend a very warm welcome to our new Gallagher Bassett professionals.

Lastly, I'd like to touch on the true competitive advantage that's Gallagher's unique culture. It is a culture that helps us attract and retain the very best talent, a culture that promotes our relationships with our carrier partners, a culture that distinguishes us from others in a highly competitive merger environment, and it's the basis for people coming together as a team to service clients, focused in doing the right thing. Nowadays, we're hearing a lot about company culture and purpose. This is nothing new to Gallagher.

We've long valued all of our stakeholders as defined in our mission statement. Ultimately, we believe that we provide value to our clients, take care of our employees and build strong relationships with our insurance carrier partners, our shareholders will be rewarded. Bottom line, our culture always has been and will continue to be a true competitive advantage. OK.

A great quarter and first nine months, I'll stop now and turn it over to Doug. Doug?

Doug Howell -- Chief Financial Officer

Thanks, Pat, and good afternoon, everyone. I'd like to start by thanking the team for another outstanding quarter. It really does position us very well to close out an outstanding 2019 here in the fourth quarter. Today, I'll make a few comments from the earnings release.

I'll walk you then through the CFO commentary document we've posted on our website, and I'll conclude with some comments in cash and M&A. OK. Let's go to the bottom of Page 5 of the earnings release, with the brokerage segment margins. For the quarter, we delivered 68 basis points of adjusted margin expansion.

That's terrific results at 5.8% organic growth, and this marks the 32nd straight quarter of brokerage segment margin expansion, a truly amazing run and an excellent illustration of how we're constantly focusing on raising our quality and productivity. Looking forward, we would expect to see about 50 basis points of margin expansion if organic growth is in the low- to mid-5% range. Let's flip to Page 6 of the earnings release to the risk management segment margins. During the quarter, we posted 18 points of adjusted EBITDAC margin.

That's really great work by the team, but well above the upper end of our targets. So we wouldn't expect to see that in the fourth quarter. Perhaps more like 17 to 17 and a half percent, which will finish off the year nicely toward the higher end of our full-year target, also in that 17 to 17 and a half range. Let's now move to the CFO commentary document that we can find on our website.

Let's turn to Page 2. Relative to third-quarter estimates that we provided during our September IR day, nearly all of the lines came in very close. A few other comments. First, our integration efforts, mostly related to the aerospace and Stackhouse mergers we did this summer.

Further moving along on plan and on budget. Second, we're making nice progress on our back-office support layer transformation project we discussed at our IR day. We've already contracted a few hundred positions and we have a nice line of sight in the areas where we can lower our cost and improve our service quality by centralization, standardization and automation of most of our back-office functions. We'll redeploy the savings into processes to help us drive our organic growth, sales support and sales management with the tools, data and sales analytics, additional production talent, marketing and branding.

In other words, all our effort to allow to sell more, hire more and acquire more. And finally, still in Page 2, I'll make note. Please make sure your models are picking up our estimates for changes in estimated announce and also earnings from non-controlling interests. Neither are big numbers but still can move your estimates by $0.01 or $0.02.

We'll stay in the CFO commentary document, but flip to Page 3 to the corporate segment. Relative to the estimates we provided during our September IR day, interest in corporate expense lines were both within the range. Acquisition expense was just a touch higher, mostly due to a couple small international deals. And then finally, the clean energy.

You'll see that the third-quarter adjusted results came in a couple million dollars above the midpoint of the range, a great quarter. Looking forward, fourth quarter is looking a bit lower than what we were seeing during our IR day. Weather thus far in October is not nearly as hot as last year. So we moderated our fourth-quarter outlook just a bit.

That said, it's stacking up to be another $100 million a year for this investment strategy. We also see a clean energy adjustment line this quarter. The clean energy had a very busy quarter. Footnote 2 describes these four items.

We've resolved a five-year patent squabble with a great outcome. We prevailed in Tax Court, we opened the new patent defense litigation which I think is an American but we did the finding and rigorously. And finally, we're making terrific progress in moving three of our 2011-era lower production machines into a really great 2009-era locations. You can see this clearly on Page 4, the CFO commentary -- in the fourth row of that page shows the machines are currently producing less than $1 million of earnings here in 2019.

But by moving them, we can achieve 10 to $15 million of earnings. Hats off to those engineers and operators that we used to make this happen. Really a great job. There's also affirmation from our utility partners who truly have an excellent process and that we're delivering substantial environmental benefits.

We'll stand at Page 4. You'll see that we are also providing numbers around what we think is possible for clean energy earnings in 2020. That's the far right columns. These numbers are still in line with what we've said is a very early during our September IR day.

You'll see that by moving these machines we can counteract the natural trend of power production toward renewables and natural gas. It's an early look. A lot can change, but here we are a decade later and still looking at an investment strategy that can deliver great returns for a couple more years. At the end of the quarter, we had over $950 million of credit carryovers on the balance sheet and at least another two years of production ahead of us.

So we're well-positioned to harvest those hard-earned cash flows well into the mid- to-late 2020s. Finally, let's move to cash in and may. At September 30, we have another $300 million available cash on our balance sheet. This was the free cash flow to the year ended -- at the end of the year, and our borrowing capacity should round out a year where we can still invest deeply in our business, pay a great dividend and still fund about $1.5 billion of M&A before using any stock.

When I look out our pipeline through the year-end, I think we'll be close to that level and if we happen to go over it, it will only have been using the very small amount of stock. This clearly demonstrates the strength of our growing cash flows. While I look out toward 2020, it looks like we can easily do another $1.5 billion of M&A without using any stock. So those are my comments, an excellent quarter, an excellent nine months.

Back to you, Pat.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Thank you, Doug. Devan, we're ready for questions if we have some. Could you open it up?

Questions & Answers:

Operator

[Operator Instructions] Our first question comes from the line of Mike Zaremski with Credit Suisse. Please do the question.

Mike Zaremski -- Credit Suisse -- Analyst

Hey, good afternoon. First question, so as you guys know better than I do, there's a lot of commentary about the P&C commercial market hardening. And there are certain views out there that rates will continue to harden. I know, Pat, you've said that 5% is no hard market, and you said you're kind of going all the way back to 2001 to see what a real hard market looks like.

Since it's been a while, let's just -- if we had to hypothesize that rates just continued to move north, maybe you can kind of help us understand what a hard market would mean in terms of Gallagher's impact on your financials and the pluses and the minuses?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Mike, yeah, sure. Thanks for the question. First of all, you hit it exactly on the line. This is not a hard market.

It's getting firmer, there's no question about it that when you get into some higher-end property stuff and catastrophe exposed or places where there been losses, our people working very hard to place those. Some of the stuff is getting done at the last minute, it takes more effort, more submissions to more E&S markets to get it completed. We're seeing excess casually take a little more effort and cost more money as well. But this is not 2001, 2002 by any means.

There is still plenty of capacity. Deals are getting done. And remember, our job is to mitigate this for our clients. So No.

1, we're training our people across the globe, get out in front of this and explain to your clients that in fact in many instances we can show you that your rates are lower today than they were in 2005. So you had a very good run, this is not a knee-jerk. People -- the rates that are being requested in many instances make a lot of sense, but it certainly not a message that anybody wants to hear. Now let me compare that with what a hard market is, and again, you've got to go back to 2001, 2002 and that's when the door slam shut.

You've got people getting canceled left and right. Cancellation notices are going out every month. You are out trying to explain to your clients why they've been loss free, and yet the XYZ insurance company's not going to renew them. And they better get ready for the consequences of significant deductible increases and possibly the reduction of limits on a drastic basis.

Frankly, that's not good for anybody. Now I've been through three or four of those in my career, and it's a little bit like going home and finding out the electric company just decided to change the current and none of your appliances work. And so that's not good for anybody, and I don't see that happening. I do see disciplined need for rate, and that is being explained by our professionals.

And where necessary, we're doing everything we can to help them find cover at a cheaper price.

Mike Zaremski -- Credit Suisse -- Analyst

OK. So as a follow-up then. So if we kind of get maybe Goldilocks, the rates keep jerking up at least a couple of points, I mean, do you expect -- the question we get from investors is, will AJ Gallagher continued to say, it's 50 basis points of improvement if we could enter 6, to 7% organic territory, would you expect for more of the organic to fall to the bottom line?

Doug Howell -- Chief Financial Officer

Yeah, Mike. It's Doug. Yeah. I think that if you got over 6% for a continued period of time, you would see -- you can see similar margin expansion than 50 basis points.

Mike Zaremski -- Credit Suisse -- Analyst

OK, great. And then just lastly for Doug, on the M&A sandbox. It's interesting, there's been some IPOs of smaller companies that have been very successful on and they're trading at nice multiples, there's one this week as well. Does that have any impact in terms of maybe making another pipelines robust, but maybe remove some potential for some of the larger deals if these companies that find out choose to go the IPO route?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

I don't know if it makes a dramatic difference to that. I think. Remember, people joined Gallagher because they see our capabilities, our resources. They know that being together with us, that would be a better opportunity to deliver value to their customers.

The folks that might want to IPO or go to a financial sponsor, that's really not what they're trying to do with their business. The ones that were trying to attract, and we did 40, 50, 60 of those folks a year want to come in and be better together. So it could happen, but I don't see it pulling a lot of folks away from us.

Mike Zaremski -- Credit Suisse -- Analyst

Thank you.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Mike.

Operator

Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please do the question.

Elyse Greenspan -- Wells Fargo -- Analyst

Hey, thanks. Good evening. My first question, at your investor day, kind of just a little bit over a month ago, you guys have pointed to, I believe, a little bit of a slowdown in organic in the third quarter. I know, Doug, I think you said that last year was a tougher comp.

Obviously, the growth that you guys printed in line with what we have seen through the first six months. So did some business outperform relative to your expectations? I'm just trying to get a sense of what might have changed in those few weeks toward the end of the quarter?

Doug Howell -- Chief Financial Officer

I think that we did have a good September. We're talking about a few million bucks here, so -- but if you're looking at places we're particularly strong, U.K. and London operations are really killing it right now. They're doing great.

We saw good growth in Canada. You go through where Pat talked about, where we're seeing some lift there. But I think that September is a big month for us, as is December. so we did have a difficult compare, and I was pretty proud of the team to go over the top of that.

Elyse Greenspan -- Wells Fargo -- Analyst

OK, that's helpful. And then so as we think about 2020, it sounds like you guys are pretty optimistic in terms of what's going on with exposure growth, as well as property casualty pricing momentum at least being maintain at its current level. So does it seem like 2020 can be kind of in that five and a half percent range that you're guiding to for the fourth quarter? Just any kind of initial view there?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Yeah, I think that's how we're seeing 2020. So for instance, the 5%. Remember, also during this time, if losses go up, you could have some programs, that need to reprice. You can have some carrier decide that they're going to pull back on some stuff.

So it's the repricing piece that's always hard for us to take a look at this far in advance.

Elyse Greenspan -- Wells Fargo -- Analyst

OK, that's helpful. and then I appreciate giving that color on clean energy earnings for 2020. There's a $20 million range, which does seem a little bit higher than typical. I guess, why is there a slightly bigger range? And how should we think about, I guess, falling toward the higher end versus the lower end of that range for next year?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

We're a long ways away. There's still the utility, they're still doing their budgets. We pulled them here during the last month to see if we can get an early lug. So we typically don't provide this til January.

So I'd expect us to narrow that range. But also, when you look at the utilization of coal for electric power sector production, in '18, it's been declining about 3% a quarter, maybe 4% a quarter. We had a big drop off in April and through June of this year in the second quarter. I'm just looking at some of the statistics you can find out on the EIA, and they were down 18%.

That's weather-related more than it is displacement. But if you really think about at the line to look at, it's 50 to $60 million worth of production related to those plans that we're making us 56 to $58 million this year, that's may be a 4 to 5% pullback in the numbers, maybe a little bit more. But between 80 and 100 million, we're still really darn happy with this. When we set out 10 or 11 years ago to do this investment strategy, the idea of us making call it the midpoint rate $90 million in the ninth year, that's -- I don't think we would've dreamt of that.

So we're pretty proud of that effort.

Elyse Greenspan -- Wells Fargo -- Analyst

OK, that's helpful. And one last quick question. your acquisition revenue Page 5 for the fourth quarter, the 116 million, that's about 21 million higher than what you guys have provided at that September IR day. Is that one deal driving that from either -- that was announced in the fourth quarter? Is that just a compilation of some of the smaller deals you announced in the fourth quarter to date that flow into the fourth quarter?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Elyse, can you just restate the question? You're looking at something in the fourth quarter, our estimates for rolling revenues is $116 million, right? Is that what you're looking at?

Elyse Greenspan -- Wells Fargo -- Analyst

Yeah. So that's 21 million higher than what you had told us at the IR day. So is that -- is there a one big deal that you announced since then that benefits the fourth quarter that much? Or is it just more a lot of deals that were announced since September?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

All right. So some of it is the Q4 deal call it half of that difference that we closed Q4 deal. And also I think the JLT -- the aerospace business, we've got a better line of sight on what we think is rolling in from that.

Elyse Greenspan -- Wells Fargo -- Analyst

OK. That's helpful. Thank you very much.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Elyse.

Operator

Our next question comes from the line of Yaron Kinar from Goldman Sachs. Please proceed with your question.

Yaron Kinar -- Goldman Sachs -- Analyst

Hi, good afternoon, everybody. first question is around the EBITDAC, adjusted EBITDAC margin in the brokerage business out quite a bit year over year. And even seasonally, it seems to be quite strong here. And then as I recall, I think Doug, you said in the past that the second half of the year has a little bit of weakness just because of the salary increases or compensation increases that come in.

I'm looking out three years in a row with the third quarter is actually quite seasonally strong. Is there any change in how you're thinking about seasonality here? Any driver for a particularly strong result here?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

I think the biggest answer is the team did a really nice job. We kind of put the clamps on hiring. And when you're hiring 350 people a month, you can kind of control your comp ratio a little bit by just putting the brakes on it a little bit. coming into the end of the year, we didn't want to get too aggressive on our hiring.

That's probably delivering most of it in the quarter, which is a little different than -- typically, we don't do that until the fourth quarter. So I think the team just got ahead of a little bit.

Yaron Kinar -- Goldman Sachs -- Analyst

OK. and do You think there was a timing issue here? I would just think there was firming markets and opportunities, maybe the hiring will still commence?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Yeah, we're always out there looking for producers. We're always doing that. I think that you're really seeing some of the economies of scale coming through. We did do a rift, if you'll recall, some of that -- I wouldn't call 300 people a rift on 34,000, but we did a tightening of the belt in June and July.

So that's part of it. But also, we're just getting good results by utilization of our offshore centers of excellence. We're getting good results through our technology list. I just -- you get these economies of scale as you get that -- as the business grows.

Yaron Kinar -- Goldman Sachs -- Analyst

OK. And with that in mind, and as we look forward, do these, -- in the past you said, anything above 4% growth should achieve, what was it, 30 basis points of margin improvement, or 40 basis points margin improvement. 5% organic growth will get a little more than that. Is it an acceleration of that given the economies of scale?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

I think There's two things that we'll look at. We'll look really hard. The team's having a terrific year, so we'll look at how the bonus expense looks in the fourth quarter. I think that we still feel comfortable for posting over 5%, we'll get 50 basis points of margin expansion.

Yaron Kinar -- Goldman Sachs -- Analyst

OK. Second question, if I may. Contingent commissions. If the industry is raising rates in a rational way, basically, to address inadequate returns, I would think, should one expect a decrease in contingent commissions over the next 12 months?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Well, numerically, contingent commissions, you could have a little flattening in the growth of contingent commissions. I mean, think about a -- we've got hundreds and hundreds of contingent commission contracts out there all around the world. That's our business that's loss ratio sensitive, let's call it $50 million of annualized earnings. If this flattens out, you probably get paid back for that in the base commission and fee line.

As you get some rate lift and some exposure lift. So overall, all-in organic shouldn't suffer too terribly much based on what we see in the loss ratio environment right now.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. Thanks so much.

Operator

[Operator instructions] Our next question comes to the line of Meyer Shields with KBW. Please proceed with your question.

Meyer Shields -- KBW -- Analyst

Great. Two quick questions, if I can. I want to follow up on your runs question, and ask whether the deteriorating casualty environment that we're hearing a little bit about this quarter is translating into more claim -- lighter with the claims handling within this management?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

There is no doubt. I mean, We're seeing -- first of all, we are seeing inflations spent. we're seeing inflation across our book of business, in particular, in areas like transportation, sexual misconduct and D&O, in places like that. Our liability book and severity -- in the liability book in Gallagher Bassett, it's built up in terms of numbers of claims, as well as the settlement amounts that are being paid to close.

There's clearly [Inaudible] inflation.

Meyer Shields -- KBW -- Analyst

OK. And that sounds like it would be good for risk management revenues?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

It should be, because a big part of what we're trying to prove in the marketplace. And realize we're getting a size now as the risk management claims provider, that many of our own trading partners don't handle the number of claims Gallagher Bassett does. So we're trying to point to the fact, to carriers, to captives and to risk management clients, that if they select Gallagher Bassett, their results will actually be better. We will have a better claim outcome than their used to in the general market.

And we believe we can stand up to that. So yeah, I mean there's people start to feel the squeeze, and as the settlement cost go up, the more reason you'll listen to our story.

Meyer Shields -- KBW -- Analyst

OK. Excellent. and Second question, i guess if you look back, I'm interested in how accurate past surveys of client growth have been in terms of predicting how the economy actually pans out?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Really, really good. Our people are on the street. this is an honest survey of a bunch of economists that are sitting in Washington, D.C. These are people sitting across from customers right now planning for 2020.

And they're not going to be pie in the sky, because the fact is, when you tell us your payrolls and your exposure -- other exposure and your sales are going up, you're going to have a higher deposit on your insurance premium. So there's a natural tendency to lowball. And if you lowball, you get a free loan from the insurance company. So no, no, no.

These guys really have an ear to the ground.

Meyer Shields -- KBW -- Analyst

OK that's fantastic. Thank you.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Meyer.

Operator

Our final question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good afternoon. Doug, the 1.5 billion in capacity for next year, could you refresh us on how much of that you would anticipate just to be free cash? And then how much you would borrow? And then what's your capital cost would you imagine on that piece that you would be borrowing?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Half would be free cash; half would be borrowing. And what's our cost of borrowing? I don't know, 4% for the quarter, something like that.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then, just to be clear, in the CFO commentary, your estimate for revenue contribution, that is entirely inclusive of all the deals you've done heretofore, including I think you said $90 million in acquired revenue in October, is that correct?

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Through yesterday, yes.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Through yesterday. OK. Great. thank you very much.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Thanks, Mark. Any others, Devan?

Operator

There are no further questions at this time.

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Great. Then let me just make one quick comment to wrap it up. Thank you again for being with us this afternoon. I'm extremely proud of what the team has accomplished so far this year.

And I believe we're poised to deliver a strong finish to the year. So thanks everybody for being with us today. We appreciate it.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

Patrick Gallagher -- Chairman, President, and Chief Executive Officer

Doug Howell -- Chief Financial Officer

Mike Zaremski -- Credit Suisse -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Meyer Shields -- KBW -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

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