Morning. I'm Ray Iddings, Head of Investor Relations at Gallagher. I want to welcome everyone to our third quarter 2018 Investor Relations meeting. For those of you that are here attending in Rolling Meadows and those of you who are joining us via the webcast. Each speaker today will have about 20 minutes of prepared remarks, then we're going to open up for Q&A for those of you who are here in the room. Additionally, we just handed out our updated CFO commentary document, and we posted the same document to our website at www.ajg.com/september13materials. A Form 8-K regarding this information will be filed this morning as well. Before we get started, I'd like to make a quick legal comment. Some of the comments made during today's meeting, 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 risks and uncertainties that may be discussed today or described in our reports filed with the SEC. Actual results may differ materially from those discussed today. With that out of the way, I'm going to hand it over to J. Patrick Gallagher Jr., our Chairman, President, and CEO.
Thank you, Ray, and good morning, everybody. I appreciate you being here. It's good to see some faces that we've seen many times before, and welcome to our headquarters. I'm going to be very brief this morning. We've got Mike Pesch. We've got a great lineup, in fact. We've got the heads of our operating divisions coming in. They'll give you about 20 minutes, as Ray said, then take questions and answers. Mike runs our Gallagher brokerage operation, our property casualty retail operation here in the U.S., and we want to get him on pretty quickly so he can get off to an airplane. We're going to focus today on the same things you've heard coming out of my mouth for many years, no different than really probably what you heard from Doug at the KBW conference and at our investor day earlier this year.
I think you all know that we're focused on four things. There's four things that we're trying to do that we know will drive growth, and these haven't changed in years and years. Number one, we're focusing on organic growth. We're doing everything we can to put ourselves in a position to bring on new accounts and then to hold on to them. Organic growth is at the crux of literally everything we spend our time on all day, every day. Secondly is mergers and acquisitions. I have to say, I don't know in my history with the company if we've ever had a more robust or better or deeper pipeline. It's really incredible what's out there. When you step back and you realize why, you realize what a vast industry it is, how many opportunities there are for acquisitions.
If you look at Business Insurance this past summer, the July issue, number 100 on the Business Insurance list at $29 million. You'll see us continue to click off primarily tuck-in acquisitions. Our average acquisition comes in at about $5 million in total revenue, and we still are able, on these types of deals, to pay a pretty reasonable seven and a half to eight times. As CEO of the company, I think that we're positioned probably better today than we ever have been. I'm really pleased with our positioning. We've got a very talented management team. Everybody is on task and knows what they're supposed to be doing. Do we get it all done every single time in every business unit everywhere in the world? No, but we absolutely know why and where. We've got a great culture.
People have told me for years that they're astounded that we can keep a culture that feels like Gallagher as we've expanded the company, both globally and in headcount. Yet I can tell you that if you did these types of trips around our global operations and you went into the building, you'd feel in Sydney like you feel here today. You'd feel in London like you feel here today. I'm really proud of that. I know that our strategy works because we don't jump around on strategy. What you're hearing today from our people and you'll hear from me is what you've heard over and over again. We're going to focus on those four things, and we'll drive them. We think the economy is in a pretty good spot. We're seeing our clients, in fact, their businesses are pretty strong. Employment is strong.
I would categorize the market as stable. There's been some press in the last couple of weeks about market rates really escalating, and we're not seeing that. We do see some increase in rates in auto, in property. Workers' compensation has flattened down a little. I would consider this market stable. Now, you've heard me say this many times. If I look back over eight years, almost 10 years now, the market goes up one, it comes down two, it goes up three, it goes down four. When you think about my history with markets that go up and down as hard markets, soft markets, those were markets that moved in 15% and 20% tranches. Really what we have is a stable market, which is fantastic for Gallagher. That lets us go out into the marketplace and prove to our clients that we can really help them.
Very proud of the fact that once again this year, we were recognized as a recipient of the Ethisphere's World's Most Ethical. That's seven years in a row. By the way, that award does not get easier to get. The Ethisphere Institute is very clear about where we're strong in our application and where we're not as strong as some of our other applicants. There's over 1,000 companies that apply for this, and only about 100 get it. We're very diligent all year long at trying to work on those areas in that application that Ethisphere said we need a little bit more attention here. You'll see us getting, and we have gotten very strong over the years in corporate social responsibility. Really with that, I guess I'd make a comment on Hurricane Florence. We see that it's weakening.
I still think it's going to be a major catastrophe. We have about 500 people in its path that are our clients. We have about 20 offices. It looks like those offices will all be closed down. The beauty of where we are today with our systems and capabilities is we can move that work. We've already been in contact multiple times with every single client that we have in the path of the hurricane. Our people are ready to be of service, and our catastrophe management folks are on point. I get updates twice a day, and we also have two other hurricanes that we're watching in both the Caribbean and in Hawaii. With that, I'll turn it over to quick questions and hopefully get to Mike as quick as we can. Anybody for me? Elyse?
Thanks. My question, you spoke optimistically at the start about the economy kind of stable pricing environment. How do you see this shaking out when you think about organic growth going from 2018 to 2019? Does 2019 seem better for you? If it does, what do you think the driver of that is? Is it exposure growth, new business? How do you see the pieces of organic growth next year?
All right. First of all, how do I feel about organic growth in general? I think 2017 was a strong organic growth year. I think 2018 will be a little bit better. I think the stars are lining up well for us. I would hope that 2019 would be as strong as 2018, maybe a touch even better. Because of what you touched on, number one, everything in insurance is predicated on employment and exposure units, we are seeing exposure units increase, which is a good thing. We see that in Gallagher Bassett with a slight increase in claim activity as well. Secondly, the things that we're doing around buying operations. When we do a lot of acquisitions, one plus one does in fact turn out to be five.
If you've got a great local entrepreneurial business and we bring our capabilities to it, you will double that business faster with us than you would have on your own. If those entrepreneurs that sell to us stay, we'll do quite well. Thirdly, we're recruiting people left and right. Just this week in this room, we had over 200 new producers that I introduced to the company and our culture, et cetera. These are pretty much seasoned people that we've recruited, literally, in our benefits and property casualty around the country. Then, as you know, we had 450 interns this summer. We also grow and manufacture our own. From myself through the organization to the basement, people are committed to and understand that organic growth is required. When those things come together, good things happen. Mike? Oops, sounds like Greg.
Hey, Pat. Greg Peters with Raymond James. I just thought in the past you've commented on some of the technology initiatives like service centers. I know you have the India Initiative, you also have the Las Vegas Initiative. I was wondering if you could update us on what's going on there.
Well, there's two things. You touched on technology. Then, of course, our centers of excellence, our service centers. We have over 4,000 people now in India that are supporting us. In the case, Mike can maybe address this when he gets up, in the case of our U.S. property casualty group, over 20% of their employees now reside in India. The Las Vegas service center is a service center that mirrors what we're doing in India. It's in Las Vegas, that is, again, across the organization, different services, back room services being provided. I see tremendous opportunity there. This goes back to your touching on technology. Number one, we can move work from the desks of our folks around the world into our service centers. What you do when you go to a service center is you have to standardize.
I'll take one service, certificates of insurance. You can't do certificates of insurance 10 different ways and have it being done for you out of India. You got to pick. We've done that. Now to go back in history, 20 years ago, we would literally do certificates of insurance different ways in the same office. This unit over here might do it one way. This unit might do it another. The beauty about standardization in today's day and age with AI and robotics is once you standardize the process, now you can actually bring robotics to it. For instance, a certificate that has 14 fields filled out electronically or robotically is a good certificate. It can be sent. If 12 fields are filled out and two are missing, it has to go for human intervention.
We have a ton of AI, robotic, and those types of things going on in the company today. We're coordinating that. We also have a unit today that's doing nothing but focusing on and watching what's happening in the InsurTech world. I feel really good about where we are in terms of what we're doing with tech and with our service centers. Mike?
Thanks, Pat. You've talked a lot over the past many years about the stable P&C rate environment helping most likely retention and not disturbing your customers. P&C commercial rates have been increasing modestly. The latest Towers Watson poll was up to 3%. Just curious, is there a point if rates go to plus five or plus seven where it could start kind of maybe being an incremental negative to retention rates?
I don't think plus five, plus seven will because our job for our clients is to mitigate that. We mitigate that in a number of ways. We'll either suggest that they take higher retentions. We might suggest that they restructure their program in a certain fashion. We'll help them deal with that. Rates haven't gone up 5%-7%. Over this entire last decade, they've gone up two. Willis' report this past week was saying three. Frankly, we're not seeing that. We're not seeing three. There are some lines we're seeing three. Our businesses in Australia and New Zealand are getting about mid-single digits, so your five to seven. That is causing a bit of consternation among those clients.
I would not say it's impacted retention at this point, because when you have a market rising like that and someone says, "Hell, at 7%, I'm going to take another quote." We're not going to get beat. What you really have that's a difficult market for brokers is when rates are coming down 8%, 10%, 12%. Because then the guy that's out there that's got a shingle on his door that says, "Hey, I'm an insurance broker," can wake up some morning and beat you with a much cheaper quote. Then you're kind of scrambling, telling your client, "Well, yes, I could have gone to Travelers, but you've been with Chubb for the last 20 years. They've paid these 5% didn't seem unreasonable," and you're in that discussion. At twos and threes, it's all about what are you doing outside of the insurance to help my business?
Mike will get into that. That's where we talk about our CORE360 value proposition. Put the insurance over here. That's table stakes. Now, what are the exposures you have as a business that we can insure? What are the things that you're doing as a business that make sure you don't use the insurance? What's going on with loss control? When you have a claim, how are you managing that claim, making sure that we get that thing mitigated? There are all kinds of things that we're selling clients that have nothing to do with what's the price of insurance. In a stable environment, we kill the competition. Remember, when we go out in the market to compete, it's only 10% of the time we compete with bigger players. 90%, we're competing against that group of folks that are under $29 million.
When I roll out our capabilities and say, "Mike, you've got to protect you. This is your family's construction company. Are you really going to do business with Joe that's got $10 million in revenue? Or are you going to look at what Gallagher brings to the table and all these other things that we can do for you that help you stabilize, protect, and frankly, grow your business?" It's a pretty powerful value proposition. Thanks. You want to go to Mike?
Yep. We're going to go ahead.
Michael, you're on. Thanks everybody for coming. I appreciate it. It's great to see you all again.
Next up is going to be Mike Pesch. He leads the U.S. Retail PC operations. He has the next 30 minutes or so, maybe 25, because he has to catch a flight.
Thanks, Ray. Good morning, everyone. Everyone can hear me? I do apologize for the little speed dating affair here. I do have to catch a plane for some family matters. Thank you all this morning for coming in. As Pat said, Mike Pesch, I am responsible for our U.S. retail property casualty business. That's basically about 100 offices here in the U.S., in pretty much every major geography. About 4,900 employees. We touch clients everywhere from your personal lines business, through middle market, all the way up to risk management accounts. Like Pat said, we're trying to do four things every single day. We're trying to grow organically. We're trying to find mergers and acquisitions, good folks to join us. We're trying to remain as efficient and as effective as possible so our productivity is strong. We're trying to keep a great culture.
I'm going to touch on each one of those in a little bit more detail and maybe add some color to what Pat was talking about. Organic growth. Heard a lot of comments in the room here about rate and so forth, and retention. For us, it's about how we can drive value to the customer. Pat mentioned CORE360. This is a value proposition we rolled out about 4 years ago, really making it a consistent way that we approached handling our clients' business. What we found is that when you do a lot of acquisitions, even though we all sell property casualty insurance, we all do it a little bit differently. For us, it came to a point in our corporate growth where we needed to have a consistent way to demonstrate our value.
CORE360 was our way to demonstrate that. It's really centered around six cost drivers that affect a client's business. Everything from specialized loss control and claims to contract negotiations or contract liability, to our go-to-market strategy. Last time I was here, we talked about our go-to-market strategy. We talked about our SmartMarket strategy, which is a way that we use technology to connect our carriers and their appetite with our book of business to streamline the process, make it more efficient, to make sure that our producers never miss an opportunity to place a piece of business with a carrier that has an appetite for that account. That's really what it's all about. Some of the other organic strategies that we have center around data and technology. For us, that's a big thing right now. Pat mentioned InsurTech.
It's huge for us to understand our clients' business. He mentioned also that we are doing everything as much as we can in a consistent way in every office. That has been very helpful to harvesting data out of our book of business that we could then use to do things like make sure we're being paid fairly from the carriers. At a certain point, we get paid mostly on commission. We want to make sure that our producer are armed with the information to suggest that if someone in New York is getting paid 12% commission on a line of coverage, we want to make sure that everyone's aware that that could be the high water mark for that line of coverage, and to use it as a negotiating tool with that underwriter. We also use data to help our producers make better decisions about our clients' placement.
It's sort of the Amazon effect of, hey, if someone in this industry bought this line of coverage and they paid this amount, and they paid this rate, and they had this retention, and they bought this limit, the ability for our people to arm our producers with that kind of information sets us apart from those local competitors. They just don't have the same amount of clients to be able to use that kind of information, and they don't have it in the same kind of format that we have it in real-time access to it, that they can help their clients make good decisions.
That's going to be crucial as we get bigger and bigger, and as buyers demand more information about, hey, if someone else, if a construction company in Chicago, by comparison to all their peers, are paying this, and they're with these carriers, and they take this retention, and they buy this limit, that's really, really important to them to make sure that they're making a proper decision. If someone asks: How do you make sure you keep your retention at a good level? Well, you make sure you keep your retention at a good level by driving more value to that customer, and that's one of the ways that we do it.
Everything from making sure our clients are with the right carriers through SmartMarket and our appetite, to making sure our producers are armed with the right information to make sure they're negotiating properly with our underwriters. Making sure that our clients are aware industry, and how to make sure that they're on par from a rate perspective, a limit perspective, and a retention perspective. That's how we compete organically. We have a lot of producers. We have about 1,200 producers in the U.S., and those folks every day wake up talking to their customers about CORE360, trying to demonstrate their value and talking to prospects about the same thing. Again, we compete everywhere from the middle market all the way up to risk management type accounts.
I would tell you that, again, as Pat said, 85% of the time we compete against someone smaller than us, and we like that. We think we can drive more value to those customers, thus giving us an opportunity to grow organically in a quicker way. Mergers and acquisitions. Through August, we closed nine acquisitions. Like Pat said, our pipeline has never been stronger. We've got a lot of opportunities that we're looking and considering, but we're making very strategic decisions. We're not interested in being the junkyard dog and buying every opportunity that's out there. We want to make sure that it's geographically important, that the cultural fit is there, that the folks that we buy embrace the kind of change that we give to them. The tools and resources that we give to them to make sure that they can service their customers and grow their businesses.
We're not necessarily interested in someone handing over the keys to us and then going and traveling the world. We want them to be a part of our business, and so we actively pursue these folks. We have a team of five people here in the U.S. who do nothing for us but explore and look and meet and create relationships with these folks to find the right cultural fit in the geographies that we either don't have an operation or that we want to grow. I should have mentioned, part of our organic growth strategy is our niche strategy, which I'm sure if you've been in this room before, you've heard a lot about. All of those tools and resources, we are also building into verticals.
Everything from real estate to construction, to public entity, to you name it industry, we have niche expertise, leadership structures within those verticals, and we build resources and tools that are tailor-made to each one of those verticals to make sure that we're driving more and more value within those industry segments. Clients today expect that kind of specialization. They don't want you to wake up in the morning and go out to see a construction company and then in the afternoon go see an entertainment company. They expect that you understand that business. And so when we talk to our producers, when we coach and we teach and we mentor our producers, we channel them into one or two industry segments where they can be an expert. And so part of the merger and acquisition strategy, in addition to being geographically important, is finding more experts.
There's a lot of boutique independent firms out there that may want to perpetuate their firm by selling to Gallagher, who have very specific expertise in some of those industry segments. Those are the folks that we'd love to have join our team, and those are the ones that we pursue. Productivity and quality. Pat mentioned we've got 4,000 folks, in India. We've got an emerging group of folks in Las Vegas. From my operation, the U.S. retail property casualty business, about 20% of our employees are in India. 20% of our workflow goes out to India, and that's things from certificates of insurance to things that we do to add value to our customer, like loss analysis and loss stratification, to make sure we're driving more and more information to our customer. Things that are critical but can be done offshore in a non-client interactive way.
These folks don't speak to our customers, but they add tremendous value to the customer experience by arming our producers, by giving our support staff the tools that they need to get their job done more efficiently. And we know that 99% of our certificates are done and issued within 24 hours, and they're 100% accurate. 99%. None of our smaller competitors can tell you that. That's a commitment and a dedication to quality and productivity. What we have here in Las Vegas is sort of an offshoot of what we have in India. It's very strategic and focused on different things that we're trying to make more efficient. Things like claim reporting.
We do some claim reporting on behalf of our customers, we feel that if we can centralize that in a place like Las Vegas, get some critical mass, we can do it more effectively and more efficiently. It's not nearly the size of what we have in India today. Culture. We spend a lot of time in this organization talking about culture. It's critically important. It's one of the reasons why I've been here for 27 years. I believe that this is a great place to work. We guard it tremendously. When we do acquisitions, we're constantly evaluating whether that person or those people would be a fit culturally within Gallagher.
We do an engagement survey every other year, I'm happy to report that our stats are amongst the best in our peer group in terms of people who take the survey and their ultimate response. We take that information, we actively pursue solutions to help make sure that we're listening to our employees and addressing their needs. It's timely that with this hurricane blowing offshore, because to me, culture sometimes is very difficult to define and understand. Last year when Hurricane Harvey was blowing offshore, of course, we had a lot of employees in that area of the country, in South Texas and East Texas, many of them were personally affected by the results of Hurricane Harvey.
I'm proud of our team because not only did they take care of our customers, being on one system, we were able to offshoot the client work to other offices that weren't affected by that hurricane, we're doing the same thing with Florence. We will be prepared and ready to handle our clients' claims and needs remotely from other offices so that our people can get their lives back together. In that specific situation in Harvey, just to give you an indication of our culture, we had many people who were personally affected from the damages and the floods that occurred in Hurricane Harvey. Not only did we fund different charities, Red Cross and things of that nature, we crowdfunded tens of thousands of dollars for our employees to make sure that they could get back on their feet.
I'm really proud of that because I think that speaks to our culture. It speaks to who we are as an organization, that when some of us are down, we help pick them back up. With that, again, I think about the U.S. retail business. We want to grow organically and do everything we can with the resources and tools that we have to do so in an effective way. We want to find mergers and acquisitions to join us that fit us culturally. We want to remain as efficient and as effective as possible, we want to drive a great culture. I believe that's what sets us apart. I believe that's why people want to join us. When I think about our culture, Pat mentioned the 200 folks that were here yesterday and the day before, just fantastic.
Most of them, a lot of them came from other industries. We have a program called Hire Right, where we recruit folks who can sell from other industries who may have reached a glass ceiling or feel frustrated in that industry, but know a lot about that industry, but would want to change careers. We have a whole curriculum and a training program to get them up to speed. That kind of culture. I think that's why people join us, because they think we're a great place to work. With that, open it up to any questions you may have. Yeah, Greg.
For the U.S., can you comment on what you're seeing in the workers' comp market? It's something that you've talked about in the past.
Yeah.
I know it's pretty intensely competitive in the market. Talk about what you're seeing there, please.
No, Greg, it's a great question. When Pat was talking about some of the rates, the reason why we handle usually most every major line of coverage for our clients. Your work comp, your GL, your auto, your property. When you look at the book of business, we don't necessarily see the lift in rate, largely because work comp has been on a pretty big slide for a lot of years. A lot of reform is going on in different states. I believe the state of Florida just issued for next year a 13% rate reduction in their standard rates. You've got a lot of stuff going on in the marketplace that. For good reason. Clients are performing better. Companies are getting safer. There's a lot of tort reform in a lot of states that is influencing the claim values.
Honestly, it's a good thing for us because we can help our clients. Even though rates are sliding, there's still a need for them to get professional help when they do have claims, and also prevent claims in the ways of loss control. We have over 200 people nationwide that do nothing all day but help our clients prevent claims and deal with claims once they have them. Yes, while it's a headwind from a rate perspective, when you look at the whole book of business, it's offset in many cases by slight lifts in property. It's offset by lifts in auto. We're still seeing some rate pressure in auto to the tune of 3%-5%, and again, depending on the industry, could be even higher than that.
I don't know if that answers your question, but I think they all kind of mitigate each other out. Again, it's an opportunity to still add value to the customer experience.
I'm just curious, some of your larger competitors in the Fortune 1000 space have created some of these exclusive facilities where they'll put a niche risk into the facility and kind of give it exclusively to a carrier too. Is that something? I think there was a carrier that you compete with in the U.S. that did it with the Hanover Group, more recently for a lawyer's book, a small book.
Yeah.
Just curious if that's something you think is in the playbook for the future as you guys grow and gain scale.
Mike, that's a great question. In fact, I probably failed to mention in my comments about some of the things we are doing from a product standpoint. We are doing that in very specific areas. Take, for example, umbrella line of coverage. There's several endorsements that can be added to a standard umbrella policy, and we've worked with several of our key trading partners to build out a form that only Gallagher producers get access to so that they can get those endorsements on every placement. We've done similar things with other lines of coverage.
We are going out to select carriers and trying to figure out where can we partner, where can we, because of our volume in this industry, because of our volume in this line of coverage, we would like to have these Call it bells and whistles added by endorsement to every placement that we have. That is something that, as a larger competitor, we can do. When you talk to our merger prospects, that's something they don't have the volume to be able to entice or get the carriers to want to participate with them in having. Now, they might be able to negotiate those forms on a one-off basis, having it on a universal basis, where there's a facility where our producers can go and get that type of coverage every single time, that's a real value add.
Is there greater economics for Gallagher for those types of relationships?
There is. There's a slight lift from a compensation standpoint. Obviously, we want it to be a fair trade for both parties, so that if the carrier ultimately is going to benefit from our volume, we want to make sure that we're benefiting as well. Really it's about the client, making sure that they're getting the best in class coverage.
Yeah.
Thanks. Yaron Wiener with Goldman Sachs. Doug's sitting in the back of the room. I'm sure we're going to ask him about margins sooner or later. I know Doug's talked a lot about how as organic growth increases, there's more opportunities to spend or invest in the business.
Just curious to hear your perspective, how the conversation goes with Doug. You have good organic growth.
Doug, right?
Is it a list of things that you kind of want to invest in and now you see the opportunity to invest in them because you have better organic growth, or is it just a matter of keeping up with competitors? How does this decision process go about?
Yeah
investing more in the business as organic growth increases?
Yeah, I think, again, I inherited a business from Jim Gault, who ran this business for 15 years very efficiently and effectively. He did a lot of the heavy lifting when it comes to what I was explaining in India, making us efficient to get to a certain margin that we feel good about. The organic growth obviously does help the ability to then use some of the proceeds of that organic growth to reinvest in the business. We don't set specific targets. We work collaboratively with our finance teams to make sure that we understand what we think we need. A lot of what we think we need centers around data and information.
We are building, and you heard Pat say, we are building infrastructure not only within the U.S., but globally to make sure that we can harvest a lot of this information from our book of business. I don't know that I'll be able to give you a specific answer in terms of we earmark it at this, but it's a collaborative experience with Doug and the finance team to make sure that wherever we can, without putting undue pressure on the business, reinvest those proceeds from organic growth into things like data and technology. It's a bit more of a dance than maybe what you're looking for in terms of an answer. It's definitely a priority of ours to reinvest for our clients' benefit.
Is it just a list of priorities or projects that you have in mind that now is the time to pull the trigger on them?
We evaluate it every year. In fact, we're right in the middle of it right now, itemizing our priorities of what we want to do going into 2019. That's what we'll share with Doug and his team and say, "These are the things that we would like to do." It's not always easy to put a dollar value to that at the time that you do it. That's part of the whole process. Yeah, Elyse?
When Pat was talking earlier, he spoke about 2019 looking a bit better than 2018 for organic growth, I guess, for your business, do you see the same thing? What's the driver that you think about 2019 being better than 2018, and how much better can you see organic growth get for you guys?
I think we had a really good second quarter as you saw. We're very optimistic about the third and the fourth quarter. I think a little bit does hinge on rates because certainly that lifts all the ships in the water. I'm really pleased with where our team is at from a sales process approach. We spend a lot of time re-engineering and training our folks on things like CORE360, so that we are all sort of singing off the same song sheet. To give you a specific answer about my view on 2019, I do think it's going to be as strong as what Pat was suggesting, maybe a little bit better than 2018. I can't give you an exact number, but I do feel very optimistic about it.
Even if rates were to stabilize completely, I do feel confident in our team's ability to go get market share from our weaker competitors.
You guys have spoken about white space, right, in terms of identifying opportunities, and that's going to be helpful to organic. Can you provide us a little update there and how that kind of translates into 2019-
Yeah
being better than 2018?
Yeah. White space is crucial. We want to make sure that we have all of our clients' dollars. Having the data to support what our clients should buy by comparison to their peers is really, really important. I can't give you an exact percentage of our organic growth that we drive from white space, but I can tell you that when we look at our book of business, we see tremendous opportunity. You look at our average client, and we write most of the main line of coverage. Don't forget, there's a lot of elective coverages out there, things like cyber, things like environmental insurance that they probably should buy, that they don't necessarily buy today. It's a constant education process of those clients.
All right.
Thank you, Ray.
We're good to go.
Thank you all.
Next up we have Jim Gault, who's going to talk about our international PC operations. Jim, the next 25, 30 minutes are yours.
Thank you, Ray. Let's let this run.
Well, technology is a challenge. Where's the button? No, it isn't. Okay. Good. Okay. Good morning, everybody. Other than, let's see, Greg, you were here in June, right?
Yeah.
Elyse, you were here in June, right? Anybody else who was here in June? Okay. Paul, you as well. I started in June by saying that this is really sort of Tom Gallagher's spot to take. I'm substitute teacher, and anybody who's seen any of the skits on Saturday Night Live on substitute teacher, I'm going to do the best I can, don't turn on me like you used to on substitute teachers. There's three things I'm going to talk about. I'm going to talk about international at a 35,000-foot view. I'm going to touch on our plan. This is sort of pro forma stuff I always do, even when I was talking about the U.S., it all fits with international as well.
Before I take any Q&A, there's two things I want to talk about that have happened since the June Investor Day that I thought you'd like to know about and hear that significantly changes both in the U.K. that I think are worth spending a couple of minutes on. At 35,000 feet, our international business in 2017 was about 33% of our reported brokerage revenues. That means it was about $1.3 billion in revenue. We have about 7,300 employees today in international, and we place about $10 billion plus of clients' funds, premiums, spread risk throughout the world. Although we've got dots across the map in most of the major areas of the world, the fact is that the preponderance of our business is in four areas. It's in the U.K., it's in Canada, and Australia, and New Zealand.
The U.K., last year was about $600 million in revenue, which was split about 60/40 between retail and wholesale. That's probably other than RPS when you talk with wholesale, that's the most significant wholesale business that we have throughout the world. You've got about $300 million of significant retail business in the U.K. In Canada, it's about $150 million, in Australia and New Zealand, it's again about $300 million. What we do is, other than that wholesale piece in the U.K., is we act as a retail broker, a retail broker is something Mike probably just discussed. I came in halfway through his presentation. You go out and you find a suspect, you talk about property casualty insurance, you try to convert that suspect to a prospect.
When you convert that prospect to a working prospect where you can collect the data and analyze what the exposures are for that particular potential client. You get it down on paper. I'm an old-timer, I use paper. You put together a submission, you market it with the carriers you think are going to provide the best program for that insured based upon that insured's appetite for risk. You close it and you service it, 12 months later, you start the process all over again. There's no mystery to it. The business is handled, is step-by-step the same internationally as it is in the U.S. We get paid the same way that we do in the U.S., commissions on policies. Sometimes we get fees for services. Sometimes we get fees in lieu of policies.
Sometimes we get commissions and fees if it's legal, depending upon the jurisdiction that we're in and what the client agrees to, these are always discussed with the client. We also generate income through supplemental and contingent arrangements as we do in the U.S. Again, at 35,000 feet through the second quarter, if you look at those four major areas where the preponderance of our business is, if you look at the U.K., the organic growth was probably around 4%. That's on the retail side. There was probably low single-digit exposure and rate growth. I know I mentioned in the June meeting that now that we've gotten our act together, I'll touch on that a little bit more later, in the U.K. in the retail space, we're working on our margin. There's some margin improvement that could be done.
It's a good margin, it could be better. That's one of the four. Two is Canada. Canada's organic growth was in low single digits organically for the first half of the year. They are getting low single-digit rate and exposure. It's not quite the same as it is over the U.K. They've got a good margin, we're working on trying to make it a little bit better, it's better than it is in the U.K. Finally in Australia and New Zealand, they generated about 7% organic growth in the second quarter. That's a long time coming. They had an incredibly competitive market for years down there. In fact, when we took over that franchise from Wesfarmers, the Australia portion of the retail business down there, it was going backwards by sometimes anywhere between 7%-8%.
We've been able to stem that tide through a lot of good work that the team has done, new management team, reorganized, and of course, with the market helping us a little bit, that business is now on the positive side of the organic growth meter. When you look at New Zealand, New Zealand is probably the Pound for pound is the best franchise we have in the business. Their margin is strong. They grow year in, year out. While Australia was struggling, New Zealand was still growing in a market that was going backwards. It's just a tremendous franchise. We're using the influence of the New Zealand leadership to help us get better in Australia, and it's taking hold.
I stand here and say that really, we don't have any significant problems across the globe, and what we're working on is just making our franchises better, and they're responding. It's good to be us right now. How do we differentiate ourselves? Again, internationally, we differentiate ourselves the same way we do in the U.S. We have good products. We tout our services. We've got great market relationships. We compete most of the time against brokers that are smaller than us, no matter where we are. U.K., Australia, New Zealand, Canada, we tend to compete against brokers that are smaller than us, that don't have the depth and breadth of relationships with insurance carriers that we believe we do. They also don't have some of the strong expertise that we have.
We're bullish on the fact and believe that if we have a fair opportunity, we should win more deals, simply because if you're competing against somebody that just doesn't have the firepower and the size and the scope that we do, that we should win more deals than the competition. That's kind of a 35,000-foot overview. When you look at our strategic plan for the international business, it's the same as the U.S. We got four parts to it. We want to grow organically. We want to grow through acquisitions externally, if we want to get more practice, and we want to drive our culture. When it comes to organic, the tactical things we're doing to grow the business organically are virtually the same. We're trying to develop products. We're trying to get better commission levels.
We're trying to organize our people that are good at what they do to help each other and through niche sales. A great example of some of the help that we've given to our international partners is, in New Zealand, for example, as good as that franchise was and as well-known as it was, we were not on the, if you may, qualified or approved list of brokers that could do business with governmental entities. Because we brought in a team from over here that was really strong and showed our expertise globally, we were able to get on that list, and now we're getting RFPs from the government in New Zealand. In Australia, for example, they had lots of opportunities on higher education. What we did was send some of our better people in higher education from the U.S., which is one of our strongest niche practice groups.
I'm pleased to say that we now have a number of clients in the higher education space in Australia simply because of some of the help that we were able to give and to show that the global strength that Gallagher brings to our niche practice groups. That's how we're trying to drive the business, amongst other things that Mike said. If you take a look at international, as I said, we're trying to do everything that we're doing in the U.S., and we're probably, depending upon where you are in the world, a little bit ahead, a little bit behind, but the U.S. has kind of set the template, and we know what we need to do, and we're trying to follow that template. There are going to be nuances in certain countries that you don't do things exactly the same, and that's understandable.
When it comes to the basic blocking and tackling, we know what works, and we want the rest of the world to follow that in a way that will drive their business better, and we can get the results that we want. When it comes to mergers and acquisitions, it's the same story. You've got a hugely fragmented business throughout the world. You've got small brokers out there that didn't prepare for succession. They don't have an exit plan. They need some way to capitalize on their life's work. There's just an unlimited number of opportunities to do tuck-ins and bolt-ons and small mergers, and we've got a nice footprint now in those four major areas of the world. Don't quote me on these numbers, but I would say we probably have 25, 30 offices in the U.K.
I know we've got that many in Australia, that many in New Zealand, probably 15 to 20 in Canada. There are cities where we can plant another flag, but we're pretty much where we want to be. It's easier for us now to work the local market for those brokers that don't have an exit plan and don't have a succession plan and want to join up with us and provide a better platform for their clients and career path for their own employees. I looked at this last week. Through last week, internationally, we had done seven deals, and that's in the four major areas of the world that I mentioned. The total revenue, annualized revenue, was only $16 million, $17 million. You're talking about an average of a little over $2 million per transaction. Clearly, these were all bolt-ons.
That doesn't mean that if there was a nice one that came along, it's a $20 million deal, that we wouldn't want to run at that if it fits. Right now, the pipeline is very full of these nice small tuck-ins that tend to be very profitable when we do them, and they tend to grow better when they're with us because they get the strength of Gallagher. When it comes to productivity and quality, again, the template was set here. I heard Mike mention it earlier. In the U.S., 10 plus years ago, we started our India service center to push all the transactional work to India. We had to do a number of things to get that right.
We had to go on one agency system, that was painful, because at the time, we probably had 100 offices using a half a dozen different agency systems. When we said we want to go to one, everybody in the room agreed that they wanted to go to one system, but when you said which one they want to go to, they all said, "Go to mine," right? We had to change everybody to go to one, which then gave us the ability to standardize job descriptions, to standardize the workflows, to then align with our India service center better, so that we could send the repetitive work to them and let them handle it better, more efficiently. It got rid of multiple touches that we were having before.
It has increased our quality significantly, it's had a major impact on helping us manage our errors and omissions, because if you think about it, the less touches you have on something, if it's done right and done the first time, the less chances you have of having something go wrong. That template is what we're trying to roll out. We're in the process of doing that, we're on one agency system in the U.K. We're on one in Canada. Both are now working with setting up and going through the standardization process and standardized job descriptions and working with our India service center to do some of the same things they do with us, but then for the nuances of those countries, they're going to have to have a little different setup on certain things that perhaps don't necessarily translate to the U.S.
Finally, we're big on culture, as everybody knows. We talk about it all the time. We're pushing 30,000 people, and I've been around here a long time. I joined when we had 100 people, and you could feel the culture every day. What I find really gratifying is when I'm out meeting with new merger partners or new employees that join us, they describe the feel here as the same as I felt when we had 100 people, and Bob and John Gallagher were walking the halls. I think that's powerful. It's really powerful stuff. People come here. They like to stay. They see the career path opportunities. They want to be associated with a winner. All those things are happening outside the U.S. as well, particularly in those four areas.
Here's the two things I wanted to mention now that I've gone through my usual preamble, because you've heard that many times. Here's the two things that I haven't talked about before that have gone on internationally, both in the U.K. One is we have a transition of power in the U.K. Grahame Chilton, who was our CEO, he is stepping aside. He's still with us. This is very typical for us. We don't want to see our talented senior people leave. We find spots for them to continue to bring value. Gilly is going back to Capsicum Re, but we have a relationship with Capsicum Re, a very strong one, an investment in it, Capsicum Re. We're there to help him, and he's there to help us. Let me say that he didn't do a good job. He did a terrific job.
He came in at a time, three and a half years ago, after we had a senior management defection that, quite honestly, it did destabilize us to a degree, and it could've caused a huge problem over there. I say this all the time. We do a lot of business with the church, so somehow there's divine intervention every once in a while. Gilly stepped up and offered to take the leadership position at a time when we had just done two significant retail acquisitions that were not integrated with defections from senior leaders. We really did not have our act together, and it was a really tense time. He came in. Not only did he bring in the right team, he stabilized the group, and he's positioned us with a much better position today than I believe we'd been in had the other regime stayed.
It is truly divine intervention. He did a fantastic job. Now, the great news on that is that his successor, Simon Matson, has been with us for probably over 10 years. Simon's a known commodity. People know him. They like him. They respect him. This decision wasn't made just overnight. It wasn't like, well, Gilly's going to step down in June, so we got to find the leader on May 15th. No, this decision had been discussed and vetted, and it was not known publicly for a long time, but I can tell you it was over a year and a half ago, because I was there. The smoke went out of the chimney about three, four months ago.
Simon has been in preparation taking this job, and he will do a great job taking it to the next level because of the amount of respect he has with that team. So I'm really excited about what Simon's going to do for both the U.K. and for us internationally, because he's got a proven track record. The second thing I wanted to mention, and maybe some of you have seen it, maybe you haven't, but we've really stepped out of the old Gallagher mold. Back in the old days, we used to say that Bob and John Gallagher would throw around nickels like manhole covers. We didn't spend any money on marketing or branding. None. We'd run ads in Business Insurance occasionally, but then when we had tougher times, we just cut that budget.
The knock on Gallagher has been for a long time is that if you know Gallagher, they're damn good. If you don't know Gallagher, you don't know Gallagher, because we haven't done anything really to promote ourselves. In fact, I don't know if any of you are familiar with Greenwich Associates. Okay. Well, Kevin and David Fox, who's one of the principals, used to call me up all the time, and he would want me to pay for his survey. He would say to me, "Jim, you got to see this survey." What it says is that the people that know you would recommend you to anybody and everybody. They think you're the best quality, best broker in the space. He said, but the problem is, if you don't know Gallagher, nobody knows who you are except the people you actually touch.
You need help in terms of branding. I said, "Well, what does the report cost?" He told me, I said, "That's too much. I'm not going to pay for it." I didn't. That's been the knock on us for a long time, in fact, there was a time when electronic stamp machines were invented. Bob and John Gallagher decided that they were going to go look at getting a stamp machine. When they saw the cost of a stamp machine, it cost too much, so we went back to licking stamps. This is the way we've managed the dollar for a long time. To step out of this is a very big thing for us. I think we're doing something really cool. We're sponsoring the Premier Rugby League, not a team, the league in the U.K.
If you think about the U.K. retail business, we bought the Heath operation, which was kind of on life support probably five, six years ago. It got us into the retail space. That was the whole idea. We didn't expect a lot from that, but it gave us locations and a book of business. It struggled for a little while, we added Giles and Oval, two nice franchises in 2014. All of a sudden, we went from having really no retail presence to having three brands that came together and having a presence. We now needed to brand it as Gallagher. Over the last couple of years, one of the things that Gilly did was he got the right leadership, pulled it together. We've now got a really strong retail franchise, and it's time to get our name out.
The opportunity came along to co-brand or to support the Premier Rugby League in the U.K. I don't know how to score rugby, right? I'm going to have to learn. If you think about rugby, and probably most of you know more about it than I do. It is a worldwide global sport. I think that we're going to get more exposure out of this, way more than the U.K. Here's some of the stats. There's 12 teams. They play 135 games between now and next spring. Every player's uniform will have a Gallagher logo. There'll be signage in every one of the stadiums, we'll be on the pitch. There are community volunteers, because it's a community sport in the U.K., that will work with those teams to get exposure and to work them as part of the community.
Those people will wear Gallagher shirts. It will be televised throughout the U.K. to 23 million homes. Here's what I found out. I was up in our Canadian offices, they were asking me about sponsorships and stuff. What I found out was when I said, "Well, yeah, we're doing this thing in the U.K.," they said, "Great. It's awesome." I said, "Well, it's in the U.K." They said, "We watch rugby up here like crazy. We love it." I realized that it's a global sport. There are 200 countries that will televise Premier Rugby, and it's piped into 600 million homes across the world. I just thought I'd pass this around if you want to see it. This was the opening from the Times Supplement, and you'll see our name all over it and our logo.
For a company that really hasn't done a lot of this, I'm pretty excited to see how it turns out. It's all about.
How much does it cost?
Pardon me?
How much does it cost?
I honestly don't know.
I do, and we're not allowed to say.
Let me just say that.
We make a big deal out of this.
It is. Well, for us, it is a big deal. We've never done anything like this.
It's not financially a big deal.
Yeah.
It's an evolution of Gallagher.
Yeah.
It does the three things.
Well, yeah. Is what I was going to say, Greg. The bottom line is it's about driving more new business, better people, more people, and acquisitions. It will do all three of those. We have ways to track those. Those are my two new things since the last one. I'll open up to any questions. Yeah, Greg.
Can you walk through, perhaps at a high level, just the economics internally to someone that goes out and finds an acquisition opportunity for your company and executes? You're trying to do book rolls in New Zealand and other opportunities, and you have individuals internally that are sourcing this. Do they get compensated? How do they get compensated? Maybe you could differentiate between what's going on internationally and in the U.S.
Well, it's kind of all of the above, Greg, meaning that we expect our field leaders to know who is good in the community, to go to the agent meetings, the agents association meetings, and when they compete against them and if they meet them at the country club or whatever, and work the local markets. We expect our leadership to build the business, not just by hiring producers and selling more business, but to find who they can bring on that would fit culturally.
We also have, and it depends on where we are in the world, we'll have full-time people that their job is to turn over opportunities and find them and work them. I would say that's probably becoming a bigger deal here in the States as we need more and more deals, and overseas there's not quite as many of those people, but it's a combination of full-time people and the local leadership.
Thanks. I have a few questions. First, I think you said you have about $1.3 billion of commissions and fees off of about $10 billion of premiums placed. Sounds like a pretty high margin relative to what we see in the U.S. or even what some of your competitors talk about. Can you maybe walk us through maybe some of the structural advantages you may have that would lead to such margins?
Well, there's no margin connection there. What I'm saying is $1.3 billion of revenue generated from over $10 billion in premium.
Right. Sorry, I meant commissions and fees to premium, that margin. The 13%.
13%. In the States, I think we're 11. It's not significantly greater. The number could be $11 billion. It's in excess of $10 billion.
Okay.
I wouldn't make a big deal of that.
Maybe to tie into that, though, you talk about some margin improvement initiatives in a few of the countries you're in. Ultimately, with that level of commissions and fees, do you think that margins, once you're done with the initiatives, should be above what the overall brokerage platform is generating?
I don't think it would be above, no. I think our goal is to get it to where we want it, which is in the mid to high 20s.
Yeah.
We've always said we don't want to have a super margin because then you can't invest in the business. We've got competitors that had big margins, and we love to take their business away because they couldn't provide the same services that we could. They put everything on the shoulder of the producer, and the bigger accounts need to be touched a lot. High margins are not necessarily a good thing from a growth and retention standpoint. We like where we're at. There's just a couple places we can get it up a little bit. It's not leaps and bounds. It's not like in the old days when we didn't pay attention, and our margin was probably 17%, 18%. That wasn't that long ago. That was 15 years ago.
Maybe put differently, do you think you can exceed your overall brokerage business' growth naturally now?
Are you talking about organic growth?
Organic.
Oh, sure. I think that can happen. The world's a funny place. You can get more economic growth in certain areas, it'll drive rate. You've got really odd things going on. Australia and New Zealand was backwards for five years. Now all of a sudden, we're getting a lot of rate, and they're also growing. It's probably somewhat of a correction, too, because the carriers down there probably underpriced the product for a long time. That's the great thing about having the spread that we have now because you're going to have upticings and downticings. Overall, the franchise is performing quite well.
Finally, since you brought up the rugby sponsorship, how do you quantify success there? What do you look at to see that this is actually money well spent?
We're going to get reports, I know, from the other side as to how many eyes viewed these things, and what that could translate into. We also know we can track the business that is coming through. For example, with those teams in the U.K., we are their preferred partner. They're owned by entrepreneurial people like sports teams are here, right? They're promoting us to the people they do business with. We will pick up a lot of business through, whether it be personal lines business or vendors down the road that they deal with or their friends. It's already happening. It's happened with the Cubs.
Have you guys seen, I know we've spoken about this in some of the past meetings, there's obviously some investigations still ongoing concerning some of the other brokers in the U.K. Have you guys seen any business kind of shake out as a result of that, or you're still kind of wait and see until some of the investigations conclude?
From what.
I'll let you pull that.
It's a wait and see right now. I think we're expecting the FCA or whoever's doing that there'll be a report by the end of the year. We've been cooperating. We don't believe that there's anything we targeted in that, but we have assets for information we've provided. We've got a really good relationship with the regulators over there. Right now it's kind of still wait and see.
One last one.
I just wanted to go back in your answer regarding it's not good to have too much margin, it hurts retention. Embedded in that comment is you're suggesting there's a cap on how much margin your business can get to before you build customer issues. Is that right?
Yes.
What's that number?
Depends on where you are.
Wow.
In New Zealand, our margin-- Well, no, Greg, honestly, it depends on how you run your business, right? In New Zealand, our margin is well into the 30s, and we can service our clients properly.
The 30s margin isn't hurting your business?
No, it's not. If you've got a preponderance or a large amount of large commercial accounts, and they require a lot of touches, and you need to give them a lot of service-- In New Zealand, we're incredibly efficient. We've got great products and programs, that have cut through a lot of the friction that you get in small accounts. They can generate a better margin and still invest in the business. At that margin level, in Downtown Chicago, you'd have a problem. You could get there, then you'd lose a bunch of accounts because they want the touches. One size does not fit all. Honestly, that's the answer. It depends on the mix of the business that you have.
Thanks, Jim.
Yeah.
Thank you, everybody. Next up we have Bill Ziebell. He's going to touch on the Employee Benefits Consulting and Brokerage operations for the next 20 minutes or so here.
I was going to take an hour.
That's fine, too.
Good morning, everyone. I am Bill Ziebell. I lead our Gallagher Benefit Services, which is our employee benefit account consulting practice globally. We are in the U.S., Canada, the U.K. and Australia. Most of it is in the U.S. What we do is we help employers in the middle market, primarily, attract, retain, and engage employees and talent necessary to fulfill their mission at a sustainable cost structure. That's a mouthful, I know, we know from doing a lot of surveys what our clients expect from us, what they're looking for. You think about what's going on globally with the economy, there's a fight for talent out there are a lot of choices, a lot of open jobs versus available people looking for jobs right now.
How do you get the talent on board and bring them in and keep them in goes well beyond any one lever. The name, think about benefits, that's primarily both of our majority of our revenue. We know from our surveys that they're looking for solutions. Think about yourselves, why you work where you work today. Are you there because of just the benefit package? There's probably a lot goes into it. Your compensation, career pathing, people you work with, the culture that you work with, understanding your opportunity to get promoted, move up the ladder, things of that nature. We help clients do all those things. Whatever their needs are, that's the kind of stuff we try to help them do. It's a balancing act because you can't overspend swamp your boat and have an unsustainable cost structure. Overspending doesn't work.
You can't underspend, you can't underdeliver, otherwise you lose your talent. It doesn't matter whether you're a sports team you're actually in business a nonprofit a school district, you're always fighting for talent that balance on that cost structure versus getting that talent in. We finished last year with $1 billion. We have mid to high 20% margin. We typically grow mid to single-digit, organically. We do about 15 mergers a year. We've done eight so far this year. We continue to go down the path of organic growth, mergers, acquisitions, focusing on our culture, also looking for opportunities to improve our productivity and quality. Why we win organically. We do focus on niches. We have eight that account for about 40% of our revenue, we win because we know our client's business better than our competitors do.
We've had a series of wins, for example, in the healthcare niche, where we know that the local broker was asleep at the wheel, didn't know what was going on in the industry. Their value proposition was clearly only about the renewal of the benefits book. We knew what their business issues were. We were able to come in solve for them win some significant new business that way. It works for us. Having the expertise in those niches really does matter. We also know what the pain points are out there. For example, we know healthcare costs continue to rise. One of the key drivers in that space are pharmaceuticals, PBMs, those costs, very complex. A lot of our smaller competitors still do it the old-fashioned way, where they do look at discounts from average wholesale price.
They spreadsheet it, come back to the employer and say, "We recommend this one. They have the best discounts." More times than not, you'd be surprised that's not the low price, the low-cost answer, because these PBMs are very complex, very sophisticated. They know where to get the money, and it's all in the details of the contracts. We've been building a business now in our pharmaceutical practice, bringing in folks from the PBM industry, people that know how to find the money in those contracts, and all about the definitions in those contracts really do matter. That is a rapidly growing practice for us, and we are going in and generating new revenue, picking up new clients because of that expertise we bring to the table. That expertise is huge. PBM is a big area of need. Another one is communications.
It's not enough to have a quality benefit package. It's not enough to have competitive compensation. If your employees don't understand and appreciate it, they don't really value it then. We're getting hired by some Fortune 100 companies to help them with their internal communications. This is a really rapidly growing area globally. We've done a couple of acquisitions in the communication space overseas, over in the U.K., and they're very well known in this space. One of the thought leadership we just published a couple of weeks ago called State of the Sector here in North America. What they do is they survey internal communications folks from different employers, and they publish it. What's going on? They segment it by size of the employer. What are you spending on your communications?
What's the means for your communications, whether it's social media, emails, executive presentations to their teams, and so forth. This is a big area. It's a rapidly growing area for us as well. Communications is one of those differentiators that we're really going after. Our thought leadership continues to be really important to us. We put out annually a national survey in the three countries of U.S., Canada, and U.K., where we're asking clients not only what are you spending on benefits, but what do you intend to do the next couple of years. It helps us give insights to our clients and prospects what they should be doing, too. Go back to what I said before. Am I offering a competitive package? I'm losing people. What's going on?
We want to be able to help the client understand what it's going to take to get people in and keep them in here. If, for example, they're underpaying or shifted too much cost to their employees, we can help them get back to the norm where they need to be. In some cases, the employer wants to be the employer of choice in their space. What's it going to take, Gallagher? How can you help us get there? Compensation, benefits, things like executive benefits, help them get that talent and keep them in here. Again, we try to help people get the talent they need to win. The thought leadership, the national survey, we put out annually something called the Human Capital Insights.
It's a collection of our thought leaders in our business discussing and sharing what's working at their clients in different areas, whether it's well-being and engagement, communications practice, pharmaceutical, managing healthcare costs overall, disability and absence management. I mean, it goes on and on. This year, we came out, about a month ago, 17 different articles, just really getting into detail what's working out there. Clients want to know, what else should we be doing? What else should we be thinking about? What are our competitors doing? What else can we be doing to get the talent into our organization? Recently, literally just last week, we finished and published internally, a client engagement survey. We've done all these things. We know what they want. We know that the clients focused on attracting talent and keeping their costs down.
I know it doesn't sound like rocket science, again, and again, we hear that time and again. What's interesting here in 2018 is the focus on attracting talent as a primary focus for our clients has gone up, and the focus on keeping costs down has actually gone down a touch. With the economy, the way it's going, shortage of talent out there, people are saying, "What do we got to do to get that in?" This client engagement survey reinforced the same thing. What's also really good about it, we have very high net promoter scores with our clients. They like working with us. What we hear from them is they love our strategic thought. They love what we bring to the table in terms of the service. We've got great people that really focus on their needs.
We win because we're not going in there trying to, quote, "sell something to them." We help them solve their issues. They often say, "Well, can Gallagher help us with that?" That does result in a sale. It's the approach, very consultative. We take their needs first. We understand their issues. We try to help solve for those. Organic is a big focus for us. We continue to bring in new producers. We have an organic playbook that we're running to. We have branch managers who know what the playbook is, attracting new producers, having sales meetings, and so forth. Fundamentals, really important things we're doing globally. Moving on to the merger side. As I said, we've done so far eight this year. We average about 15.
Independent agencies like to join us because of our culture, because of our niche expertise, because of the opportunity to cross-solve with our property casualty folks on the GGB side. We have a lot of good reasons, but as much as anything, it's about fit. We want to find merger partners that want to help us build a business. They care about their employees, they're passionate about their clients, and they join us because we have that same feeling about our employees and about our clients. That fit is very important. There's a lot of folks, all they want to do is cash a check and run off into the sunset. That's not an ideal merger partner for us. We take our time. We find the folks that have that same desire to build this business. We've done quite a few recently, last two years, internationally.
We will continue to focus on opportunities outside the U.S. as well, also look for any opportunities within the U.S. It's very important to us to do that. What we find, not only do we put a flag in a geography and pick up some revenue and some people, but the bottom line is, what I love about our merger strategy is, we always find a treasure trove of talent, of new ideas. The entrepreneurial spirit is alive at Gallagher. Keep focusing, keep trying to win. That's what we love about our merger strategy, because it brings in new ideas and new talent. It's really very important to us. Productivity and quality. We are undergoing the process of doing more and more in terms of getting the right work with the right person at the right time. You're going to see more from us on that side as well.
What we've been able to do over the years with the mergers, if you do 100 different mergers, you probably have 100 different ways of servicing your clients, 100 different ways of going to the carriers to market your plans. What we're going through right now is we're going through piloting and standardizing the back office work, then by doing that, we can then become more efficient at it and free up some additional dollars to reinvest back in our business. New producers, new tools. Again, that's what our clients like from us is those solutions that we have available to them. We're really excited about where we're going with that. Small group service centers are up and running. We're also doing more and more in terms of CSO internally as well. Productivity and quality is a big, important initiative for us.
We are seeing some amazing results from that. I'm going to move on to culture. You always hear all of us at Gallagher talk about it. I don't know how much of you buy into it, but I will tell you we do. It really is important to us. I talk about fit with mergers, feel the same way when we're recruiting somebody outside the industry or from a competitor. Will they fit in? Will they do the right things? I've personally escorted people out of the organization that I didn't think fit. They cut corners, perform unethical acts, you're out. We don't need that kind of stuff. We don't need that kind of people around here. I'll tell you one story that really resonates with me, I hope it will with you as well, about the kind of people we have here at Gallagher.
You remember last year in Las Vegas, there was that shooting at the concert. Remember all that in Mandalay Bay? One of our executives was there with his wife, was on the ground getting shot at. He was quite traumatized, as you might imagine, because he was running for cover. He was helping people who were bleeding to get out of the line of fire. He and his wife were just so overwhelmed with this whole thing. Long and the short of it was, I asked him to take some time and talk to the EAP because he was pretty shaken up about it. We ended up having a sales conference in Vegas, and our reservations were at the Mandalay Bay.
I asked the leadership team, "What do you want to do?" This could be a little bit weird for people, and this is not the folks in Las Vegas' fault. If everybody did that wouldn't be good for them. The team confirmed we wanted to go back to Mandalay Bay, and we were there. This individual I'm telling you about came to me and said, "I want to give back more to Las Vegas." You might understand, I haven't been through this, but this guilt feeling that he survived. What else could I have done? He asked if we could do some things while we were there. We did. We did a blood drive, and the American Red Cross board came to visit us. It was very quite moving.
We also did a fundraiser for the police foundation out there, people that give money to the fallen police officers, things of that nature. They came and spoke at our group as well. It was an amazing moment when that happened, but it was very much therapeutic for our executive. The team felt really good about it. It was just a really moving moment. That's the kind of culture that's alive and well at Gallagher. I wanted to share that with you because I know it's kind of trite when you hear these things, but it really does resonate with us and the kind of people we are. With that, I'll open up any questions you might have about GBS. Yeah.
You spoke about the PBM initiative.
Communication surveys, things that seem to enhance the value proposition.
Just curious, would these initiatives put pressure on the margins, maybe in the early days, or maybe they're just less scalable to all your clients?
Have they put pressure on the margins? Is that the question?
Do they put pressure on the margins as you roll them out?
No. We have not seen that at all. Understand a couple of things, part of our merger strategy allows us to get into space without having to have a lot of startup in an area. When we go out, we find a merger partner. For example, we found one in the PBM space on the East Coast. They were a top 5 PBM consulting practice when we acquired them, and now we've taken their leadership and their knowledge and their know-how to build out the practice in a very accretive manner. We find a PBM consultant, put them in a geography. We're going out to our clients and very quickly, rapidly picking up new revenue when that hire happens. It's actually more successful than your typical organic hire on the health and welfare side. We're having a lot of success with that.
Similarly, with the communication, when we do an acquisition in the communication space, they already have a vibrant, well-run business, and we just build on that from there. There's not been a dip in margin when we do these initiatives. It's actually just the opposite, helping us grow.
Okay. That's helpful. Can you remind us, what is a healthcare trend right now that your clients are seeing?
High single digits, you've got the ranges, of course, depending on the individual groups and so forth. Okay.
For the U.S. and your benefits business, are you seeing any effect on what's called the near full employment state of the economy and employers' willingness to make alterations to their benefit packages for their employees? In other words, I'd be interested to know if employers are less inclined to change their benefit package now, therefore, there's less revenue opportunity for consultants and benefit providers.
Yeah.
Do you understand what I'm saying?
I do. There's a couple of things in there that I'll just point out that there's been a lot of cost shifting the last decade because of sustainability issues, right? What's happening now with the economy growing, the focus is getting away, back to what I said earlier about what we're seeing from our surveys and our own client engagement survey, is there's a little less focus on controlling benefit costs and a little bit more on how I get the talent in. We've run out of the runway in terms of how much more you can shift to your employees. Yeah, in a lot of cases now you're seeing the employer going, "Okay, I'm going to have to eat this," and not just reduce the benefit levels. We're seeing that a little bit more.
Thank you.
Okay.
Any other questions for Bill? All right. Thanks, Bill.
Okay. Thank you.
All right, we're going to take a break, I think on the schedule until 10:00 A.M. We'll be back online a few minutes before then.
Thanks.
All right. We're going to go ahead and get started about five minutes early. Next up we have Joel Cavaness, who leads our domestic wholesale brokerage operations. Joel, the next 30 minutes are yours.
Great, thank you. Morning, everyone. Thanks for making the trip to Rolling Meadows. I hope you enjoyed the tour, for those of you that took it. I'm here to talk, bring you up to speed a little bit on Risk Placement Services and where we are, our positioning as an entity and as a business, and where we think Am I going up?
No.
I will get help with that. Out of my league.
Trigger on. Hold that. Okay, that's better.
Okay.
Feeling better?
Great. Yeah, it's probably going to be a mic, but
Yeah. I don't see why it's.
I don't get it. If you can't hear me, let me know.
I can't, so I'm just going to do this.
Oh, yeah. I'm having a problem. If you guys can't hear me, let me know. Let's talk about Risk Placement Services. Again, where we're positioning and where we're going, where we believe there's a lot of opportunities exist. RPS is our domestic property casualty executive lines wholesale operation, where we have four different businesses that we operate in. RPS, we started in 1997. We started it out with four employees in downtown Chicago, doing wholesale brokerage, only property and casualty. Over time, through mergers and organic growth, we've grown to where we are today. We expect that we'll place about $3.5 billion into the market this year. We operate in basically four bigger divisions. Our larger divisions are binding business. If you saw Business Insurance just came out of the rankings because the WSIA starts in a couple of weeks.
They always do that as a preview to what was NAPSLO and is now combined into WSIA. I'm very fortunate that I have the position of being the vice president of WSIA, and I will be president starting in 2019. Our business is, to give you a good description, starting with our binding business which we're, as again, shown as Business Insurance, we're the largest MGA in the country. We operate that business nationwide, including Hawaii. We're a big player in Hawaii. Obviously, a lot of activity in the Pacific region with hurricanes this year, a lot of activity for us in Honolulu. That business is basically where we operate as an underwriter on behalf of about 50 different insurance companies. Lloyd's, Nationwide, Nautilus, which is a Berkshire company, and on and on and on, where they outsource most of the activities of underwriting to us.
We operate in geographies where we have authorities based on geographies and based on boxes. We quote the business, we bind the business, we issue the policy, we collect the premium on their behalf. We do basically everything for them with the exception that we don't generally handle claims for them, and we don't generally handle the reinsurance for them. In that particular business, that's kind of the landscape. It's generally smaller business. It's a bar, tavern, restaurant. It's something that's just opened. Average premium is maybe around three, four thousand dollars. We just do lots of that. As an example, to give you an idea, we have about 120,000 policies that are under $1,000.
That's a great opportunity, when we get to the productivity part of the discussion, to talk about the ways to look at that business a little bit different and get some great lift out of those businesses. That's kind of the binding business. Moving into our brokerage business, that's generally where we're going upstream a little bit. Transactions are larger. We don't have underwriting authority. We accept the submissions or the opportunities in from various retailers across the country, we take that business and we go out to the general marketplace and negotiate, hopefully, the best terms, conditions, and premiums on behalf of our retailers. They go back to their client, we bind the business, we collect the premium, we remit it to the carriers, that's basically the transaction. That business is big in property.
As we discussed a few minutes ago, before the rest of you got in here, maybe a little bit more now that a lot of things are going on with the storms that are out into the Atlantic and the Pacific. We do a lot of property. We do a lot of casualty. We do a lot of wrap-ups. We do a lot of New York contractors. We do a lot of just general transportation business in brokerage. We also do healthcare. We do executive lines business. Most of our people who produce this business are very specialized in a particular niche, and they don't generally get out of that niche. You have property people who just do property. We actually have property people who then, beyond just property, they specialize in habitational.
It's a very niche-y, very specialized business where healthcare doesn't go into property and property doesn't go into healthcare. We have specialists dotted across the country, mainly in the major centers of the country, who specialize in that business. We do business with lots of different retailers across the country in that business as well. We have a programs space. Our programs space is great. It's very focused, where if you go to our office in Short Hills, New Jersey, we only do 2 things. We do country clubs, and we do amateur sports. That's it. They're very specialized. If you go to Poulsbo, Washington, if you know where that is. We only do bicycle manufacturers and public entities. That's all we do.
We have officers like that who have very niche-focused business that has generally 1 market or 2, where we bring the value that we bring to the client as a specialized product, and what we bring to the insurance company is specialized underwriting. Generally, again, it's a business where we quote, bind, and issue on behalf of the insurance companies, but it's only very focused in particular niche businesses. We also have, as many of you know, we expanded into the non-standard auto business this past year with the addition of Pronto as a merger. That business is, again, very focused in the Hispanic community and very focused right now in the non-standard auto business.
Pronto's a little bit of a different model for us because in addition to using the independent agent system, which we use in RPS every day, they also have captive agents, and they also have franchised agents, where they franchise a Pronto insurance agency brand out into the marketplace. Predominantly, they're large in Texas, growing in both Florida and California. They did 2 mergers in the past in California and 1 in Florida. All are growing very well. Pronto brand is very dominant. If you go to, especially the Rio Grande Valley area, you will see Pronto everywhere. If you drive through a small town in Texas, you will see Pronto. We love that addition. It was a nice merger for us. It brought everything that we generally needed in that space. We had a great leadership team, a phenomenal leadership team.
It brought a great brand that we can expand across areas of the country where the Hispanic community either exists or is growing. It brings a market presence. When we looked at it, we've known this particular operation for over five years, and because we had looked at it before. It had expanded and gotten so much better over this five-year period, they wanted to come with us. They were looking for a strategic partner that allowed them to continue to grow in what they do. They weren't looking for another private equity leadership vessel. They were looking for a home. We're a great home for them. We like their niche. We like the way that they manage it. We like the way that they look at the pricing and the opportunities for growth.
They have a platform of four different carriers with four different reinsurance panels that give us more flexibility in the States. It also gives us more comfort that it's not a one-trick pony. We have the opportunity to expand all four different platforms for the growth. Those are our different divisions. Each one of them, we look at in two different ways. We look at the opportunity to grow them organically, we look at what kind of merger opportunities that we have to grow. Most of our merger has been around MGAs and program managers. Typically, on the brokerage side, our growth strategies for brokerage is just to hire more specialists. Go out and liberate people from others, or candidly, the biggest success that RPS has had is we grow them from the internship program. Everybody's heard about the overall Gallagher internship program.
We had over 300, almost 400 college interns this summer. RPS had 61. Our ability to hire people and train them our way and help them grow in their career is one of our largest opportunities for growth in the past, where we've had a lot of our growth from the wholesale brokerage side and we believe in our future as well. We get them in, we train them, we train them our way, and it's been highly successful. 50% of our over $1 million producers last year came out of the internship program. That will tell you that we believe in that kind of career opportunity for the internship. On the merger side, again, going back, we continue to focus on program managers. There's 3,000 program managers.
I'm sure that some of you will see if you follow the E&S space, AM Best just released their new report this past week. If you follow this space, they'll show you the opportunity, what the past has brought to the E&S space and where they believe the future's going to go. The E&S space only had one material issue over the course of last year, and that was a student loan thing that probably didn't belong in the E&S space. It's a great space to continue to grow in. The opportunities to grow in the program space through mergers and development of new programs through data initiatives that we operate within RPS. You take all the $3.5 billion of data points that we have, drill that down into opportunities to build new programs, build new specialties, and bring more value to our retailers is enormous.
Of course, you couldn't do that 10 years ago. Today, you can. Today, you can build programs around data and books of business that you already have and do things with it. We're excited about that. The 3,000 program managers, and there's probably, based on our numbers, somewhere around 1,000 general MGAs out there that pop up that are mergers. We'll take our bolt-ons all the time because we can bolt them into an already existing system. I was working on one before I came down here. I listed all you get, which Pat calls it the candy store. Here's the candy store you get when you get to merge with RPS. When I was listing out all the things that you're getting, it's pretty powerful.
You get backroom support, our quality initiative, where we have a big group of people in our India service center and our domestic service center, where we take over a lot of backroom activities. Nobody wants to be the backroom. They want to grow, they want to underwrite, they want to broker. Nobody wants to issue policies. It's just part of our business. You want to get it down to a point where you can prove a quality of issuance policy. I would tell you, 10 years ago, we issued policies, we had mistakes everywhere. We all did. It was part of the industry. We've gotten to the point where we can control 99% of our quality. We know that 99% of the policies we issue are issued just like they're supposed to be. That's very powerful.
You can use that when you go talk to a retailer. Yeah, you should check the policies, always check the policies. But if you have our policy, we're going to convince you that 99% of the time it's going to be right, and that's very powerful, and no one brings that to the table like RPS does. That's very exciting to talk about what you bring to a merger partner. Obviously, you guys understand we operate and we get paid in typically three ways in Risk Placement Services. We get commissions. We share in the gross commissions that we get. We pay our retailers a commission, and then we get to keep a certain percentage of it. We're typically on the binding side. We're high fee generating firms because we get policy issuance fees, surplus lines fees that we have to pay the state.
We get other fees for, especially on small transactions. It's hard to do a $1,000 policy or $500 policy where you make $50. But if we had a $25 or $50 fee in a particular state, then you can do very well doing that. We're fee generated. The third way we get is we get contingent or profit-sharing commissions from our carriers because we do underwrite on their behalf. We do have a fiduciary responsibility to accept good accounts that we place with our carriers, with our binding contracts, and then they pay us. They share in their profit that they make with us as part of our revenue stream. Those are the ways in which we get paid. We operate, obviously, in a competitive environment. There are a lot of good competitors out there.
Our main competitors, if you look on a national basis, would be Amwins, CRC, which is part of BB&T. We compete with Worldwide. We compete with RT Specialty, which is Ryan Specialty company. Those are kind of an idea, thought of who the competitors are. There's about six larger firms like RPS, and then everybody else is typically much smaller. Not that they're not good just because they're smaller. It's just they don't have the resources and the financial wherewithal to do the type of things that we're investing in to make ourselves better all the time. Our geography, we do operate nationwide, as I said. Probably the only part of the country that we don't get into is we really don't much get into Alaska.
It's not really a space that we've looked at investing in just because of the size, and there's not a lot of catastrophic environment up there, so we stay out of there. We have about 2,750 people today. Pronto brought us about 1,000 people. That helps us grow a fair amount. We'll continue to focus on our employment growth. Our organic growth continues to be mid-range single digits. This year's been a particularly good year. We've been very happy with our progress on our organic growth strategies. We've hired a lot of people, a lot of producers in the past year. We've invested in new product and program development. That's helped our organic growth strategy. We've done very well at focused on where we want to grow. We've also been able to go out and focus on our retailers, our customer base.
We made a strong investment 2 years ago on client relations managers, where we've been out and we've been focused on who our customers are, make sure that we're staying on top of all of the big groups that are out there today. 10 years ago, you didn't really look around. You looked around, and there were these big SIAA or the Leavitt Group or Smart Choice or all these ISUs. There were a few out there, but not to the magnitude that there is today, and those are the kind of places you need to stay engaged because they're growing. I was up at Acrisure the other day. We've become an ACE partner with Acrisure. We're actually on the list. We should get it next week, and that's a big growing retailer that fits very well with your direction of where RPS is going.
Our client relations team has really paid off. It's been a focus day to day. We have two groups of them. No one else is doing this, which is what's kind of interesting. In our space, nobody has the kind of client relationships that we have. We have two groups. We have one that's focused strategically with our large customers. Again, the Gallaghers and the AssuredPartners and that group, where we operate very strategically with them from the top down. Then we have a big group of people who are windshield people. They get in the car every day, they go see our customers, they're focused on selling everything that RPS has. They walk into a retail insurance broker's office, they sit down, they talk to them about everything that we have to offer.
It's not just a geography thing or a local thing. It helps sell all of our programs across the entire division of what we're doing. Margins. Margins are healthy. They continue into the mid-20s. We like that focus. We like the ability to obviously make money so we can continue to invest in the business. Our margins are very healthy, and we like that. Let's see, acquisitions. We talked briefly about our acquisition. We've done about 18 since 2014. It is a focus. We did get a new corporate development person out of the Pronto merger that we did. He's based here in Chicago. He's an ex-CMO guy, a capital market guy. I'm very impressed with what he brings to the table. We've now deployed him to not only do mergers for Pronto but also to do mergers for us.
Brings a very refreshing, new approach to us. When you have the same person calling you over and over again, sometimes it gets stale. This gives us another set of feet on the street that are out there making phone calls, talking to people. The activity is pretty brisk in the M&A. You guys have seen that valuations have obviously been a little bit different. A lot more interest in people now talking where they weren't talking before. It's a really good time to look at what your options are for the future. We're deadly focused on that. We continue, we believe, to be the merger partner of choice. We bring a lot to the table other than just money, and that's what we try to focus our merger partners on.
Look, yes, we have a great, nice war chest of money that we utilize, we also bring all these things, and that's really what you're focused on. You merge for a reason, right? It's not just a capital event. You also merge because you're going to get value out of it, and we believe that we add a lot of value to the transaction. To talk a little bit about productivity and quality. We like what we're doing there. We are fully focused on that. There is not a person in RPS that doesn't buy into what it's brought. It's a proven roadmap. It's proven that it can help take things off of people's tables.
If you don't have to worry about issuing policies anymore, that just gives you that much more time to go out and call on retailers, call on your markets, call on your customers, do all those kind of things. We're taking all of that off, and that just allows us to be that much more productive. Again, we talked about eating lunch, right? If you're not eating lunch, then you're working. That's exactly what India and our domestic service center does for us. We were able to monitor our quality. We're able to monitor the work. We're able to get it to the right level.
We started a thing called GEO this past year, which is called Growth Enabling Opportunities. That's making sure that we get the right work to the right desk. We have deployed that across all of our binding. Now we're moving into our brokerage business. Making sure that we're freeing up resources to do what we can do to grow our sales without having to grow people. It's been a great initiative for us. We'll continue to grow that. Finally, talking about our culture. We talked a little bit about our internship, talked about where we're going in that and what that's brought to us. The culture part of things is I've been here 32 years.
It's not like I didn't stay for the culture because the culture is very important to me. We get a lot of people that stay because of our culture, because of what we bring to the table. Our investments in people and talent management. Believe me, we talk about it all the time. There's a war for talent. We want the best talent. We want to recruit it. We want to keep it. Our culture really does that. We're very focused on it. We're very focused on our employee engagement survey and what we did. We did a great job. We went out, we had huge participation in employee engagement. We actually told them what we found out. We told them what we were going to do about it. That's what people want to hear about.
They want to hear communication on what you're doing about anything that's going on out there that needs to be improved. Our culture is very important. I know Pat, I'm sure, talked about it. We focus on that each and every day. We believe that that will help us. That is a differentiator for the Gallagher organization. Hopefully that gave you a quick. Happy to answer any question, give you anything that you want. Hopefully I can help you with. Mike?
Can you remind us of the market opportunity for Pronto and what organic growth rate it's been throwing off?
The good thing is, there's a couple things, some of this goes to the past, and of course, we have to look at it for the future. There's two areas of growth for Pronto on the organic side. You get rate, then you just get market expansion. The rate they file generally in the three states that they operate in today, they're actually filing the rates. They're generally filing based on statistics. In the past, they've been able to file generally about a 7% increase. That would show you that you're going to get organic growth just based on rate.
Then, of course, market expansion, which is going into the various communities where the customers are and either planting independent agents if it makes sense, or it might make sense to put a captive agent in, or it might be an opportunity for them to add a franchise. There's been the paths of organic growth and where we believe the future is. We find it to be pretty favorable.
Is that double-digit organic growth then?
I don't know that I would go double digits.
Okay.
It is a program manager, you do have to manage your growth, of course. You do have a responsibility to making your partners successful. I would say that it's mid digit organic growth. Elyse?
I also have a couple questions on Pronto. Is the goal to expand it beyond the states that they have a footprint in? Also in terms of the margins, I know on the last call you guys had said that there might be some margin headwinds from some recent deals, which I thought Pronto, just given seasonality, seems like for the full year, it's kind of in line with the rest of your business. Correct me if I'm wrong, maybe just some seasonality there. Is margin improvement part of it, or it's not because it's where the rest of your business is?
I'll take where we're going to go with Pronto, and I'll let Doug talk about.
It was seasonally a little lower in the third quarter, Pronto. Just to answer that first piece.
As far as where we're going, we're going to go where our customer base is. Clearly, we're focused today on that particular niche of Hispanic non-standard auto. There is a huge market in that. The way that we, I don't want to call it attack that market, but the way that we serve that market is very unique. We make it very easy for them to do business with us. If Jorge and Wendy were here, who are the two leaders from that business, they would tell you, we want to be easy to do business with. We want to give you the information. We want to make it easy for you to pay us. I've been down to Brownsville lots of different times and been across the country with their carrier partners now.
When you go down to Brownsville, people pull up to a drive-through window and pay their premium. You can't make it easier than that. You can pay online, you can pay with a credit card, you can pay with a check, or you can pay with cash. We're fine with that, and they're fine with taking that money because that's the demographic that they have. That's the way. They want to make it easy. They want to come by at lunchtime on their lunch hour and go through, possibly drive-in, or at an H-E-B store. I don't know if you're familiar with H-E-B. H-E-B's kind of like a Walmart down in the Texas area. You can walk out of H-E-B, as you walk out, and you can pay your premium. They want to be easy to do business with.
That's where some of their competitors have fallen down. They couldn't quite get over that ease of doing business. Of course, we can explain that. We want to make a simple product, whether that's manufacturing homes, whether that's dwellings, the other things. We just want to make it very simple for them, same way that they do in their non-standard auto. Make it very simple to do business with us. You'd have to go down. It's pretty impressive. Every paperclip in every store that they have, either captive or franchised, is in the exact same place. They make it very easy, repetitive, do it the same way every time. It's kind of a process.
You said the overall wholesale business is about mid-single digit organic. We spent part of the other presentation kind of talking about what 2019 looks like. Broadly, Scott said 2019 will be a little bit better than 2018. Do you see the same for the wholesale business? Can you kind of keep up that growth level?
Yeah, I do. I think that the things that we've invested in, of course you get two areas in our organic growth opportunities. One is rate, of course, and one is just selling more insurance. Those are the two areas. We believe that we've put both of those pretty firmly together right now. Rates are working in an environment where rates are generally steady is a huge positive for us because there are no big swings ups, and there are no big swings down. We think we compete in a very good way when rates are generally level. The economy is doing well. We do a lot of transportation business. The transportation business is doing well. I think that the forecast is actually very strong. I met with a couple transportation specialists last night. We were talking about shortage of trucks, shortage of drivers.
There's a pent-up demand for that. That means that there's more opportunities for us. We do a lot of small fleet business, a lot of startup truck business, and that's what our market's like. That's a growth opportunity for us as well.
Just a quick numbers clarification point on Pronto. I think you said you're getting about 7% rate.
That's what they've been getting in the Texas region.
Okay.
7% range.
Mid-single digit organic growth. Are you actually losing business or no?
No, just being careful with my-
Okay
answers. Again, rate is only one piece of it, but we're definitely not losing business.
Okay.
Business is doing very well.
Thank you.
We're excited about it. Anybody else?
Any other question for Joel?
Thanks again. Appreciate everybody coming in. Anything I can do to help, I appreciate it. Thank you.
Thanks, Joel. Next up, we have Scott Hudson. He's going to talk about our risk management segment in the Myler Gallagher Bassett. Scott, the next 30, 45 minutes are yours.
Sure. Got it. I didn't know if I was turning it on or off here. Good morning, everybody. As Ray said, Gallagher Bassett is the topic. Like I think everybody else is doing, I'll start with a little bit of context. Many of you have heard that before. I'll cover the four topics. How we drive organic growth, M&A activity, productivity and quality, and then culture. To summarize, it's just a quick reminder of kind of how we win in the market. Open it up to questions. Putting GB in perspective within the Gallagher organization. If you look at the 2017 revenue
We were in the $750 million range. That puts us about 16% of the total enterprise. A couple of other ways that you can measure the business is the amount of claim payments that we make. We're approaching about $10 billion. If you put that into the context of a typical insurance carrier that translates into probably a carrier that's in the neighborhood of about $15 billion. We're big. We're relevant. We've got 5,700 employees. Just as of the recent census that we took. We've experienced mid-single digit organic growth over the last five years. What was reported at the end of the second quarter was a bit of an uptick. I think we were in the 10.1 range. That was a little bit higher first quarter. We're expecting it to be in the upper single digits for the year.
Our business may be a little lumpy from quarter to quarter, but considerably stronger than it had been over 2017. Margin has been in the 17%-plus range, 17%, again, the mid-17% range. Strong there as well. That's grown over the past few years. A little bit of M&A activity. I'll talk about a few of those, remind you some of the things that we have bought. A couple this year, a few in 2017. As we look forward, there's still some additional opportunities for us. The business we're in. We serve four client segments. Our traditional business is the large risk management type clients. Kind of household names like Costco, Waste Management, Whole Foods, now it's a part of Amazon. Essentially we run their work comp program or the liability program for them. There's those guys. There's public entities.
State governments have a lot sourced their business to us. Local governments. A lot of local authorities in the U.K. Big states down in Australia. We act as agents for them. A lot of public entity business. Insurance carriers. You've heard me talk a lot about that recently. Where we're starting to see real strong evidence that's a legitimate marketplace for us. Where they're contemplating or considering outsourcing their claims business that they typically had inside in the past. We've taken that over. Then the fourth area is alternative markets. Captives, MGAs, businesses like Joel's where they need a claims entity, a claims service provider to do that business. The way we generate revenue. There's a couple of different ways. We'll do it on a per claim basis. A lot of our clients do pay per claim.
There's a couple of different structures in there in terms of whether it's the life of that claim or whether it's the life of the relationship we have with the client. In other cases, there's a large relationship, and it's a number of people of which we will then put a multiplier on the top of. That's how we will make our margin in those particular cases. Then there's a number of instances, not quite as many, where it's on a % of premium basis. That's primarily reserved for our captive business. Some of our carriers operate that way as well. The competitive landscape. I've mentioned this in the past. It's actually unique by geography that we operate. Here in the U.S., there's some well-established carriers. Sedgwick being one of them. Broadspire, who's owned by Crawford & Company. ESIS, owned by Chubb. Helmsman, owned by Liberty Mutual.
A little bit smaller ones like CorVel that came out in the managed care space. There's some established competitors here. Obviously, we compete with the carriers directly themselves as to whether they're inside or outside handling their claims. You go over to the U.K., not as well established a market. A couple of the entities I just mentioned, Sedgwick and Broadspire, operate over there. For the most part, we're competing with smaller TPAs, and in some cases, law firms. They actually do it on the inside and will have a law firm service. You go down to Australia. A little bit of a different competitive set. TPA might be with employers, EPL. For the most part, we're a little bit of a unique entity still in Australia and New Zealand. I mentioned where we operate. We have people domiciled in the U.S. We have them in Canada.
We've got a number of people in the U.K. We've got a large contingent of people down in Australia and New Zealand. We also are very clear to explain to people that we can handle claims anywhere around the world. Some of those are through partnerships, some of those are handling those claims with people that we have in the locations I just described. There are instances in which we're handling claims in well over 60 countries around the world on behalf of our clients. We do have a local capability. Not necessarily people physically located in all locations. One last piece would just be the type of claims that we handle. If you were to go back a number of years, basically the TPA business, in a lot of respects, started on the work comp side. It moved into the general liability space. Auto.
We've got a lot of that. More interestingly, I think, is we're moving into specialty lines as well somewhat recently. Medical malpractice, product liability, things like that. We're expanding our reach in there. I'll talk a little bit about that in a second when we talk about growth. The other thing that we do, starting to do more of, is on the kind of environmental health and safety side, where we're actually in the business of trying to prevent claims. We're seeing a little bit of an uptick, and I'll talk about a specific acquisition that we made in that space here recently. That's the context side of it. If I go to organic growth, what we're doing inside Gallagher Bassett to drive organic growth, I'll talk about four things.
One is we're going where the tide is rising, the segments of our business where we see the greatest opportunity. By no means are we in any way abandoning or ignoring what we're good at today. Where the real opportunities are, I think, are on the carrier side. As I've mentioned to you, we've gotten into this in a big way, probably three, four, five years ago. We have built dedicated operations separate from our risk management space or our captive business to serve carriers directly to meet their specific needs. We continue to see, not just here in the U.S., but down in Australia, New Zealand. We're starting to see it over in the U.K. We're seeing real opportunities of a significant size where carriers are looking to us to handle the claims going forward.
The alternative market, the captive space, the MGA space is another segment that I think holds tremendous promise for us. Something that we've just started doing more recently is we've actually got people working to kind of penetrate relationships inside the Lloyd's marketplace. It's kind of a variation on the carrier side. We're seeing actually a lot of potential upside there as well. The second piece around organic growth is product expansion. As I said, traditionally, we've been in the work comp and general liability business. We actually see a lot of potential by moving into other specialty lines. The vast majority of our clients, whether they be carriers or risk management clients today, they have other risks, other exposures in their business where we have an opportunity to handle claims for.
I mentioned if we're inside a hospital handling their workers' compensation claims, there's medical malpractice opportunities. If we're inside a products type company handling their workers' comp or auto type claims, there's product liability opportunities. We're working pretty hard to build out the specialty business. You'll see some of the acquisitions that we've made, one in the long-haul trucking space. Of course, it's in a position to grow that. Market expansion. We continue to look to have an opportunity to kind of plant flags in other parts around the world. We're not hesitant to do that. We need the right opportunity. One of the things that I've mentioned in the past is for us to set up a shop, to set up an operation in a country, we need to have line of sight towards a significant number of claims.
You can't have one or two claims adjusters working in a location. Before we're going to do that, like we did recently in New Zealand, we're going to have to have line of sight into a meaningful opportunity there. We may do it by acquisition. I do see us continue to expand around the globe. The fourth point in terms of our organic growth, and I talk about this every day when I'm out in our marketplace talking to clients, is the thing that's going to drive our growth more than anything else is superior outcomes. Validation of that here in the U.S., I think I mentioned this the last time we chatted, is if I did a survey that said single-handedly Gallagher Bassett is the best claims handler out there, that includes carriers. That statement goes to one thing.
It says you're delivering the best outcomes. That's what's most important. We just got credit here recently for Business Insurance for an innovation that we put in place. It's what we refer to as our SMART claims scoring system. The whole purpose behind that, I won't go into a lot of detail, is what we believe is a unique way of figuring out how to score claims to evaluate whether we are delivering superior outcomes relative to our competition and relative to over time to a given client. We're pretty darn excited about that. Couple of other metrics around growth. Retention is in the mid-90s for us.
As I said before, we have been kind of performing at the mid-single digit, mid to upper single digit level on organic growth here now for a number of years, with this year being a little bit stronger than it would have been in 2017. M&A. We did three deals in 2017. We've done two so far here in 2018. Triax was one that we did here in 2018. It was a leading provider of occupational health and safety services down in New Zealand. One that we're really excited about is a company by the name of WCD Group here in the U.S. Chip D'Angelo and his team are in the environmental health and safety business. I think I could probably talk at length about what we see as the upside potential there. As I mentioned here in my opening comments, we're big into the prevention space.
I would expect to see over time significant growth there. If you shift gears to productivity and quality, just as a reminder, we're a 17-+, mid-17 digits performing business. Couple of topics here, scale and efficiency. Continue to work pretty hard to look for opportunities to scale advantages. In this business, there are some scale advantages. One of the things that detracts a little bit from that is we tailor our services to each and every client. Everybody's not getting the exact same product. That detracts a little bit from the ability to see scale advantages. We are working really hard to make sure that our product and the service that we're delivering across the company, in all locations, is on the same technology platform.
We're also working very hard with Michelle and James Gallagher's service centers to offload as much activity as we can into those service centers. We've got some exciting things going on in Las Vegas. We're taking a lot of the customer service interaction that a typical adjuster has and relocating that to our facility in Las Vegas. I think we'll see some real upside advantages, both on the service side as well as on the cost side with that. Technology and analytics. This is another area where we've been making significant investments over the last four to five years. It's pretty darn exciting. A lot of our analytic tools are getting high marks from the marketplace. You're seeing, whether it's BISON, whether it's Business Insurance, recognizing our SMART technology. Just down in Australia, we got some applause for the Australian insurance industry.
We had one of the most fantastic innovations. It's a product we put together for the Northern Territory down there, one of the states that we handle claims for. Pretty exciting things that we're doing analytics-wise, technology in terms of process and efficiency, just the tools that we're doing our job each and every day with. I did mention that we have made a conscious decision to organize our operation in line with the segments that we're attacking. There was a point in time in the past where an adjuster in our business could handle a claim for a carrier, could handle a claim for risk management client. Now we have dedicated operations for each and every one of them, which has, I think, from a service standpoint, has made a huge difference. The last thing I'll say around productivity and quality is around security.
One of the things that we're spending a lot of time and effort, a lot of money, a lot of resources to make sure we've got a highly secure environment. We are as susceptible as anybody from the standpoint that people the data that we have. The privacy laws apply to us because medical information is personal information that we keep. It's absolutely critical, our clients, our prospects are absolutely assured that we got an airtight operation when it comes to our data. All signs to date have pointed to the fact that we're in pretty darn good shape there. The investments that are having to continue to be made to make sure that that environment remains secure, they're not minimal by any stretch. Culture. As is the case with all state Gallagher business units, culture is a big deal inside Gallagher Bassett.
We're proud of it. The things that I point to, it is a big enabler for us to bring in top talent into this organization. We have no difficulty. We just actually hired a couple of consultants from Bain into senior positions. We can get those people to come here because they get pretty darn excited about what we have to offer in the prospect recruitment cycle for this type of organization. Work ethic inside GB is phenomenal. We've got people that show up every day and are committed and passionate about what we do. On the passionate point, one of the things I've shared with you guys in the past is I think we are one of the primary drivers behind the shift in the way people approach this business. You got to do it with a heart.
At the end of the day, we're putting people's lives back together. We're not handling claims. We're putting people's lives back together. The people that are working on the front lines every day inside Gallagher Bassett know it, appreciate it, and that's how they approach their business. It makes a difference in terms of the way we serve client organizations. As one last reminder, how do we differentiate ourselves in the marketplace? This probably holds true no matter where we're working geographically. I'll say right at the top of the list is we got to be able to demonstrate superior outcomes. Our SMART claims scoring methodology is a key enabler of being able to do that. I mentioned that we will customize our claim services to a given client. That makes a difference. Not everybody in our space does it.
We're willing to sit down and be consultative with a client and say, "Hey, what's the best way to handle a workers' compensation claim in your organization consistent with your culture?" We do that, we do it quite well. I mentioned that we do things with the heart, care. It matters to us. We know we're dealing with people's lives. We know we're dealing with organization customers. A couple of other important things is as we move into the carrier space, our relationship with the brokerage business, it's a big deal. It matters. We're seeing where it has significant impact. There's a lot of carriers that want to do business with Gallagher on a very broad basis. Wrapping the claims piece into it, if they're willing to do it, then the broader brokerage relationship makes a difference.
The last thing, the fact that we can handle claims, especially against some of our smaller carriers or smaller competitors on a global basis.
Just curious, I have a few questions.
Yeah.
One of your largest competitors recently traded hands. Any comments, or were you surprised, or just curious if the price you thought was surprising or not?
Probably not surprised. Their time was probably up with KKR. You're talking about Sedgwick?
Yes.
I think it was time for another financial turn on their side, so I wasn't surprised about that at all. I think the multiple points. In a way it's probably reassuring in some respects. If you look at the multiple, you figure that out, it's a pretty strong statement in terms of valuing this business. People are seeing that organizations like ours that drive superior outcomes are valuable enterprises. I don't think it makes a darn bit of difference in terms of how we compete with them necessarily in the marketplace. They'll have to figure out how to build a working relationship with a new financial partner, which I suppose may or may not create a little bit of a disruption. Not surprised by it in terms of the fact that the deal took place.
Not surprised by what was paid for it, we'll see what it means for another time, I suspect it'll have a major.
Okay. Can you flesh out, you spoke about growth in the MGA captive space, if you could elaborate.
If you just look at the pipe. I probably won't name names in terms of specific carriers, we actually just did a recent deal that will accept the beginning of next year with a very large carrier. Primarily workers' compensation, a little bit of liability. It's an organization that probably historically in the past would not have looked to a TPA dealer. They see us as being able to build a platform that is unique. It gives them some flexibility because they don't have to go out and hire people. They're leveraging our technology investments. There's a lot of advantages to them.
We've probably been at this journey for four, five, six years, I think what's happening is this idea that it's out of the ordinary for a large, well-known carrier to use a TPA to handle their own claims, it's not quite as out of the ordinary. I would say probably every week or month, we're getting new opportunities in that space. It's happening down in Australia as well. It's happening in New Zealand. I've mentioned in the past, we're basically building the marketplace. If I would've been sitting with Pat Gallagher inside one of our meetings with one of the senior executives of large carriers five or six years ago, they wouldn't have given us the time of day. It was like the TPA has a very specific role. Now it's like, you know what?
From a strategy standpoint, why don't we consider, rather than say we're going to build an in-house claim operation, why don't we consider Gallagher Bassett as a viable alternative? That's happening more and more. I think as Pat and I both said is there will be a day not too far down the road where our carrier side will be significantly larger. GB's carrier business will be significantly larger than our traditional risk management business. That's no reflection on risk management. It's just if you look at the volume of claims filled today, the vast majority are still handled by carriers. If we're going to grow and will in the future, we need to be attached to them, and I think there's strong evidence that that's occurring.
Hi. I had a couple questions. My first was there's been some carriers that have talked about the potential for higher workers' comp claim costs, just given lower unemployment levels, more workers-
Yep
greater claims. Is that something that you're seeing? Can that benefit your organic, can you remind us how big workers' comp is of your business right now?
Let me start with the last one. I think I must say work comp's about 60, or our CFO, Jim Bond, said it was 65?
65.
65% of our business. Yes. We have been seeing a little bit of an uptick in just claim volume with inside existing organizations. I can't say definitively what you'd attribute that to, but we would often see in a growing economy where companies are growing and bringing on new employees, frequency of workers' compensation tends to be higher at that moment in time. They are opening new facilities, opening new stores. That's a driver of our volume. It's hard for us at the moment probably to distinguish between is it an increase in frequency, or is it just growth associated with their own headcount, their own business growth. Can it benefit us? Yes. It benefits us from the standpoint that if there are more claims to handle, that's how we get paid.
Even on a client where it's a dedicated group of staff, at some point, if there's more claims to handle, we'll add staff, and we'll get paid more for that. Yes, it does benefit us.
When did you start to see these trends? Was that something that you think benefited the second quarter growth?
I wouldn't say that was a primary driver, no. That was not a key contributor to growth. If you go back a couple years ago, we were in the very low single digit growth claim counts. In the 0% to 1%, maybe a little bit 1%. Starting the middle of last year, we're starting to see a little bit of evidence of an uptick. I would say this year now we're in the 2%-3% growth level. Once again, in some cases, again, you think of percent of premium counts. At some point you would think the premium goes up, the claim counts are going up, but there's not an immediate correlation there. It doesn't happen immediately. On the per claim one, those claims come in, yes, it helps us immediately. We are probably up year-to-date a little bit.
Nothing in the last few months, but this has been more something that's been gradual.
I think that what I've been saying around organic, I think it's a reflection of new business. It's a reflection of growth in some of the segments. There may be a little bit of help from just increased frequency of claims, which could be just economic growth as well.
On another topic. There was always murmurs at some point a few months ago was that Amazon was looking to get into insurance. As those sort of tech expertise look for new opportunities and they don't have the ability to handle their own claims, is that an opportunity? Just as think about this and how you think about things like this can be a driver of maybe more long-term growth than just immediate growth right now.
Interesting question. The fact is, anybody who amps claims, especially for something like Amazon, it's like, why in the world would they want to go try to build their own claim operation? I could think that's a possibility. We're not engaged in any conversations what I would describe are these out of the ordinary type prospects. Interestingly, we've got a very strong relationship with Amazon now because when they bought Whole Foods, Whole Foods is a client of ours. Any and all of those type of organizations. The only thing we see happening is on the InsurTech side. We've got a complement of probably now, I think a half a dozen of these InsurTechs that are getting into the space. They're the great example of an organization like, okay, we want to write insurance.
My gosh, the most difficult thing to do in writing insurance and getting into the insurance business and build a claims operation. You have to hire people, you have to build systems and so forth. We are a phenomenal platform for somebody who doesn't want to have to incur that expense out of the gate. I would say InsurTechs are maybe an alternative group of organizations that are getting into this space. Sure, if anybody who might get into it, I think we lower the entry cost in a pretty significant way for the startup costs associated with representing. At the moment, I don't see any of those as being immediate indicators.
Anything else? Anything else for Scott? All right. Thanks, Scott. Next up we have Doug Howell, our CFO. He's going to be talking about the CFO commentary, probably clean energy and other financials that you guys want to discuss in the next 30, 45 minutes here.
Oh, great. I think I need a mic. I actually forgot about Zoom.
Of course you are. Hey, Doug. Comment.
Oh, okay.
They're all next up there.
I'm telling you, I'm a mess this morning. Actually, thanks everybody for joining us today. I think there's a lot of news going on in the wires today. There's some interesting news between the hurricanes, some acquisitions, divestitures, et cetera. I appreciate you having about a 75% focus to our conversation today. For those of you on the phone, probably the same thing. I always start off saying, what do you want to talk about? We've done this now for about three or four years, where we get together once a quarter. When I walk away from this, what I always find interesting, it gives me an opportunity to sit in the back of the room and listen to every single business unit leader talk about the excitement that they have in their business and what's going on.
It's an interesting day because starting next week, we start with our dominant priority sessions. We've already had some preliminary budget, early budget meetings. This is actually a very exciting time of the year for me as the CFO, because really our businesses are hitting on all cylinders at this point. They are performing well. They've got good objectives. They have clear line of sight to what they need to do to continue to be successful. We have the ability, we're well-organized, well in control, thoughtful leaders and CFOs and operating folks in the business that are talking about normal business issues. How do I hire better? How do I acquire better? How do I promote the culture? How do I get better at what we're doing? How do I take care of the people that are driving our business?
These are natural business discussions that as I sit and think about what my next five days are going to be like next week, meeting with 100 or more leaders around the world, I don't know where the negative spot is. As a CFO, we've got great margins, we have great organic growth, we've got opportunities to improve. As a CFO, this is actually going to be a really great September for me, I hope. I think I would know the bad news that might be coming out next week in advance of sitting down. Thank you for coming. I think it's a terrific time. I think the optimism of where we're going. I do have a few comments that I want to make sure that we get through. Maybe we'll start with the CFO Commentary Document.
We published that this morning before you came out, before we started. I just want to make sure that those on the phone, if you have it. I've got four or five comments on there, and I want to make sure you see them. On page two is kind of where all the action is. FX bounces around a little bit. Last time we spoke here, we didn't think there'd be any impact on revenues. There's still very little impact to nothing on our earnings, but it does impact the revenue a little bit. Just be aware that it's flipped from being zero to maybe $10 million of headwind. I think that the dollar is bouncing around a little bit, so we'll see where we end up when it comes to the end of the quarter.
I also have added something that we haven't provided before because I think it's time for us to talk a little bit about it, and that's on the workforce and lease termination line in there. We've given you guidance that we might take $0.03-$0.05 for the next two quarters because In the footnote number one in there says that during the third quarter, we took actions to eliminate approximately 350 positions and restructure another 30 positions. We expect to incur severance of $10 million-$12 million after tax in the third quarter and approximately $9 million-$11 million after tax in the fourth quarter. I want to make sure we'll put that as an adjustment in there so you see it, this is a belt-tightening exercise.
I think it's also important to know, and this goes back to the point that you asked Mike Pesch about, maybe Jim Gault a little bit about, is what are the investments going into the business? Much of that we say in here is that we're going to save maybe $25 million-$30 million after tax as a result of these efforts. A significant portion of that is that we're expecting to be additional investments in production, selling more, talent development, data and analytics, and marketing. When we talk about what we're doing with that, this was an opportunity to take 400 positions and redeploy them into that as they leave, we'll take those positions, and we will deploy them into things that help us sell more, acquire more, and hire more. There was a question about what's the cost of some of these sponsorships.
They're embedded down in there, that's not the full cost. What we're doing with rugby, IndyCar, with the Chicago Cubs, those are not significant investments in terms of what you would think a $5 billion company would be spending. They're very targeted because they represent our culture, and it helps us, again, sell more. I want to talk a little bit about this hire more, because like Pat said, there's 300 folks around here that are in the offices today that are redeploying other industries to sell insurance for Gallagher. That's really an important effort for us right now. I want to highlight that. Elyse, I think you had a question perhaps on that point. I want to point out a couple more things too on here.
My question was just have you guys had a restructuring like this in the past where you've eliminated a significant number of positions?
We've had in 2012 and 2013. The difference today versus what we did then is we were really harvesting positions that really were redeployed to our centers of excellence. That was we were in the harvest phase of those efforts that we did in 2012, 2013. This is a little bit more surgical in that, I would say. I don't want to say it's mostly management, but there is a big piece of management in that. As we become more productive, as we become more standardized, span of control can increase. Sometimes the jobs just need to be restructured into I'm just making this up. I don't think I can take a person that's really great at real estate development or lease management and redeploy them into data analytics or into recruiting for more production.
Sometimes as jobs wind down in the state of the company, those jobs exit, and then we hire more folks in different ones. We have done this, and we've done it kind of quietly over time. We contract that company. We just really saw a terrific opportunity right now to take a hard look at our workforce and on 30,000 people, it's not a big number. It's not going to be culturally damning. I don't think it's going to be anything that's significant, but there is an associated severance, obviously, for that for a couple of quarters. Also on the point here, one of the things as our acquisition pipeline increases, I just want to make sure that you focus on footnote number two on that same page.
As it says that we do more acquisitions, as you're building your models going forward, yes, we can roll in the EBITDA. Most of our valuations, from what I see, people are doing it based on EBITDA or EBITDA per share. When it comes to EPS, you have to remember that whatever we pay for something, you've got to increase the amortization for it in your model. Sometimes as we look across the modeling in the brokerage space, sometimes folks forget about that fact. Doesn't impact EBITDA, but it does impact EPS estimates a little bit. Take a look there. Those were two comments there. On page three, as we were working on this last evening, in footnote number two, we provide you our clean energy estimates. Right now, we think we'll make between $25 million and $28 million.
Very similar to what we thought. It's exactly the same numbers we said in July. I add in footnote number two, Hurricane Florence is currently approaching South Carolina. We have four clean energy plants operating in South Carolina. Estimates could decrease by approximately $2 million as a direct result of the hurricane. That's after tax because it's softening now to not quite the same intensity as before. I don't know if those plants are far enough. I know where they are. I know that they are inland. They're not on the coast. If this produces a flood, we could have slightly less production. Fortunately, it's sitting in a month where we don't really. As you toggle from running air conditioners to running electric-driven furnaces, a lot of plants come down during September anyway. It's not a big number if you're looking at making $120 million.
If it's a couple of million bucks, if there's heat and humidity that happens afterwards as a result of the storm system, maybe they'll even run more air conditioning in September and October. Those are the new things that are in the CFO commentary since when we last published it in July in connection with our earnings release. I want to make sure I touched on that just so that you could focus on it and yeah. Questions on those points at this point before I go into either questions or kind of an overview on.
For one question, you guys had given us the tax adjustment for the remainder of the year and the foreseeable future in the second quarter that runs through the corporate segment from tax reform. That doesn't seem to have changed. As of today, there's no.
I think I'd tighten it up. The real question is what's the impact of tax reform on our book results? Remember, this is something I want to get to in my program. We're taking about a $3.5 million after-tax impact in the quarter related to the impact of U.S. tax reform. Some of that is tweaking of year-end estimates. Some of it is actually continued run rate. I can't emphasize enough that it's not cash. When you look at our cash taxes paid, we provided some guidance. We believe that will be globally somewhere between 3% and 5% of our EBITDA numbers for the next two to four years, and then maybe it'll go from 5% to 9% in years four to eight, and then maybe it'll be around 10% to 12% after year eight. Depends on how much U.S. income we create versus international.
Basically, because of our tax credits, having a $750 million receivable from the government on our balance sheet, we do not forecast having to pay significant income taxes in the U.S., so when you average it in with the global, we're not going to pay a lot of income tax over the next 10 years. Still the plants are running well. I think that we've got good operational excellence in that. We do have another plant, machine, or facility that I think that we can put in place in the next three to six months. I think there could be more opportunities. That won't be significantly more. It's one of those things as some plants come offline and they might choose natural gas or they're just later in the dispatch curve and they don't need to run.
Maybe the plant coming on can kind of be a buffer for the natural tendency for plants to maybe displace to natural gas. Remember, this program runs through 2021, is the last year thus far that you could earn credits on your machines. There could be some extension of that in Congress, but we wouldn't know that for a year or something like that. The plants are running well. We're generating tax credits. They're doing exactly what we intended, yet all of this survived tax reform. We think that the outcome of tax reform for Gallagher was about as close to an A+ as you could get. We're pretty excited about the fact that we can now pay less in taxes, and we will take that money and reinvest it by buying brokers and risk managers.
In the event that there's not enough brokers to buy or risk managers to buy, we'll use that to repurchase shares. That's the purpose of paying less income taxes to reinvest. It actually is aligned with public policy of, look, we want to reinvest to cause our business to grow more.
Thanks. Did I hear you correctly, Doug, saying that you thought years nine and beyond, you get a 10%-12% cash tax rate?
Yeah, I think so at this point.
Why wouldn't it be higher once the credits kind of-
We have carryovers. I think that right now we have a $750 million carryover. We're producing about 200 and some back here. I think last year we produced $230 million. If we can run for another four years, maybe we can create another billion dollars of tax credits, 800 to a billion, something like that, if we get an extension. We can carry those forward for a period of 20 years. Right now, we're stockpiling credit that we'll be able to use for a long-
Okay. With regards to the efficiency measures you're taking and kind of reinvesting them back in the business-
Not all of them, a significant portion of it, right.
Is it fair to just think about it in the sense of basically giving up some margin while still improving margin a little bit, but maximizing growth over the long run?
I think with this belt-tightening of about 350-400 heads, I think that what we can do is we can maybe alleviate some concerns that as we invest in marketing, as we invest in data and analytics, as we might be negated. In a way of saying it, my sentiment was when I think Greg asked the question of how much is the rugby going to be, my antenna goes up and says, gee, there might be concern that somehow we're going out and spending $100 million on advertising, those type of things. That's not what we're doing. We have targeted approaches to market in those areas where we believe we can hire more people, sell more insurance, and acquire more businesses.
One of the things that on this point, I think it's important to understand having brand recognition, like Jim Gault said. Those that use us love us. Those that don't know us, don't know us. We have to get more people to know us. Also, there is a cultural wave happening where people want to belong and work for a company that makes a difference and matters. Giving back is so important. That's why we talk about culture all the time, and you can't get it on your spreadsheet the way you feel it, hopefully, when you come in or you meet people. We like each other. We like coming to work. We like training with each other. We like helping each other be more successful. That's a culture that's based on love and respect, in my opinion.
Getting people into the culture, they need to know who you are. They need to know what you stand for. We're giving back 90,000 hours. For our 90th anniversary, that was a grassroots thing. Let's give back to the world for 90,000 hours worth of community service rather than making a donation or setting up a statue or making a plaque. Would've been pretty easy to spend the money on 90th anniversary on a statue of Art Gallagher out front, right? Oh, we're celebrating our 90th anniversary. Art would be 120 years old. Here's a statue of him. That's not what we're about. We're about giving back to the community. Having somebody know us. Imagine you're in a smaller city in the U.K. that has a rugby team. You're a broker.
You're selling yourself into an organization that wants to embody the spirit of what's going on in your community. That's important to these folks. You want to work for a company that people know who you are. As a matter of fact, I've got hats back in the back that if you want. Last time it was socks, this time it's hats that have a Gallagher logo on it. Take them. They're $2.91 a piece. I can afford it. It's not expensive. Take two if you want. These things are important when it comes to the culture. Where's the money going in to promote what we're trying to do?
We're not a large consumer-driven company, but we are a large business-to-business driven company, and these positionings are targeted to appeal to business owners or agencies that are owned by individuals or people that want to come to work for us. It's not because I want the phone to start ringing, and all of a sudden, the number of auto policies or homeowner policies starts going up. That's not what this is about. This is appealing to business owners that want to affiliate with somebody like Gallagher.
A few questions. First on clean coal. Part of the laws would expire in 2019, assuming that there's no change. It sounds like there's still the possibility. As we think about our modeling, I know you sometimes say that you can almost maybe shift some of the production on some of the plants. I know it's not part of what keeps the cash tax rate low, but how can we think about the credits and the P&L impact on the corporate segment when we model through 2020?
All right, the real question is, in 2019, what is the impact of our 2009 era plants that may not be generating income in 2020? You can go to page four. You can say that those plants, the 2009 era plants, we believe, make about $17 million-$18 million a year after tax. Again, the difference would be is that those locations, we could take a 2011 era machine and move it into a location that's running and extend the location's life to 2021 on that. I would not say that all of a sudden $17 million-$18 million of GAAP earnings are going to go away because I think that we have techniques in order to at least extend that through 2021.
I'd like to see a law change that does it for us before we move a plant. But again, that's the GAAP earnings. Truthfully, I always worry, and I've said it since we started doing this, the reason why we keep our credits down in the corporate segment is this isn't a GAAP earnings generator for Gallagher. We are a broker and a risk manager, and we have this clean energy investment that creates earnings, but the earnings aren't what matter. It's the tax credits that we can use to create lower cash taxes paid in our brokerage and risk management segment. In answer to your question, the worst case would be a $17 million-$18 million earnings would drop in 2019 on an EPS basis. You can see.
What's the best case?
Best case, I can take one of the lower production plants, the 19. If you look, we have 20 plants, machines that are being used elsewhere, and if they are lower production machines, we will unplug them from the current location, and we will move them to a 2009 location and continue to generate tax credits.
Your GAAP earnings are going down, and your cash is going up.
Correct. Yeah. Cash earnings will go up. The point is, think about this, is that when you go to a coal plant, we put our machines, let's say, right after the coal pile, where we take that machine and we mix the recipe there, and it goes on a conveyor belt later. The machine that's in that infrastructure can be pulled out of there and put in another location. Think about switching an engine on a truck. You can take an engine out of one truck and move it to another truck to extend the life of that chassis in the truck. That's what we can do with these machines. There's delicacies in this, and there's sophistication. It is possible. I would like legislation to just bring the 2009 plants in to expire in 2021 or go to 2022 or 2023. We'll see.
That's something that takes Congressional support on that. We're aligned with extending solar credits and wind credits and those. I think there is an appetite for extending it. It's not a huge amount of money for the economy. It does foster innovation. It is doing what the law provided, so it is in better public policy to extend those. We'll see what we can get done.
Okay. Then, Capsicum Re, can you remind us, I think it's the end of this year or early next year when you have the opportunity to buy the stake that you don't own. Then, there was a reinsurance rank order put out by reinsurance.com recently, it put them with revenue was out just under $50 million last year as the 10th largest reinsurance broker. I'm not sure if you guys have put out any figures. Can you confirm if maybe that's within the ballpark for Capsicum Re?
Yeah, I think the question is, if I recall that article, I'm going from recollection, might've said they were doing $50 million in revenue. I think that directionally it's higher than that right now. That maybe we're seventh or eighth now, we're closing in on number six or five or something like that. But this is a business that's grown from a standing start pretty well over the last 5 years. Actually, it's terrific. I think that Chily and Rupert have done a terrific job of growing that business. We'll look at whether we want to deepen our ownership relationship with that in 2019. There is an option for that by the end of 2019. Do I see it as all or none? Probably not. There could be something in between.
I think that Chily is going to return to manning that ship here this fall, I think it should be a pretty interesting conversation. I'll be over there in November. He'll have early thoughts about it. But listen, it's an exciting part of what we can do. I think that it brings some value to the overall Gallagher organization. I think that it puts us from risk to capital dollar. From exposure to capital dollar, it adds another value in that chain. Frankly, I like the folks. I think they have a culture that aligns pretty well with Gallagher. The real question is: Can we align? Can we do better together? That's the whole thing we have to look at. No, go ahead.
Okay. I think we've digressed from open Q&A at this point.
Sure, fine.
So one-
Your meeting, Greg, go ahead.
That's a generous comment. Thank you. Two things. First of all, last time you updated us on the view of cash flow for the full year 2018. Can you walk us through any changes? It doesn't look like there's any change, but just walk us through the math again on that. I know it's a very small piece of the overall puzzle, but I'd do like just an updated perspective on how SmartMarket is doing financially for you guys and what the impact is there.
SmartMarket is doing well. I don't have a committed number mentally on that, but I would say that I think that whatever we said last time, it's about the same.
It's not growing.
No, it is growing, but I think is it growing 10% where the rest of the business is growing five maybe. It's not like it's a leaps and bounds type issue like that. If it was for $10 million, I would look for it to be $11 million this year, $12 million, something like that. If it's $20 million, maybe it's $22 million, something like that. I'm not evading the question, I just can't remember what the answer is.
Right.
I think it's an opportunity for us to demonstrate that we can design product and we can align risk with risk appetite, and that's important. Remember what we're trying to do is, it makes no sense at all to take a piece of business to a carrier or to a capital provider that has no interest in that risk. It's a waste of their time. It's a waste of our time. Let's align. Let's get out in front and have an aligned discussion about do you have an appetite for this risk or not? If not, then go someplace else with the risk. If you have an appetite in it, what are we going to do to make that policy and that coverage better for the carrier and better for the client, right?
If that means you have to deploy loss control in it to make them better, fine, let's do that. If that means there's an endorsement that's better for the customer, let's do it. This is all about aligning risk, and Mike talked a little bit about that in the CORE360. In terms of cash, I think that the reality of it is going from EBITDA to cash is something that you all have the ability to do pretty easily. You take EBITDA. I already said that we're paying less than 5% in taxes. You know we're running about $120 million of CapEx. You know that we have interest expense, right? Then cash taxes paid, we talked about, and then we pay a dividend that's $300 million.
What it really ends up at the end of the day is that you end up with $600 million-$800 million worth of free cash that can be used for M&A, right? Plus borrowing capacity on that M&A. In our case, we've been running sub 8 times basically for the year. If you can borrow 2.5 times of the EBITDA, then your free cash flow is basically, let's just say it's 5 times. You can buy basically whatever the free cash flow is, you can buy Divide that by 5, and that's about what you can do for M&A capacity. Or you can divide it by 8 and then presume you're going to borrow 2.5 times it, 7.5 to 8. The cash flow is good. We don't have other large demands for cash right now.
Our CapEx is pretty steady to what the depreciation replacement factor is. If you look at our depreciation, it hasn't changed all that much over the number of years, and if it does, it's because when we acquire something, they have fixed assets that depreciate. Our capital asset replacement model, we're not spending more on new than we do having depreciation on the old. That's it. I feel strong about it. I think that our cash accounts, if you go back two years ago, we said we were embarking on an effort to unlock cash through 400, 500, 600 bank accounts around the world. That's gone well. We have unlocked a lot of cash. Right now, we're in really great shape when it comes to cash. I think the borrowing capacity is there. I think the interest rates are still low.
I think that we have plenty of opportunity to do a billion+ of deals, not only in 2018 but in 2019.
Thank you.
Let's go over here. Paul, hi.
I wanted to ask a couple of M&A questions. First, this quarter, last quarter, a number of comments that the pipeline is as big as it's ever been. I'd like to know what's the incremental change that's making it as big as it ever is. Is it internal? Is it external? My second question, which is somewhat related, the cost on an EBITDA basis seems to I remember when it was 6x. Now it's more like 7.5x-8x.
I remember when our multiple was 8x, and it's not.
Right. No argument on the arbitrage, is there a limit beyond eight that's good? The six to eight has been a long time, sort of this commentary. Is there a limit where you start stepping away if it's beyond eight?
Yeah. The question is, when do we back away from it? I think as long as there's positive arbitrage, I think we're not going to chase silly arbitrage. A ridiculous silly low arbitrage on there. The big issue for us is that there's a really an interesting confluence of events that's happening right now, that if you go back, I've been with Gallagher for 15 years now plus. When you go back, Pat and I talked way back when at our early investor days about how the baby boomers are going to reach the point where their kids have all gone off to not sell insurance by and large, and they need to have an exit strategy. That was just pure, the age of the startup broker. That's one way. We talk about that a lot.
The other confluence of events that's just happened is the complexity and the need for capabilities to even be a small broker in what your clients expect from you. Mike talked about that a lot. This business has gone more than your golfing buddy that can place your insurance to somebody that really says, "Wait a minute, my whole business is tied up on the reliance of you placing the insurance the right way for me. I need capabilities to make sure that my family," this is a customer, "that my family fortune isn't lost from an unfortunate loss, especially one that can be anticipated, and actually we can buy insurance on." That to me is the acceleration of the M&A pipeline. Pricing is also up.
People say, "Listen, why not?" I think that the cycle has come out of the P&C sector, the mini cycles that are in there. I think that means the steadiness of cash flows have to be worth more. The more steady the cash flow, theoretically, the higher the multiple and the value is, and less risk. When you've got baby boomers or approaching baby boomers that recognize that our capabilities are so necessary that we can bring to bear, that they say, "I'd rather do it with you for the rest of my career than I would against you." That is what's happening right there right now. I think on the big deals, the multiples can be ridiculous to a certain extent. We're not adversaries. We like our tuck-in acquisitions. We like the revenues 20 and less.
There's a couple $50 million deals on the deal sheet right now, $50 million in revenue, that are making $15 million of EBITDA. Are we going to have to pay nine times for that? Probably. We're trading at 12 or something like that, depending on how you look at it. There's still an arbitrage there, but it's also putting us in a place that we're not. If somebody builds a $50 million agency, it might be 100 years of work that they've spent on that, and that broker isn't going to be available once it's gone. If you look at the William Gallagher acquisition that we did in Boston, it was about $50 million in revenues, if I think about that three years ago. What a home run for us in Boston.
You see the stuff that's happening now in New England that we could have never done with three guys in a shoebox sitting in Boston. I think you see that, especially on the benefits side. Bill and I spoke after he spoke. Just the needs when you sit down and talk to a human resource professional or a CFO that has a responsibility, the last thing that they worry about on their list of needs is what am I going to do for my medical, dental, and vision insurance? We can get that done in a half-hour meeting. That next four hours are all the other things. Retirement plan. What are we going to do for workplace betterment? What are we going to do for training? How are we going to attract the best people?
That is illustrative of the need for expertise delivered by people that you can trust and that you have confidence in. The smaller folks that we buy, they're really good at what they do. They just need more resources and capabilities. There's two really compelling events that are coming together that I think we're right in the sweet spot for that right now. There's enough of them that Hub will get their share, USI will get their share. Brown will, Acrisure, those people will get their share. There's 30-some thousand just in the U.S. alone. I think it's the right time for us, Paul, and the multiples, I think that people are willing to take a fair price because they know they can be better together for us and have a nice long career runway. Mike?
Follow up.
That was a little soapboxy, but whatever.
Follow-up to the M&A question. There's a lot of private equity in the space. It's been in the space for a while. Just curious, you guys pride yourselves on speaking to a lot of the agencies. Do you also speak to the private equity owners?
Sure. We get calls on the books and let me explain. Every book that comes out, by and large, from a PE firm, if they're going to sell or look for a role or something, we get that. We have enough of a network. If there's 10 of them that are presentable, we'll see eight of them, right? Sometimes they just sole source with somebody, and they move on.
I'm curious, at the late tables, there's a lot of those shops. I'm curious if you think maybe some of those could be attractive.
Sure. By the way, there are right now, if I think about it, we just had our meeting yesterday. There are six opportunities on our deal sheet that probably are on the Business Insurance Top 100. That they're there. It doesn't mean they're PE-owned. It could be individual-owned still, or family-owned. The PE shops, I'll be honest, our interest in those, never say never on anything, the problem is you get 60 branches that come along. We're going to love 20 of them. 20 of them we're going to feel, okay, fine, we can make this one. There's going to be 20 that we have absolutely no interest in. For those, I'm willing to pay six times. For the middle ones, I'm willing to pay eight times. We'll say for the really great ones, I'm willing to pay 10, just for the illustration.
The effective multiple on those really good ones end up being 16 times. Why do I want to do that? Just pay eight to nine times or seven to nine times for the really great ones that we like, rather than taking the ones that we don't want. That's the problem because they haven't been enculturated, they haven't been integrated. They are individual branches that operate with a philosophy. Just send in your check. We'll sweep the bank accounts at the end of every day. That's the extent of who they trade under as a common name. No internship, no common system, no common way of doing anything. When we do acquisitions now, our pitch is everything's going to change. We want you to invest in interns. We want you to use our system. We want you to use our offshore centers of excellence.
We want you to use our cash management techniques. We want you to use our general ledger. We want you to go through a budget and planning process. We want you to run our organic sales book culture. Some people just don't want to do that. They want to be left alone. That's good. Sell to the PE firms. We don't want you to sell to us afterwards say, "No, I don't want to do any of that." We want to be better together, our model works. It's proven that we can bring people in, we can actually make them better being part of us.
There'll be people that want to sell to the PE firms want a double bite of the apple, they want to have their ownership changed a whole bunch of times, they just want to send in their check. I think we might be the only broker right now that's pitching deals, mergers based on everything's changing. We're fine with that. That's our strategy. You're going to join us, you're going to become a part of us. We can show you we can bring you the resource that we think will help you be better together. Turn it around to Elyse.
Usually at these meetings, we'll provide a little bit of an update on how the current quarter looks. In terms of the organic, how does the third quarter look? I know on last quarter's call, it seems like more just due to some seasonality with some bonuses, there were some salary increases, there was some margin headwinds. Has anything changed on either organic or margin side from the second quarter?
Great question. I think moving back from Q&A to some of my initial thoughts, here's how I feel about the brokerage business. Probably a little early for me to talk about what will happen with the organic numbers in brokerage. We had a really good second quarter. There's a lot of push to the end of the quarter here, so I don't have really great insight in. I think the business right now feels to me like the second quarter or the first quarter. I don't think there's anything systemically that's changed that would cause the organic in the third quarter to be dramatically different than the first and the second quarter. For the full year, we still feel it a little better than last year for the full year. That's on the brokerage side.
On the Risk Management segment, Scott did say that Risk Management is lumpy, and we talked 10% last quarter. I'm thinking something 3%-5% for Gallagher for Risk Management in the third quarter. Full year, I think Scott said maybe mid to upper single digits for the full year still feels about right for the year, but it is a lumpy business. Profitability-wise, going back to the brokerage side, yeah, we do give most of our raises that hit July 1st. That does put a little bit of margin expansion compression. For the year, if we pull off an organic year better than last year, I think we can have margin expansion a little bit better for the full year too.
In the third quarter, I wouldn't be too bullish on margin expansion just because of the timing of raises on the seasonality of the Pronto acquisition. Risk Management, in the 17%-17.5% range is what we've been saying. I think we can pull that off. Even with 3%-5% organic growth, I feel pretty good about that. Clean energy too. That's the other earnings vehicle. Even though it's not GAAP earnings, in my opinion, I think that we're on track for a year within our guidance. Overall, the health of the business seems good, like I said on my opening remarks, and I think that should translate into another quarter of what I consider to be really good results.
I think that our organic growth was terrific in the second quarter, and I think our margin expansion was good in the second quarter. I think we got caught up. There seemed to be a little bit of noise around the impact of tax reform, which kind of is befuddling to me, that maybe took a little shine off the stock and right when we did the earnings release last time. I think that those laws are becoming better known at this point. I would hope for some nice technical corrections that might come up in the lame duck session on the tax reform that might help us with some of that. We're still a ways away from that.
Overall, I see it Listen, add up the first and the second quarter and divide by two and it might be kind of what you'd see on the third quarter. Mike?
Should I wait?
Yeah. Sure. Let's wait. How are we on time? I don't have a watch.
It's 11:30.
I guess just to be clear, what are you waiting for on tax reform? Should we be thinking about that BEAT, the acronym, impacting Gallagher at all?
Base Erosion Tax. There's two things. The GILTI Tax, which basically negates some of the value of your interest deductions. I think the Base Erosion Tax is something that there. I think there are going to be some technical corrections, one in particular is the fact that financial services firms have some of their interest expense deductions eliminated if it's in the U.S. and you're buying foreign assets with it. Well, if we're buying foreign brokers, that's an intangible asset. Let me put it this way. If you have intangible assets internationally, the value of your interest deduction is diminished a little bit. If you have hard assets internationally, you don't have quite as much of a haircut. If we're running $150 million of interest, I might have to take a haircut. I mean, Sarah's here.
I mean, our interest haircut might be $20 million or something like that. Somewhere in there. It might cost us six or eight million. The difference is, I may have to, on one line of the tax return, say I've got to pay more GILTI Tax, is what it's called. On the other hand, I get to use more credits. The amount of cash that I'm actually sending to the government doesn't go up. I might take a book charge for that $20 million, let's say, of it, but I wouldn't have a cash taxes paid. We would not send more cash to the government. Those things, if we can get some of those things corrected in the lame duck session, maybe the impact of that on the book income would be less.
I want that to be, if we can get it fixed, great. I know the U.S. Chamber of Commerce is working on it, and other lobby groups are working on it. If it happens, and we get that technically corrected, fine. If we can't, all right, fine. I've got a little bit of book expense, but it's not cash expense we got. That's what we'll find on almost all of these nuances. Some executive compensation is no longer deductible. Some entertainment expenses are no longer deductible. All right, we don't get a deduction. I just use some of our tax credits. Our tax credits, I'm not going to say they're free, but they're pretty close to free. The amount of cost that we take to create them isn't very much. I'll just use more tax credits. For us, again, tax reform's a win.
We're not going to pay a lot of tax, but there's some work to be done through Congress this fall if we can get it done. We as a collective, not necessarily just me. Other questions. I can go through in some of my notes here to see that we touched on things. You feel good about the rates around the world. I want to make sure everybody understands because sometimes there's a little bit of a mix on that. Almost on every single line, we're seeing rate increases. The only places you're seeing, except for maybe workers' comp, the only place that you're seeing greater than 5% rate is property, and then maybe it's closer to 10% on cat-exposed property or coastal-exposed property. Every other line is up 1%, 2%, 3%. Workers' comp is maybe off just a smidge. Again, maybe it's down 2%.
I don't have the charts here in front of me, but I think that's pretty close. M&A pipeline you talked about. It's huge right now. I think that we've been saying that. There's plenty of M&A pipeline. We've said that I think we've got 60 deals being agreed or prepared right now, around $350 million of revenue. I think that's basically what we said at the KBW conference and the second quarter call. There seems to be kind of this level that for all the deals that are getting done, there's just as many popping up. I would say that's a healthy M&A pipeline. I'm just trying to look here through the notes. What do I think about Hurricane Florence? Hopefully, everybody's okay.
I think it's going to be probably more of a flood event than it would be a wind event at this point. What do I know what 110 mile an hour does for three days sitting over your house? It's got to do something. Other questions? Anything else from the group? All right. I think we might be done for today. Thank you very much for listening to the story. Hopefully, you found the excitement in each of the folks. You think that they're working their business. They're plugged in. I think it's a really terrific time to be a broker right now, and I think Gallagher's shining bright in that entire space. I appreciate you making time to come and spend the morning with us because I think it's very important for you to hear our story today. Thanks to everybody for coming.
Grab your hat on the way out. Thanks, everybody.