I'm Ray Iardella, Head of Investor Relations here at Arthur J. Gallagher & Co. I want to welcome everyone to our second quarter 2018 investor meeting, including those of you that are attending here in Rolling Meadows and those of you who are listening on the webcast. Each speaker today will be providing about 20 minutes of prepared remarks. Then we will open up for Q&A. For those of you that are here in the room, note that we have a handheld mic we'll be using during Q&A. For the benefit of those on the webcast, please wait until you have a mic before you ask a question. Additionally, we just handed out our CFO commentary document, and we posted the same document to our website at www.ajg.com/june13materials. An 8-K regarding this information was filed this morning as well.
Before we get started, I would like to make a quick legal comment. Some of the comments made during today's meetings, 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. Pat?
Thank you very much, Ray. Am I on, Patrick? Thank you. Welcome, everybody. It's good to see familiar faces in the audience, and we appreciate you taking the time to spend the morning with us this morning. As is my custom, I just want to tee the day up, basically. Most of you were at our last conference, which wasn't that long ago. I think you kind of when I look at the faces, I know you're very familiar with the story, and the story is not changing much. Today, we'll do what we've done in the past, which is have our operating leadership spend some time with you. As Ray said, we'll spend a few minutes on prepared remarks, then let you just dive right into the business. What are we seeing out there? What's working? What isn't working?
You've got our operating heads, and you have Doug Howell, CFO, who can spend some time on the CFO commentary. What I'd like to do is just remind you that, again, the story hasn't changed. We're trying to do four things. We try every day to get up and do what we can to grow organically. Organic growth is a key, not strategy, but it's what we're about every single minute, is what are we doing to make sure that we keep our accounts? What are we doing to make sure we bring in new accounts? And what are we doing to grow our business off of just blocking and tackling and selling and making sure people know what Gallagher does. The second thing we're trying to do is mergers and acquisitions. I'll touch on that.
The third thing is we're constantly diligently working on being more productive and having a higher level of quality, which we do believe over time will help us with one and two, which is organic and mergers. The fourth thing, and we spend a lot of time on this, and people ask me how I spend my time. I'm excited because when I'm done with this, I'm going to run over to the Hyatt Hotel, which is about a mile away, and I'm going to spend an hour and a half with 400 interns, which is really, to me, the internship lights up our summer every summer. This year, I think our team has gone to a whole another level. Last year, we had about 300. This year, we have actually over 400 interns in the U.S.
If you add what we're doing with internships in Australia, New Zealand, England, and Canada, and to some degree, Latin America, we're probably up over 500. I think that's probably the biggest commitment in the industry to bringing young people into some form of knowledge about what we do. The reason I love that is I was an intern, and my dad started the internship program because in the early '60s, he realized, like himself and his brothers, there were only two ways to get into insurance. You either were born in it or you fell into it. Nobody chose it, and I think that's changed. We now have schools that are teaching risk management and insurance, which is great. Those curriculums, Temple, Georgia, Drake, others, Illinois State, have made a difference in the industry, and I think the industry has garnered a better reputation.
Nonetheless, introducing 400, and of that 400, we will probably recruit half of them, maybe a little less than that, and we will have probably 80% of the kids that we offer jobs to will take them. 60% of those kids will be with us in five years, and 60% of those young people will be with us 20 years later. It's really been an important program to the company. You're going to see Mike Pesch today, who runs the U.S. from the property casualty perspective. He was an intern. I was an intern. Jim Gault, who's the chairman of our global property casualty brokers, was an intern. This is how important this program has been to us. That's all about the culture.
Let me go back to my prepared remarks, which are, if you take a look at the rate environment today, I think that's a question everybody asks is, let's run off rates. My view on the rate environment over the last eight years has been pretty much this has been flattish. Reinsurance is up slightly as we come into the second half of the year. Property is up slightly. Transportation is up a little bit more. Australia and New Zealand are probably mid-single digits firming. Canada's flat. London specialty is still soft. When you take it all together, you're getting impacted by rate by probably about 1% favorably. Really, if you think about rate, it's similar to what we told you at the end of the first quarter, which is not dissimilar to what we told you in 2017, and this is a good thing.
The muscle memory in the property casualty business is for people to ask, are we in a soft or are we in a hard market? It was night and day, black and white. It's either really softening or it's really hardening. That was true from the late '60s right into 2005, 2006. 2005, the market softened substantially, and by about 2008, 2009, it flattened. We've had about 8 years, 8 to 9 years, of where rates sometimes are up 2%, sometimes they're down 2%. Mostly, it's kind of hanging around 1%. To me, that's a flat market. Let's just call it a flat market. Why that's important is in a softening market, when it's really soft, anybody can beat your quote.
You go out, the next thing you know, you've got a little broker down the street, he's found the market, bam, you're losing the thing to 25% off. That's not happening. The flip side is true in a hard market. Everybody's pissed off because rates are jumping 25%, 30%, 15%, 20%, whatever, in many instances, for no reason. You haven't had the losses. It's just the market. I think what's happened is that the underwriting companies have gotten really more scientific at having mini cycles inside the lines of coverage that they're providing. Right now, for instance, workers' compensation is not hard. It's softening a bit. Probably should be softening a bit. You'll recall that property, until this past year, softened for probably 5, 6, 7, 8 years, that was also, I think, appropriate because there hadn't been a bad storm.
I think what's happening is these inside the lines of coverage, little mini cycles are basically flattening the market, which I think is a good thing for Gallagher because it allows us to take our capabilities, which are really key to our organic growth. You're going to hear today about our niches and our niche marketing, the fact that in 32 or so verticals, we think we're stronger than anybody, we're not afraid to compete with anybody. We also know that 90% of the time when we go out to compete, we're competing with somebody smaller than we are. The capabilities thing is getting to be, I think, a stronger and stronger influence on our ability to grow organically.
I'm proud of the fact that for most quarters, if you look back probably over 8 years, 32 quarters, we've either been number 1 or number 2 in organic growth in most of those quarters. We do have a culture that says every day, from myself all the way through the organization, what we're about is helping people hold onto accounts and get new ones. The merger and acquisition activity right now is fantastic. We've probably done over 400 acquisitions in the last 10 years. Most of those average something on the order of $5 million to $6 million in total revenue. These are tuck-in acquisitions. 2014, we made some big moves in Australia, New Zealand, Canada, and the U.K.
That basically, as we said at the time, was to tee us up to be able to do tuck-in acquisitions in those locations as well, and those pipelines are very strong. Again, these are not big jumbo deals. Most of the ones that we're announcing are something on the order of $3 million to $7 million in total revenue, and they tuck in. This is a real core competence for us because here's the secret sauce. We have to determine during the process whether you're going to fit us culturally because these are all entrepreneurial-driven firms. Are you going to stay and be excited about selling insurance and helping clients with our capabilities?
Are you going to be someone who gets excited about moving to the next level and saying, "Now I can attack accounts that I never could attack before." We get that right well over 90% of the time. When I talk to both investment people and business school professors, they will oftentimes just say to me, "I don't believe it, that the merger approach to business just simply doesn't work." We, I think over the last 34 years of being a public company, have proved that it can work, but you have to get the people right. This is something I think our group is really, really good at.
When you take a look at the landscape in the brokerage world, there's probably about, according to Bobby Reagan, who studies our industry, is a solid consultant in our business, he believes there's 39,000 agents and brokers in the U.S. alone. That's not people, that's firms. According to his research, every time one gets sold, another one starts, because really they're not diminishing in number. The opportunity for us, when you take a look at Business Insurance, last July's broker issue, number 100 on the Business Insurance list of agents and brokers did $26 million in total revenue. There's 38,900 of them smaller than $26 million. Yes, there is competition in the merger and acquisition world. Private equity is very active in our market. There's a lot of competition. I call every one of our merger partners after we close the deal.
I don't care if they're $2 million, and thank them for going through the process with us. You're buying these things that we think is a very fair price, close to 7.5 times to 8.5 times, so EBITDA. They can make more, though, by being successful producing. If you come aboard, you use our capabilities, you're excited, you triple your broker business, we will triple your base comp. You will participate in the growth of the stock through our LTIP programs, options, et cetera. You can do as well at Gallagher as you can at a private equity firm if you're successful after the fact, and you don't get to just sit around and wait for the next sale, but you're part of an enterprise that loves this business and is excited to be in it and is willing to help you grow.
In terms of productivity and quality, I think you've heard us talk about our centers of excellence, primarily in India, now also in Las Vegas. There's all kinds of services that are being provided by these people. The level of quality is astronomical. We will do probably on the order of $1 million-$2 million certificates of insurance out of India this year. We measure that every day. We measure that every week. We measure everything. We know that our quality when it comes to issuing certificates is over 99%, and one digit wrong in an address is an error. The interesting thing about that is when I talk in front of agents and broker groups, I ask, "How many of you have any idea what the level of quality is in the certificates that you're putting out?" The answer is none of them. They don't know.
They don't measure it. Now I think that's going to help us with organic growth because it's important to get your certs right. If I'm a contractor and you screw up my certificate, I get kicked off the job. If I don't get the certificate the day I need it, I have to start the job late. Certificates of insurance are really important to clients, and we know that we're doing them at a level that other people can't prove out. That's just one minor service of all the things that we're doing out of India that are giving our people, I think, a real opportunity to talk about quality.
A lot of data analytics, spending a lot of time on our own data, what's happening with our renewal book, what's happening with our new business, what's going on in Salesforce, what's happening with rates by geography, by line of coverage, by office. Our data warehouse, SharePoint, is getting stronger and stronger. We're now trying to get claim information into it so that the point I'm making here is that as we get bigger and have more data, we're mining that data, and even middle-market clients are starting to ask us, "How do I know I have a good deal?" Now, my answer to that 30 years ago was I went to The Hartford and CNA, I got, "This is your best deal." That's not what clients want to hear today. They want to hear, "We do this many of these.
We do them all around the world. We know this market. Typical rates are this, your losses are that, you've got a really good deal." Data and analytics is becoming a much more important part of what we do every day, we're spending a ton of time on that. Then lastly, culture. Hopefully, those of you that are in the room can feel it. Take your time as you make your way to the restroom, go downstairs into our commons, watch the people interact. I think this building basically exhibits the culture of the company, which is really, really important to us. Every single day, I probably spend at least half my day on something that has to do with the culture. That this morning, as I said, would be spending my morning with 400 interns. This afternoon, it'll be on something else. Everybody gets it.
We did an acquisition, a small acquisition in Ohio this past month. There was a great story that came out yesterday on my global conference call. The person who started the acquisition got promoted and moved. The person who ran our Cincinnati office took over the acquisition. He got promoted and moved. A third person came and took the acquisition. He got promoted and moved. The fourth person closed the acquisition. The acquisition partner's whole commentary to the person who runs the region is, "I can't believe how consistent everybody was. I started with so-and-so, moved to so-and-so, moved to so-and-so, closed with so-and-so, and I'm excited to be here." That's being together. I think that's really, really important.
One of the things that I have a slide that I show people all the time is I go back to when I became president in 1990. If you take a look at the landscape of who the brokerage business was comprised of in 1990, we were the 13th largest. Today, there are three of those top 20 left. It's important. Culture is really, really important. Again, welcome to our headquarters. Thank you for taking your time. I'm happy to take any questions you might have for me. Greg?
Good morning, Pat. Greg Peters from Raymond James. I know with interest your comments around data analytics and what you're talking to carriers about. Can you spend a minute and just give us some more color around that and specifically what the carrier's reaction is to the analytics that you're providing and are you charging them for it, et cetera?
Around data analytics, we've got a number of, literally dozens of projects. I'll give you kind of an overview. To begin with, we're loading every bit of data that we can out of our agency systems into a SharePoint data warehouse globally. We're going to know if we're doing a construction account in Minnesota. We're doing a construction account in Plymouth, England. We're going to know what's going on with those accounts. We're going to know what's happening with the rates. We're going to know what's happening with the losses. We're going to be able to pull that data out so that our production team will be able to look at that and say, "Hey, by the way, we're really good at bakeries. I'm going to go get every bakery in town." That's one.
We're going to use Salesforce in a much more robust way. We've used Salesforce now for 5 years, and it's been great. That's how we know that 90% of the time you compete with somebody smaller than us. We're learning, and Salesforce is helping us learn how to use it in a more robust fashion. For instance, as a producer comes out of an account, he can literally make a phone call through a recording and say, "I've just had a meeting with Greg Peters from Raymond James. His anniversary date is next October, and he is interested in talking to us about benefits." Someone would put that in Salesforce and go and look up Raymond James and fill the whole database with all you could find on the web about Raymond James. That populates that, and the entire team can look at that.
Greg's had a good meeting with Pat Gallagher, and by the way, who's talking to him about the benefits? Right? There's those types of projects. We are, in fact, selling data to insurance companies. This is called SmartMarket. SmartMarket is a way for them to look into our renewal book and to ask a producer for an opportunity. You're the underwriter at, I won't name any of the individual customers, but you're an underwriter, and you can look in and say, "My God, I didn't know that Gallagher had the XYZ account. I would really like an opportunity at that." Now, our producer's under no obligation to show it. This comes to you and says, "Greg, you're the producer on the Gallagher account, and I'm really interested in that." You can say, "Thank you very much. My client is happy.
I'm not marketing it." However, what's happening quite often is you're going, "Whoa, I didn't know XYZ Insurance would like that. Yeah, my client's interested. I'm interested." Those accounts, and now they can also look into our Salesforce pipeline. Here we're coming with new business, and XYZ Insurance company can look in and say, "Greg, you're working on such and such. Please put me on your list." This is having a very positive impact on the carriers that are doing it, and we're not doing it to every carrier. We're working with in a limited amount carriers that we think are really good partners. On top of that, we probably have now 50 projects going on in the organization around robotics. When we talk about data and analytics, it is a diverse across the company, across the globe focus on IT capabilities.
Next step, of course, will be AI, we see big, big opportunities. Of course, we're keeping our eye on all the Insurtech investments. There's just a whole lot going on there. We're spending the time and the resources to be on top of it, and we think it'll benefit us big time in the long run. Elyse?
Thanks. Elyse Greenspan, Wells Fargo. My question, you gave us a view kind of how the market sits today, still seems to be kind of more positive than negative. Assuming that the rating environment stays on its same trajectory, can you give us an initial feel? How does 2019 look? Can Gallagher maintain the same momentum, 4.5%-5% organic growth, assuming about a one-point pricing environment in all the different areas you're in?
Sure. I do. I think we told you coming into 2018 that 2018 felt a lot like 2017, maybe a smidge better, and I think we're seeing that. I think if you look out to 2019, if the environment stays the way it is, I think it will be a similar type of organic growth. Which is really, I mean, to me, it's really positive. We're spending a lot of time on organic growth. One point of organic growth improvement is a huge deal. We know that, and we are mining our own data. That's another one, Greg. We're looking at every account and what lines of coverage are we writing on that account, and why aren't we writing them all? We call that white space. What are you doing? You're sitting on two lines of coverage? Go find 12. Come on.
Kind of a follow-up to Greg's question. How do privacy laws that are changing daily affect all these analytics-
Oh, that's a-
since you have so much data on individuals?
Yeah, we've got to be careful with that. First of all, personal information not included in any of this. We're not analyzing Gallagher Bassett of opioid use by individuals. That's not our game. I think we're very careful to make sure that anything that would be private information is kept that way. You can do analytics around, for instance, claims that occur to this part of body, claims that occur in this geography. You can do analytics around what happens when we write all the bakeries in New Zealand. Why aren't we doing that in Australia? You can do that without, I think, having anything that has to do with really private information in the hands of your people. Of course, we're obviously very, very cautious about the whole HIPAA thing. My benefits people are big on that.
You do have the privacy consumer that are now substantially stronger, we're going to begin to pay attention to that. I think cyber risk, by the way, is to me, it's the greatest new risk that's come down the pike in the last 25 years, it's on our risk register, number one. We're watching that, are we perfectly mapped? This is also an opportunity for us. You cannot believe how many of our clients turn down that cover. We're telling our people they have to offer it to every single client. I don't care if you're a gas station, buy the cover. I'm serious. You're taking credit cards, buy the coverage. It's cheap. We can now, in three questions, quote, find, and issue online a cyber quote for small accounts. Buy it. I've got a friend of mine who does websites.
He works out of his home. I said, "John, buy it." He didn't. Shitty salesman.
Good morning, Raj Ratnesh with BofAML.
Hey, Raj.
A couple questions. First one, you talked about rate being 1% positive. Where was that number this time last year? Second question, on the earnings call, you talked about maybe nearer term 4% being more like the bogey for some margin expansion versus the 3% organic that you talked about historically. What are you seeing in the external environment, whether it's wage inflation or other cost pressures that might have moved that?
I'll have Doug take the specific numbers. Let me go back to your first part of your question. A year ago, Raj, I would say rates were probably a half a point to a point drag. Now they're half a point to a point tailwind. I look at that as flat. That's because, look, clients that deserve a 10% discount are getting it. Now people are going into the market and saying, "Hey, this guy has run a business." He or she's run a business, and they've provided you with X dollars of premium over the last 10 years, they've never put a claim in. You're going to take a flat renewal. By the way, if you're going to be flat, I'm going to move it. Now, that's not happening to every account. Obviously, it's not a soft market, but that does moderate things.
In terms of rate, I would tell you to plug into your models flat, just because that's how I feel it is. When it comes to the other things in terms of margin expansion and all the rest, I'll let Doug take those questions when he gets into the CFO comments because those are more complicated and I think need a little bit more granularization.
Yeah.
I was talking to-
Jayme Wiggins with Citi. You mentioned Insurtech briefly. Could you maybe give us two or three examples of projects you're working on now that insurance companies are investing in on the Insurtech side that they expect to drive efficiencies in two or three years from now?
Probably the best example, and this is not an Insurtech investment, but if you take a look at what we're doing, for instance, with our small accounts and one of our partners, The Hartford, that they're doing with small accounts and utilizing IBM's Watson, for instance, to do certificates of insurance automating, robotizing at some point, artificial intelligence-ing, if that's a word, a lot of what's going on in small business. I'll give you an example. We have a project right now coming out of our small business unit that is starting off by quoting the account before the profile. "Jayme," heck, Gallagher. "I sent you your quote. Any interest in that?" You haven't filled out an application. Now, that's small business. Another example of what I would call Insurtech inside Gallagher, I mentioned the cyber accounts on small accounts, medium to small accounts.
We give them three or four questions, give you a cyber quote in 30 seconds. We combined it. We have 16 products that we're trying to bring live in that same environment right now. You'll be able to get a builders risk quote. You'll be able to get a D&O quote for a small private company. You'll be able to get a small professional indemnity quote if you're a consultant, that type of thing, by coming online, answering three or four questions, getting a quote, signing it, issuing it, done, no human touch. When it comes to insurtech investments, let's think Lemonade, let's think Zenefits. We basically have Rick that's watching all those. Let's think Trōv. These are people that are raising funds in angel rounds and the like that believe they've got disruptive ideas, and some of those will be successful.
The beauty we bring, I think, is that we have tremendous domain knowledge and distribution capabilities. Almost any of those, if we decided, boy, we should partner with them, the phone call from Gallagher to XYZ Investment that says, "We're watching what you're doing. We think it's pretty clever. We'd like to consider partnering with you," I think could be considered pretty damn strong. We've got zero of those. Zero. I'm not going to go down the track that many of my partner insurance companies are doing. We are not going to set up a venture fund. We're not going to say we'll take $70 million a year and go out and make sure we invest it in insurtech ideas with smart, young engineers that are going to disrupt the business. We're not doing that.
What we're going to do is watch it really carefully and use the power that we have being in this business when there's something that we say, "That's smart." By the way, I haven't seen any of those.
Underlying economy getting a little better?
Yeah. That's good news and bad news, by the way. We've really, I think, done an unbelievably good job from the procurement side of getting what we can get out of our real estate spend, getting what we can get out of buying things better, and what you're getting into is a full employment situation. Doug can talk about it more in his commentary, but in the financial crisis, it was not that difficult to replace people. We're finding it more difficult today to fill the seat, which is pushing the price up. It's good and it's bad, but the fact is, I think we will always benefit from a better business environment on the business side. Our customers' businesses are pretty healthy, which leads to positive audits, stuff like that.
We're out of time.
Okay.
Thank you.
Thank you, everybody, for being here. Great to see you again this morning, and hope you have a great morning. Thanks.
Thank you. Next up, we have Mike Pesch. He's the leader of our U.S. Retail Property and Casualty Brokerage Operations. Mike, the next few minutes are yours.
Thanks, Ray. You guys hear me okay? Good morning. I appreciate you taking the time this morning. I will try not to duplicate a lot of Pat's commentary, although some of it will be repetitive because our message is very consistent along with things that we want to accomplish. A little background on me. Pardon my voice, I'm just getting over something here, but I started in this company as an intern. The group that Pat's gone to see, the 400 kids that we have, I was with them all last night. It's a great group of kids. We're excited to have them. My class, 27 years ago, was 15. Just the scale at which we are now bringing young people into this business is just fantastic. We understand it's important not only for our own perpetuation, but perpetuation of the industry.
This industry certainly has its challenges when it comes to the aging population of our employee base. I'm excited for what Pat's going to do when I speak to those folks tomorrow. I'm responsible for the U.S. retail property and casualty business. That business is about $1 billion, $3 billion or $4 billion in annualized revenue. It's scattered all throughout the U.S. We have offices in just about every major metropolitan area, about over 100 all in. It's about 4,600 employees. Day in, day out, we sell property and casualty insurance from everything from personal lines all the way up through your largest Fortune 500 clientele. I would tell you that for the most part, we compete, and Pat's right, we compete 90% of the time against an insurance broker, local insurance broker who's smaller than us.
In fact, most of the time, we're competing in what we call the middle market. That's companies that have anywhere from $50 million in annual revenues up to a quarter billion dollars in annual revenues. That's not to say we don't insure some of the largest employers in this country, but for the most part, we're competing day to day against smaller brokers in the middle market. Why is that important? Well, it's important from the standpoint of everything that Pat was describing to you, that I'll get into in a little more detail in terms of the deliverables, the things that we bring to market, the services and resources and tools that we bring to market that that group of clientele doesn't necessarily get from their local brokers. Okay? What we do every day, we place coverage for our clients. That's in its simplest form.
What we try to demonstrate to our customers is that there's a lot more to it than just placing coverage, going out to the market, finding a price, and procuring the insurance. There's a lot more to it from the standpoint of helping those customers become safer employers, helping those customers have an advantage in the marketplace through things that we can provide to them to make them better at what they do from a risk management perspective. I'll get into that in a little bit more detail later. By and large, that's what we do. Every single day, our folks are out there placing coverage on behalf, property and casualty coverage on behalf of our clients. Everything from your basic lines of coverage, your workers' compensation here in the U.S., to your property, general liability, auto, umbrella.
As you heard from Pat, things like cyber, other lines of coverage that are becoming more and more environmental, that are becoming more and more sensitive and are optional. These clients many times don't have to buy it. You heard about Pat's friend, small employer, trying to convince them to buy a coverage they don't necessarily have to buy. That takes a lot of information. That takes a lot of data to support that decision. Again, I'll talk about that a little bit later. That's basically who we are. Again, about $1 billion, $1.4 billion in revenues. Our margins are right in the mid-to-upper 20s. We have a very good, well-run operation. I'll talk about that from an efficiency standpoint a little bit later as well.
Like Pat, I'll go through the four critical things that we try to do as leaders within our business. My business is broken down into 10 regions. I have 10 regional presidents. That's new for those of you who are new. I took this role in December 2016, and when we transitioned that role, and I took over the U.S. operation, we went from five regions to 10. We think that's given us a lot more ability to stay really connected, not only to our producers, but to our customers. The team of people that I have working with me, most of them have been here more than 15 or 20 years. Many of them started like I did, out of the internship program. Several of them came to us through acquisitions.
I'm excited about our future with the leaders that we have. Those leaders are trying to do four things every day, just like Pat described. We're trying to grow organically, I'll talk about that. We're trying to do mergers and acquisitions, I'll go into a little bit more detail on that. We're trying to be as productive as possible, Pat alluded to a lot of the things that we're doing, so I'll try not to duplicate some of the comments that he made. Of course, we're trying to maintain what we think is a pretty special culture. Organic growth. That's really what it's all about. Obviously, you heard a little bit about the marketplace, Pat's right. We're seeing about 1%. As we see it, we get into a little bit more detail, it's a rational marketplace.
Someone asked the question, what was it like this time last year? This time last year, we hadn't gone through Hurricane Harvey, Hurricane Irma, hadn't gone through the wildfires in Northern California. Those definitely had an impact in terms of the rationalization of the pricing model. What I mean by that is, if you've got a client that has property exposure in a cat prone area, there's rational pricing. They're likely to see an increase, and it might be somewhat substantial, especially if they had claims attributable to some of those disasters. If you're in a part of the world where you don't have that exposure and you didn't have claims, you're likely to see flat, maybe even downward pressure on pricing. Auto. You probably read all about it. Commercial auto is a very difficult underwrite right now. Why is that?
You've got distracted driving, of course. You've got the fact that if you hit somebody's bumper today, and it costs a heck of a lot more than it cost five years ago, 10 years ago, with all the electronics and information on the cars today. Auto pricing is continuing, no matter where you're at in the country, continuing to see some hardening. Workers' compensation, the exact opposite. We're getting better. We're getting safer. Some of that's because of what we're doing as an organization to help our employers and our clients become safer. There's downward pressure on workers' compensation. Directors and officers liability, again, a mixed bag, depending if you're in the financial services industry, might be a little bit upward pressure. If you're a large manufacturer, probably going to see some rate relief.
Again, I think it's rational pricing, but when you look at the big picture, stand at 30,000 feet, it's about 1%. If that's a tailwind, that's a tailwind. Certainly not 5% and 10% decreases across the board. That's a good thing. What that helps us do from an organic growth standpoint is tell our story and what we can do to help deliver value to that customer. What can we do to make them a safer environment? What can we do to show them, through the use of our information, what they should be buying and where they should be buying it from? Pat talked from an organic growth standpoint about some of the things that we're doing with our carriers. He mentioned SmartMarket. I just want to clarify something. We don't share our clients' information in terms of the name of the company.
We ensure general information about, this is a real estate account. Here's the general makeup of that real estate account. Are you interested in that kind of account? For us, it's the equivalent of, we always say it's sort of our internal Uber. It connects willing sellers with willing buyers through an electronic platform. That's what SmartMarket does. It really truly is an efficiency play. Our brokers are out there constantly. There's 300 insurance companies that we trade with. They're constantly trying to figure out who's the best fit. We handpicked the top 10, 12, maybe upwards of 15 carriers that we said, these are the ones that we want to be more efficient with. These are the carriers that have big market share, that have broad appetites, that trade in the geographies that we're in.
We want to give them access for a fee to our information. Again, limited information, not specific client information, so that they can help us make decisions about when our clients are going to go to market. It truly is an efficiency play. If you think about it, in Pat's example, historically speaking, in our world, if we were going to go to market on behalf of our customer, we have a producer sitting in our office, maybe walk around, talk to other producers, say, "Who should I go to? Who should I talk to? What carriers might be interested?" Now we've created that Uber platform, where we've got electronic transfer of information to connect willing sellers with willing buyers. Now that producer's a lot more efficient, a lot more effective. It's our go-to-market strategy.
When we compete against the small brokers, we go to the client or the prospective client and say, "What's your broker's go-to-market strategy? How are they going to guarantee that this company, this insurance carrier, is interested in your business at the right time when you're ready to go to market?" The answer usually is, "Well, I have to go meet with them and talk with them." It's completely inefficient, and it's completely fraught with the opportunity to miss an opportunity to connect that client with that carrier. That's what SmartMarket does for us. We're using our data. There's a lot of questions around data. I can tell you we're using our data to help our producers understand where there is maybe opportunities to expand their compensation. It's commission, we call it commission adequacy.
We know what our clients or what our carriers pay us on every trade. If I'm a producer sitting in Des Moines, Iowa, and I've got an auto placement, I know that at the upper bound of all of auto placements within Gallagher, our carriers are paying us X as a percentage. Most of the time, we're paid on a commission, about 85% of the time. 15% of the time, we're paid on a fee, an agreement with our customer. If we're paid on a commission, we're fully transparent. Client knows what we're making. We want to make sure that we're paid optimally, that our carriers are paying us on par with what other carriers are paying us.
The ability to use that data to get compensation to a point where it's fair and consistent across the board is a huge advantage and part of our organic growth strategy. From a deliverable to our clients, we rolled out about three years ago, a value proposition called CORE360. Basically, six key cost drivers. I won't go into all of them. I would need a PowerPoint to do that. Basically, it helps our producers describe what we do for our customers. It's not just about, again, going to market, finding the right insurance company, placing that coverage. It's about all the other things we can do for them, from uninsured and underinsured exposures to contractual liability. A lot of our clients have contractual liability that we have to help guide them through. We have resources and tools, electronic tools, to help them do that.
Pat mentioned certificates. One of the biggest things that our clients face every day, if you're a manufacturer or a contractor, and you have people coming on your job site or to your location, you have to make sure that they have proper insurance. That's a big dilemma for a lot of employers, because if they have an uninsured contractor on their premises and that person gets hurt, that creates a whole liability chain. We have electronic tools to help them manage that process so that they never have someone on their premises who is uninsured or underinsured. That's a huge advantage. That has nothing to do with actually placing insurance, but it has everything to do with avoiding litigation. That's part of what we talk about when we talk about CORE360.
CORE360 is also about preventing losses and helping clients deal with losses when they have a claim. My team has 175 people scattered throughout the U.S. that do nothing all day than help our clients prevent losses, safety engineers, or when they have a claim, help them deal with that claim. Not just quote the claim, not just simply transact papers. What do I do when I have a big workers' compensation claim? How do I deal with that? Those are just some of the tools. One of the other ones I mentioned, Client Advantage. We realized that because of our size, that we could go to our carriers and say, "Hey, listen, we want certain endorsements added to this line of coverage." Umbrella is the perfect example of that. The umbrella line of coverage is usually the last thing a producer places.
We were able to go to a handful of carriers and say, "We want these 12 endorsements added to every trade." It's good for the customer, it's good for us because they were willing to pay us additional compensation as a result, and it's good for them because they're going to get the lion's share of our volume because it's better quality coverage. Leveraging our strength in the marketplace, we call it Client Advantage, and we've ticked off now about seven other lines of coverage that we're doing this for to help our customers, help our producers place better coverage on behalf of our customers. Those are just a handful of things we're doing from an organic growth standpoint. Talk about M&A. M&A marketplace in the U.S., certainly competitive. We have a pipeline that is bigger than it has ever been.
We're off to a pretty good start this year. We've got a pipeline that I think is hopefully, knock on wood, we can close some of these deals, should lead to as good or slightly better year this year than we had last year. I can tell you that all the things I described in organic growth become very important to our merger prospects. One of the things we also did was we added some firepower. We added five more people who are committed every single day to do only one thing, and that is build relationships with local insurance brokers. That's right, there's 30,000-40,000 of them out there. Building a rapport with them so that when they're ready to perpetuate, they understand the value that we drive to their customers.
The good ones, the cultural fits, the ones that are not in it to just hand over the keys and walk away. The ones that are in it to grow their business or to perpetuate their business and care about their customers and care about the value that's driven to their customers. If we get the opportunity, it's the reason why we did it, to tell our story, to give them our message about what we're trying to do and the enterprise we're trying to build to be a world-class insurance broker, we are more successful at closing those deals. If we jump ball and there's a broker involved, not to say that we don't win our fair share of those, but it's more difficult to tell your story about why they would want to choose Gallagher instead of choosing somebody else.
We're very keen to that, and we're very assertive and aggressive out in the marketplace trying to tell our story. It's working. Our pipeline is significant. These folks sell because they need these resources. It's very difficult to reinvest in this business, especially at the level that we're talking about today. As I mentioned, we were talking about organic growth Pat talked about it, and there were several questions about it, but data is becoming more and more important. Our clients, maybe it's the Amazon generation of buyers, but our clients want to know, what am I buying by comparison to my peer groups? How much limit are they buying? What rate are they paying? What retention are they taking? All the things by comparison, just like you would on Amazon, to understand how I stack up. In the middle market, that's becoming crucial.
Most of the time, when we're talking to independent agents, they trade in the small and middle market category. If those customers are demanding that kind of information, and you're a single shop in Central Illinois, how can you possibly have access to that kind of information to be able to deliver to your customers? Especially when the generational shifts happen at some of those customers, as they perpetuate their companies to their sons and their daughters, and they truly have grown up in that Amazon generation of procuring things. We have to be prepared to give them this kind of information. The first step for us was getting the right leadership. Last year, I hired a chief digital officer, and he's done some fantastic things with our information.
We're already right now rolling out some of those products to our producers, and we believe it'll be a needle mover from an organic growth standpoint in the near future. The ability to tell our customers, "Hey, by the way, your 20 closest peers buy $10 million of coverage. You're buying five." That's important information. At its basic sense, it's what we should be doing every single day, and now we have the power and the data, and we can leverage that data to do that. MA is a big part of what we're doing, and again, I think it's going to be as good or slightly better year this year than last. Productivity and quality. We embarked on a journey in this capacity many years ago. Jim Gault, my predecessor, we call it CSO.
It's our internal way of managing our storefront to make sure it's consistent on the same agency operating platform, and we're continuing down that path. We are exploring unique ways to handle our small business. Small business has, for many insurance brokers, is a kind of a thorn in their side because of the regular intensity that goes along with small business. We've put all that business together into hubs around the country. We've got centralized leadership for it, and we're actually growing it now. We've got a value proposition around it. We've got things that we've added to the equation. Small businesses not only like to buy insurance, but they like other stuff added to the equation, and we've built a whole platform on how we can deliver more resources and more services to small businesses. It's actually turned into a growth opportunity.
By the way, when you do acquisitions, and we do a lot of them, we'll do probably between 15 and 20 this year. When you do that many acquisitions, you're going to continue to pick up small business, and so you better have a strategy. By the way, most of these independent agents, if they're five and $10 million shops, they have a fair amount of small business that they're struggling with. Because they have it, because they're in the community, but they don't necessarily know what to do with it. We've got a strategy and a plan to take care of those customers. We're doing the same thing with our personal lines broker business as well, making sure that we have a consistent deliverable, we can do it efficiently, so we can continue to grow it because it's a significant part of our business.
The last thing is culture, and you heard Pat talk about it. Culture for us means a lot of different things. Of course, it means how many people we bring into the organization, whether they're new hires through our internship program. We have a program called HireRight, which is focused on bringing in salespeople, seasoned salespeople from other industries who have tapped out or reached a ceiling where they can't grow any longer. HireRight has been a fantastic way for us to bring new people into this industry who have a track record of success, and we can teach them the insurance and get involved in our niches. As Pat mentioned, we have 32 niches with organizational structure around them. Many of these folks come from a specific industry. They tap right into the niche managing director.
If they came from the real estate industry, tap into our real estate niche managing director, and off they go. They have the connections. Of course, our niche MDs have the insurance expertise, and it's really been a success. We've done it now for a year and a half, and already the numbers are coming in very favorable from a growth standpoint. We're pretty excited about that. From a cultural standpoint, we did an engagement survey. I think Pat mentioned it this last year, and overall, our results were fantastic. Over 93% of our employees responded to our survey. They most enjoy their experience here at Gallagher. We're focusing in on employee communication, making sure that we're constantly communicating what our goals and objectives are, making sure that we're all on the same page to solidify that culture and to solidify what people are doing every single day.
Let me share one story about culture. I look at those disasters that happened last year, Hurricane Harvey, Hurricane Irma. Not only when those things were bearing down in Houston, we obviously had a lot of employees at risk. First thing we did, obviously, was transfer, and because we're a big organization, and we've combined our agency systems, we were able to actually handle all of our clients' work remotely from other offices that weren't affected. We took care of the customer. Shortly after, we had about 80 employees who were affected personally by that. We crowdsourced over $100,000 of relief for those employees, and that was all on a volunteer basis.
Our employees said we should be doing things with the Red Cross and so forth, and we did, but they also wanted to do things for their own employees, their fellow employees, and I think that speaks to our culture. With that, I think we're poised for growth. I think we're poised for further success. We've got a great track record of growth, and I'm just excited to be part of it. Any questions? Yeah.
Mark Hughes, SunTrust. Looking at it, you talked quite a bit about SmartMarket.
Are you judged based on the financial performance of SmartMarket? Is it a separate P&L item, and if so, could you talk about it a little bit? How are you essentially gauging the results of that? Can you translate it into new business impact on internal growth?
Yeah. Without sharing too much proprietary information, what we have found is that the growth with those carriers that are on our platform for over a year far exceeds the growth of our average insurance company. When I say far exceeds it is well into the double digits. Yes. There are not any triggers that would signify payment or not payment. Again, remember, this is an efficiency play. This helps them from an efficiency standpoint as much as it helps us. Think about it. If I am an insurance company, I have got hundreds of people whose responsibility every day is to knock on the door of insurance brokers and say, "What do you have working today?" It is completely inefficient.
If I could sit back in my office and get a dashboard of accounts that I think would be a great fit for our appetite, then strategically meet with those producers, I have eliminated a lot of inefficiencies. As much as it is about growth, it is also about creating a platform for them to trade more efficiently. That actually helps us trade more with them because if I am an insurance broker with five locations and I do not have a SmartMarket platform, they have got to deploy their people, knocking on doors, going into offices to earn those opportunities.
How is it good for you?
Well, again, they compensate us for this information.
Yes.
There is obviously an ROI that contributes to our profitability because of it. It is also good for us because our producers are more efficient. Again, that go-to-market strategy I was talking about earlier. The first thing I ask a client in a first new business meeting with one of our producers, "What is your current broker's go-to-market strategy? How do they determine whether or not a carrier is interested in your business? Go ask them. Do not give me the answer right now. Go ask them." The answer will come back, "We think about it. We talk about it." I do not want intuition and chance to affect whether or not a carrier is interested in a client's business. I want there to be an electronic platform that they can actually see real-time what clients they might be interested in, so they do not miss a thing.
As a young producer, when I came into this business, John Gallagher, Pat said, "Do not ever lose a client to a carrier that we have a contract with." How did that happen? Because I just did not know that they were interested in that business. This eliminates that efficiency. If I can eliminate that efficiency, that is good for us as a company. Not only is it financially good, but it is operationally good for our producers.
I think most of us think about organic growth in three components, right? There is the pricing component that seems like a pretty nice positive. Pat was saying 50 basis points down last year, about 1% up this year. There is exposure growth/economic environment. That feels pretty good. First two factors feel more exogenous, not idiosyncratic to Gallagher. There is just the selling versus what you are losing, which is an idiosyncratic component to Gallagher. I think the outlook that was talked about was 2018 versus 2017, 2018 in line or slightly better than what we are experiencing 2017.
When we are thinking about there is pricing swinging 1.5% year-over-year, the second component, the exposure growth and economic growth still being pretty good, does not that imply that that last component of selling versus what you are losing is down if you are only in line to slightly better than last year? If that is not the case, why is not organic growth up more?
I think it's a fair observation. I will tell you, our net new over last is always a positive. We've been very consistent in our loss business, and we retain about 95% of our customers. Our new business as a percentage of our trailing revenues, that's how we measure it, tends to be in that 10%-15% spread. There's a lot of factors that go into that. Just because rate's up doesn't necessarily mean it trades to our compensation because we're transparent, and we have a conversation about our compensation with every single customer. Just because rate goes up doesn't necessarily mean that our clients will allow us. It's still a negotiation one-on-one, even if we're on a commission. We view that as a big positive. We want to be having that conversation, that dialogue with our customers.
It doesn't necessarily translate into $1 percentage point up in rate equates to 1 percentage point up in organic growth. It's still a negotiation one-on-one with our customer, with our CFO. There's a lot more that goes into it than maybe just the pure math of GP's up, rate is up a point. Therefore, it should be a complete lift to organic growth.
Hey, Mike, you might also want to tell Bob, since Mike isn't here on the mic, that they may only want to spend $100,000 on insurance this next year.
That's great. Yes, exactly.
Opt out of more cover, they opt out unless they take out a deductible, it might opt their budget.
Exactly. That's a great point, Doug. Thank you. Yeah, again, same thing. Client has a certain budget that they're willing to spend, rates up, their exposures are up, they may take their retention up to lower their premium. They may buy less coverage. Again, it's a bit of a dance. It's not necessarily a pure just pass-through that we get that lift.
Time for one more.
Yeah. I want to go back to, I think in your comments you mentioned a revenue split in your retail business of 85% commission, 15% fee. Can you just talk about how those numbers are changing? How they've changed over the last five years, and then in the context of your commentary around SmartMarket, is that more a fee-based component of the revenue mix, or is that a commission-based component?
I'll answer the second one first. SmartMarket is an annualized contract negotiated completely separate from any compensation with the trades that we're making with those carriers. It's a fee that we negotiate once a year, or it could be a multi-year contract with some of the carriers that we have. That is completely aside from our compensation that we make on any given trade. It's not a commission, it's not an add-on. I mean, if that was your question, I would answer-
Yeah. It's not volume-based on a per-
No, it's not volume-based at all.
Okay. Get back to the fee.
Fee, five, 15.
Yeah. Just how has that moved over the last couple of years? What do you think of it as a stake just in our fee-based component?
It has moved more towards fee-based. It moves very slowly. Most of our clients, again, in the middle market, would prefer to pay us based on commission for whatever reason. It's just easier to understand. We're transparent both ways. They see what we're making. Every single dollar we make, they see. If it's all the same to them, they would prefer to compensate us based on a commission. If you're asking my preference, I'm pretty much indifferent to getting paid on a commission versus a fee. I mean, a fee is obviously more consistent. Again, when you're transparent and you're communicating that to your customer, it's still a dialogue about the value you're getting for that dollar. I don't anticipate any big spikes in people moving towards a fee.
It'll migrate that way, I think over a period of time as it has, and as we bring in more customers. We go toe-to-toe now, and Pat mentioned it, on some of the largest employers in the world, and most of the largest employers in the world compensate their broker on a fee basis. The more we compete in that area, our book will change just as a result of who we're writing.
Thanks, Mike.
Thanks, Greg. Thanks, guys.
Next up we have Joel Cavaness, who's going to talk about RPS, our domestic wholesale operations. Joel, the floor is yours.
Thanks. Everyone, thank you for traveling to Rolling Meadows. It's great to see some of the Faces to the names of names that pop up for questions during our calls. I'm Joel Cavaness. I'm here to bring you up to date, up to speed with Risk Placement Services, what we do, where we're going, how we're positioned. Talk a little bit about some of the exciting things that are going on there. A little bit about my history, just to give you an idea. I've been with the Gallagher organization a little over 32 years. Spent about 10 years on the retail side, doing Mike's side, and then moved from St. Louis, Missouri, up to Rosemont, Itasca, home office, to take over a marketing operation that a year later we turned, McGonigle and I turned into Risk Placement Services.
We started a small wholesaler at a time that everybody was wondering why we were doing it. From three employees in downtown Chicago in 1997 to over, I guess now we have over 2,600 people in the U.S. We're excited about our growth, we're excited about where we've been, and we're really excited about our future. Give you an idea of our breadth, our size. I told you how many folks we have. We ended last year somewhere around $300 million in revenue. We place approximately $3.2 billion into the marketplace through our various divisions that we'll talk about in just a second. Our margins are pretty consistent in the mid to mid twenties. We've stayed very consistent on that. We've had good margin growth over the course of the last five years. We continue on that trend.
We have about 80 offices. I need to talk a little bit about that in a second. 80 offices that are in what was our core pool of businesses. We have just completed this, if you follow our activity. We just finalized a deal called Pronto, which is a Texas, California, and Florida non-standard auto play, which has a specialty in the Hispanic marketplace. Pronto is an organization that we've known for about five years. We've gotten to know them over that time, and they became available from private equity and some family ownership down in Brownsville, Texas. Very excited about the management team. Very excited about the merger. It adds over 1,000 employees to Risk Placement Services. We're excited about that space. We're excited about that niche. We're excited about the expansion of the niche.
It is a non-standard auto play that we believe will be able to leverage additional opportunities in the future. Mike talked a little bit about data, and the data involved in the Pronto organization is just that. They know everything about their demographic. They know where their demographic lives. They know where their demographic pays. They know the demographic that they're looking for as far as married family, two cars that buy physical damage insurance, et cetera. They know in a two-mile radius exactly who's there, who's a client, and who's a prospect, and then how to work on a grassroots basis to go and get those clients. 55% of the Hispanic communities, people live in the three areas that they're trading. They're new into Florida, they're new into California.
The expansion capabilities in Texas for not only the growth in their current products, but also the products that RPS can bring to them. We're very good at this. These are small transactions, not huge premiums, but they do a lot of them, and we're very excited about what Pronto is going to bring to us as an additional play for our organic growth strategy. Obviously, acquisition and growth strategies were strong with this, but this will bring additional organic opportunities for RPS in the future. Excited about that. Give you an idea of our client base. Their particular client base matches, similar in some ways and very different than others. You all have probably one of the recent IPOs. It's a franchise play. This has franchise opportunities in it. It has captive agents opportunities for growth in it.
It also has some e-commerce plays. E-commerce is candidly the smallest. The captive distribution system is the largest. The franchise is growing very nicely. Of course, the independent agent is really what our RPS traditional distribution system is. Talking about that overall for RPS. Mike, who just left, is our single largest client. We trade very well into our own organization. Gallagher made a decision a few years ago that they would work towards reducing the number of wholesalers or intermediaries that they trade with. Made a lot of sense. They can get a better handle on the business that they have.
They have a larger trading relationship. I don't want to use the word leverage, but people have a tendency to notice if you do a lot of business with someone versus a 1-0, a 2-0, a 3-0 when you have a problem, which is what we sell. We sell promises. When you have a problem down the road, you want to make sure that you have the kind of relationship to take care of the client with a claim servicer if it's a problem. Makes a lot of sense. We're getting our, certainly, our fair share of that business in growth. That's about 24% of what we do. Roughly 76% of what we do is in the independent side. Lots of independent agents, lots of groups all over the country.
There's a lot of trend towards the SIAAs and some of those particular groups who are bringing resources to the small independents that they need. We trade very well with them. One of the areas that we trade very well with the small independents is our e-commerce strategies, where we have put multiple products on a platform, and they can trade into that very seamlessly with a small number of questions. Once we get the product built, there's very little maintenance for us because it's quote, bind, and issue the policies, and they can actually pay. There's not much that we'd have to do to it once the product's broken up and running. That's one of the big driving forces into the smaller independent agents that we've been able to do. Talk a little bit about Pronto. The other things that we do, we do brokerage.
That's where we penetrate heavily into the Gallagher organization. That's a great business for us, where each individual account is out into a marketplace. It could be large tech property, it could be trucking, it could be tough casualty accounts, could be healthcare, could be executive lines like directors and officers or other type of executive business lines of coverage. Those are accounts where we take the account in and we send it out to multiple insurance companies and negotiate the terms, price, terms, deductibles, get it back to the retail client, who hopefully sells it to their insured. That could be an expertise area, or it could be just that it's a tough account and it needs a surplus lines type approach to it. That's a big business for us.
Our largest business, where we're the largest MGA in the country, is that we do work as an MGA, which is a managing general agent. What we do there is we're basically the outsource to an insurance company. A Nationwide, BMS, a Nautilus Insurance Company, a Penn-America, a lot of companies that you probably never heard of. What we do there is they use us for our distribution and our back room and our underwriting. We operate as an insurance company's back room, and we handle everything with the exception of two things. We don't handle their claims, and we don't place their insurance. We underwrite their accounts, we issue their policies, we bill the retail insurance broker, and then we send all that information back to the insurance company if there is a claim so that they can handle the claims.
We get paid for that. We get paid for all of those services. On top of it, if we do a good job and we make them money, then we get share in the profit-sharing of the insurance company. Those are the revenue streams that we get for those activities. That's our second largest business. Our first largest business, our third largest business is our program area, which is very similar to our MGA except in the way that we're very focused on a particular niche or product line that we operate for programs. It might be public entity, it could be social services, it could be workers' compensation, it could be a pooling event or a program we have for workers' compensation. It could be lots of different things that we do. We do sports camps, country clubs, all various lines.
Those are very specialized, and they have very specialized needs from technology and distribution. We typically keep those separate as a program manager moving forward. Certain insurance companies who like programs, and we have to provide them with expertise in a particular niche or area for their growth. We also have a standard lines department or area. We like that. Basically, what we're doing there is we provide small independent agents access to blue-chip insurance companies. We have a small independent agent here in Rolling Meadows, who's a single producer with maybe a couple of assistants or help. They can't keep a contract with a Chubb because they only have maybe five clients who are high net worth.
If we bring them this person here in Rolling Meadows and another one in Arlington Heights and another one in Cary and another one in Crystal Lake, all over the metro of Chicago, we can take the five that they have, the five that that one has, the five that that one has, all the way across. We've got 100 or 200 or 300 high-value accounts, and we can bring those to the Chubb, and Chubb is happy with us because we're bringing them business that they wouldn't get because they're not contracted. Of course, the independent agents are happy with us because we're bringing them a market that they can't get access to. It's a great business. It's typically very sticky. It sticks around for a long time.
Typically, the business where once we place it goes into their service center, so it's very accretive from a profitability standpoint. We're trying to grow that business. You'll see more and more businesses. There's a lot of that going on out there, and it's a big smile along the country that we're looking towards. From upstate New York all the way through down the coastlines through Florida to Texas and then back up to California. That's our strategy for our standard lines play, where there's a little bit of pain, and people need your help in those areas. They don't need your help in Southern Illinois, but they do need your help through that smile line. We're looking at a strategy to grow that business across, throughout that country, but throughout that smile line. Yes, Steve?
As you describe the pieces of what you're doing, can you give us a benchmark on size, scale? Just so we understand how important is this to your business? I mean, just the percentage of revenue.
Sure. Yeah.
As you describe different pieces.
Yeah. If you look at our business and you look at it the five ways. You have brokerage, which makes up about 30% of our business. Binding, which makes up about 50% of our business. Programs, which makes up about 10%. Now, I'm talking without the non-standard auto. Okay? Because non-standard auto is brand new. We just started it two weeks ago.
Thank you.
That would give you a good idea. I mean, standard lines business is a fairly small piece. It's about 8%. I don't know off top of my head if that adds up to close to 100, but it should.
Should be very close.
Those are all great pieces, all have growth potential. We talk about our growth. Just like everyone else, we look at our organic growth, and we look at M&A. M&A has a tremendous amount of opportunity. To give you an idea, there's 3,000 program managers out there. Our opportunity for mergers and acquisitions, the pipeline, I don't want to call it endless, but it's so vast. We're a great merger partner. We have the technology, we have the systems, we have the standards, we have the productivity and quality, and we have the culture. We're willing to partner. We have distribution. Our distribution is massive. If you think about a program manager that comes to us, maybe they might have 500 points of distribution. They might have 500 retailers. We have 200,000 retailers that feed us business.
Our distribution is massive and getting bigger all the time. We have an entire group of client relations people that are spread out across the country that do nothing but manage and work with those independent agents to make sure that we're getting the right looks into our business to continue to grow. We bring that automatically. If you're a program manager and you're looking to grow your program, we're the perfect place to go out. We already have the distribution. It's already vetted. We already know them. We're already transacting business with them. We know that they're licensed. We know that they're a credible business. We're excited about that opportunity to grow organically. We're in very good acquired two this month, and our pipeline is very strong for the next few months in getting other deals closed. Organic.
Our organic strategy is really common in several different ways. One is continuing to hire. Mike talked about HireRight. We talked about additional underwriters and producers who were up substantially last year. We had our greatest year ever in hiring new producers. People want to come to us. They want to come and join our team as a great alternative for their career, for their future. You can really look at it in two different ways. One, just underwriters. Underwriters who produce revenue for us through the MGA and program A, and then obviously brokers who can come and produce. We're up again substantially this year as well, which will add to our future growth and opportunities in organic growth. Anyway, we talked briefly about our productivity and quality.
Our service centers have just knocked it out of the park, both in India and in our domestic service centers. We have, as Mike said, their process. We have ours, it's called GEO. We have now embedded GEO into about half of our 90 offices, and we'll finish up the other half through this year. It's really making sure that we're getting the right business to the right person, doing it the right way, the same way every single time. When you operate an MGA business, that's very important because what you're trying to do is increase your profitability, which increases your profit share. I know we talked about, or you had a question on organic growth and how that can go. Obviously, as we talk about here, it's opt-in, opt-out. If you have $100,000, you're going to buy whatever $100,000 will buy you.
In our particular case, a lot of that fluctuation of organic growth can go with profit sharing because it's all in for us. Contingents of profit sharing are very important at RPS, we have to manage that. We recently hired a vice president of underwriting, what her role is, she's going around to the various offices, making sure that we're putting the right business and the right contracts to maximize our opportunity for being profitable, that the insurance company shouldn't go without. There are certain things we can't control. Hurricanes we can't control. Hawaii lava flow we can't control. We can do our best to make sure that we're putting that business, the right business and the right contracts to maximize that opportunity for organic growth. Last, I know Mike talked about culture as well.
Culture, walking into a room downstairs on the first floor last night with almost 400 college kids, having them literally attack you to hear about your experience and your career here at this organization, the opportunity to bring those young people in, turn them loose. The math is phenomenal as you think about hiring 75% of them, getting them in a position where they're creative through the organization, the next group of 400, the next group of 400, on and on. The pipeline for our opportunities to bring more people like us into the organization to help it grow is tremendous. Not sure I missed anything. I'm happy to talk about anything that's beyond your mind to get to stay on time. Yes, sir.
Let's go back to the non-standard business.
That is a market that the auto market itself is undergoing a massive amount of change. Just walk us through the lead up and size up the opportunity as you see it.
Yes. Candidly, the opportunity is just expansive. The non-standard auto play just in those three states is in excess of $5.2 billion. The size is crazy big. This particular product, it is a brand, and we're going to keep that brand. We're not trying to make them a Gallagher brand. Anywhere you go, if you ever go to South Texas and then move way up north, they've had expansion by territory. They started in Brownsville. They moved up to San Antonio. They've moved El Paso. They've moved up to Houston into Dallas. They're expanding geographically. Their data, give you an example. They'll only go into an area if it scores a four or five on their scale of opportunity. And then they'll draw a line, if you think about it, so they can expand in those four different ways. Independent agents, captive, franchise, or e-commerce.
You can draw a line around two miles. Literally any store prompt up. This is very impressive. There's a map on the wall that shows a two-mile area around that store, and it talks about it's either red houses or it's blue houses. Blue houses are clients. Red houses are opportunities, and they are true opportunities. They know, they buy the information, the data to know that that household is a married couple with two cars that buy physical damage insurance, and those are opportunities. It is that store manager or that franchise manager's job is to, on a grassroots basis, do this week one, do that week two, do this week three, do this week four, and they'll do it over two months, which you're supposed to do.
We draw the map, and the map gets redrawn with new blue and new red to see how we're doing, what our demographic looks like. It is patterns.
Is this a backhanded way of pitching us to deserve our goose egg multiple in the marketplace?
Sure. Why not?
Hold on.
This is a very exciting opportunity for us. We like it. We like what they do. The marketplace is growing, and they've been able to position themselves in the three different states, and candidly, the track record is why we did this. You can imagine, we did our due diligence, a lot of work. It's very exciting for us.
I assume the E&S is the overlap with your brokerage.
Yes.
Can you talk just generally about that, with the more robust economy, new business startups, is that having a bigger impact on that E&S?
It does.
Also pricing in the E&S.
I was going to talk a little bit about pricing. There's various factors, obviously, in the E&S business. To give you an idea, we do a lot of trucking business. We're probably the largest trucking MGA in the country by a fairly long shot. Trucking is a little bit of a hard market right now, and of course, as everybody's seen, the economy is such as it is, and there's a driver shortage. Trucking is in high demand. We're seeing a very nice influx of trucking opportunities. The pricing's going up. The pricing is 3-5, 2-3.
That's trucking overall?
That's trucking. That's trucking.
Broadly.
Broadly, if you look at it, general casualty business is generally flat in rates, and I'm speaking only of unexposed units. Exposed property that has losses, it's all over the place. Let's just say that we're probably looking right now, in a broad sense, catastrophic property is looking in single-digit digits right now. If it's had total losses, it could be more. If it's habitational, it could be more. There's pockets of hard markets, but there's pockets of soft markets to offset it from the property side. If you come to the Midwest, it continues to be soft. Bay State continues to be soft. Executive liability is generally flat. Healthcare's starting to make a little bit of a move upward in rate. I'm not sure that I missed. Workers' compensation's generally flat because you're dealing with 50 states. Those 50 states, it's flat.
It's a little harder in some states than it is others.
Exposures?
Exposures seem to be increasing. Construction, obviously, trucking, some of the main niches. On the flip side, if you go to public entity, we've got a lot of public entity business. That's generally flat. There's not a lot going on there as far as increases economically. We seem to be seeing increases, especially in construction. New York construction, that's a hard market. That's probably the only true hard market that is out there right now. New York contractors, they lump in New York as a cup. It's hard with any type of contractors. Does that answer your question?
In health, is it just overall healthcare liability? Is there some in the doc business?
Well, the doc business has changed so dramatically. It's become connected to hospitals and the big groups, so you're not seeing a lot of change there. You are seeing some, I was actually met with a healthcare leader today. We're starting to see some really pretty adverse lawsuits in the healthcare space. That's a little bit concerning from that perspective. Elyse was going to ask a question.
You just mentioned Pronto Insurance, right? You guys pushed into non-standard auto. As you think about the M&A pipeline and just your book of business, are there other areas that are on your radar, maybe as offering a similar opportunity that you don't have an offering in today?
Along the Pronto lines. They've been acquisitive as well. They've done three mergers over the past six months. Prior to our acquisition, they've got over 150 that are kind of in their pipeline of looking at it for opportunities for growth. If they make sense, we'll take a look at them. Absolutely.
What about Elyse's question, though? Are there other deals?
Oh, yeah.
other kind of new initiatives that might surprise us?
Yeah. No, nothing should. Hopefully, that didn't surprise you too much. Well, maybe a little bit. We'll continue to look. I really enjoy looking in the program space. I said earlier, I think there's about 3,000 program managers out there. There are some that you guys would know about that have been announced, some good-sized deals in the program space that I really like that maybe we'll have an opportunity for, that you've seen, and they've been announced recently. There's a few out there that would be good additions to us.
Thanks, y'all.
Thank you. Have a great week.
Next up, we have Bill Ziebell. He's going to be with us for another 30 minutes, he's going to talk about our employee benefits consulting and brokerage operations. Bill?
Good morning, everyone. Just remind everybody, Gallagher Benefit Services is our employee benefits and HR consulting practices in Gallagher. Last year, we did about $1 billion in revenue, just over. We've grown mid-single digits organically over the last five years plus. We have over 110 offices. We're in four different countries, U.S., Canada, U.K., and Australia, expanding in all those. Our retention rate for years in the mid-90s has been historically as well. What we do is think about your own situation as employees. You have an employer trying to attract you, bring you into the organization, we have different levers to do those things. Historically, we've been focused on employee benefits. Our business was started at Gallagher in the mid-1970s, mid-1980s, we actually spawned a separate division focused on this area. It's been growing quite rapidly over the years, very successfully.
As we look at the question, why do employers offer benefits? The answer is to attract, retain employees. That's not the only reason why people join an organization. Think about your own personal experiences about why you work for your organization. There's a compensation plan, incentives, long-term. There is a retirement plan. There are the traditional benefits, voluntary benefits becoming bigger. How well your employer communicates those, is that value proposition to you, is very important. Nowadays, a lot more emphasis on career pathing and professional development. Think about what's going on in the world today. We have changing demographics with baby boomers moving into the retirement phase. Millennials are now the largest workforce segment, the needs and demands of those employee workforce are changing. Today, we look at unemployment.
It's down significant, record lows globally, employers are now there trying to find a way to attract that talent without sinking their boat from a cost structure. They need good advisors to help them with all those things. There's compliance that goes into this, technology. We think data is very important for driving some decisions. What we're doing is trying to help our clients do those things. We advise on traditional benefits in all the countries we're in. We have a global multinational practice. If you have an employer based, for example, in the U.S., but has operations in different parts of the world, we can help them with the benefit and compensation packages each of those organizations around those employees around the world as well. That's what we're doing at the business we're in today.
On our organic side, how are we focusing on growing organically? I would say the same old traditional ways in terms of hiring new producers, bringing new talent in, whether it's from a competing competition or going after college grads from our internship program. We're also turning more in terms of specializing, being experts in different areas. The world today in terms of regulations is very complex. There's so much that goes into all these areas. Think, for example, pharmacy. That is one of the fastest-growing expense areas for any employer today. I think from a low amount, on average, anywhere from 25%, 30% of the medical expenses are coming out of the pharmacy space today. Somebody that's going to do everything themselves as a generalist is going to fail. They're going to do a lesser job. We have a very fast-growing emerging pharmacy benefit management practice.
All they do is focus on this area. It's about the details in the contracts and getting powers that do the right things for our clients. That's an area, for example, where we're getting the specialist in place, the expertise around our organization, but then doing team selling. Our client relationship is at a local level. We bring the experts as we need appropriately into whether it's compliance, PBM, communications, retirement planning, that kind of thing. We bring the experts in. Team selling with expertise as appropriate at the point of the capital with our clients. Doing a lot of that, a lot of training. As I said before, I don't think there's any one person that can do everything in this area. It's very complex. You think about our clients are asking us to do so many things for them today.
A lot of employers are struggling to have enough HR folks on their team. We become an extension for them to help them with decisions, taking care of their employees. We have benefit advocacy centers where we get hired by our clients to have their employees call us to answer their employees' questions, as opposed to them having to field those questions. Great value to our clients to do that kind of service for them. Communications is getting very big for our clients because they're realizing that if an employee is not engaged or understand the value that they're bringing to them, then that employee has choices. We might worry about the virtual low unemployment going on in the United States today and other countries we operate in as well have all-time lows as well over the last five years.
They're competing every day for talent to keep the talent they have on board. What are we doing to do those things? Communication is becoming a very important strategy in that area as well. Our clients expect us to do a lot more than just traditional placement of benefit insurance plans. We're becoming all things to those clients as well. Our employees, our teams, our consultants need to be trained up in that area as well. We have a playbook on organic. We try to make sure we're adhering to those things. Going after new logos, new clients.
Once we have a relationship, once we have a client who is now willing to trust us with something like their pharmacy plan or with our medical life disability, we want to expand that relationship as well by bringing the experts in on the retirement side, HR compensation, and so forth. A lot of opportunity to grow and expand that relationship there. On the merger and acquisition front, it's been a key component of our success over the years. Being a merger partner of choice. We have a great culture. We'll talk about that in a bit.
The building, the resources, and expertise I mentioned before, there are literally thousands of smaller competitors out there that are looking for succession planning, looking for a place that makes sense for them as owners of the business to continue to grow a business, but also that's going to make sense for their employees and their clients. The one thing I found about our culture and what we do with our clients, we're very passionate about our relationships with those clients. We know how important the products and services that we bring to our clients are to keep the doors open, but also more importantly, to help employees put their lives back together when they become sick or disabled, pay the bills, and so forth. It's a very noble business that we're in. Our consultants really understand that, and they have very strong bonds with their clients.
We want to do the right things for them, and that's important. Our merger partners have the same passion, and that fit with us. They're looking for that same feel, that same culture, that it isn't about the quick buck to sell something, but about doing it right for your clients, doing it in a good way. Those are really the best merger partners for us. We average over the years about 15, 16 mergers per year. That continued to go on last year. We've had so far three this year. We have a very full pipeline as well. They're looking for resources and expertise they can bring to their clients and continue to grow and build a business. Moving on to productivity and quality. You've heard some of this already from other presenters here today.
We continually look for ways to find the right people to do the job at the right time in the most cost-effective way. We are seeing great improvements in quality and measurement as well as deliverables in areas for small group, but also in our client service areas. We're doing pilots in the client service. We now have six centers of excellence for our small group area. Our measurement on quality is 99.95% of thousands of transactions every week. It is unbelievable how well we've improved the quality there. It's important for us to be able to bring that value to our clients. We focus mainly on the mid-market, which I would define as between 100 and 5,000 employees.
We have absolutely a lot of clients that are under that 100, we actually have a lot of clients over the 5,000, they all have different needs based on the segmentation that goes on with that. The small group area, a lot of it because the ACA doesn't have the same type of lift in terms of margin and organic commission growth. The carriers are taking some of that out. We need to make sure we find a good way to deliver efficiently a high service level that our clients are used to. That's what our small group centers of excellence are all about, we're seeing great success in that area.
We'll continue to look for those things, look for areas to improve the quality of our work and be more productive, freeing up time for our producers to go out and sell more as well. I know you hear from Gallagher all the time, it's about culture, but I think that's really a very important differentiator to us. We get a lot of folks that join us from competitors that really do comment regularly that this is a different place. People are willing to help all the time in terms of, "I've got an opportunity. How do I do this? How do I fix this? I have a problem. How do I address that?" People are generally helped to answer the question without anything in it for them specifically because they're a teammate.
They put the jersey on, they want to do the right thing for their teammates. Quick example of that, last year we broke $1 billion for the first time in our history as a division. We were pretty excited about that. We wanted to have a little fun with our team, we tried to set a world record for selfies. I know it sounds kind of funny, but we wanted to do something that everybody can kind of rally around us. Nothing was mandated. Everybody can do their own thing and so forth. We blew through the record. We had a collage of all these selfies come in, it had to be one of those where you had to have one person with one camera, you had to have the IP address and the location. There's actually not a third party that qualifies these.
I don't know if you can suggest what to do. Not only that, we had such a great participation. We asked our folks to say, "What does $1 billion mean to you?" People took that to heart. For some, it was about personal opportunity. For others, it was about taking care of their clients. Our success, our growth was about really helping our clients do a better job. The fun and the creativity we saw in all these different selfies made a collage. It was a big screen of all these different little pixels of all the selfies. It made the Gallagher globe. We made it into a really cool video that we shared at our awards meeting. People are pretty excited about it.
I got to tell you, and somebody said I'm corny, every time I watch that video, I get choked up because it's about our people and how they really feel a connection with the team, that feel like family to them. That's how I would describe our culture to you. I would just tell you information about GBS. We're well-positioned for growth going forward as well. We've had a long record of success over the years. This is no different. We continue to look for opportunities to grow organically through our mergers, improve our quality and productivity, as well as maintaining our culture. With that, I guess I'll open up for any questions anyone might ask. Yeah.
Two questions for you. First of all, in Mike Pesch's presentation, he talked about a split between commission and fee. I'm curious if you have, I think he said 85/15 commission fee in his business. I'm curious if there's any component of your business from fee and how your split might work. Then another question that I ask you almost every time I see you, can you give us an update on the private health insurance exchange market that you guys have?
Yeah. Let me go to the split first. First of all, we're a transparent company. We don't care how we get paid. We will upfront negotiating for the new business. We talk about our compensation upfront. Want to be very clear about that. How they want to pay us is entirely up to them. Today, about 80%-85% still ask us to put it back into the product, make it into a commission flow. We have about 15%-20% that is a fee for service, which we invoice them quite directly and so forth. Some of our practice areas lean more towards fee for service than others. Our HR compensation practice, for example, there are no commissions. It's really a fee for service on an hourly basis. In others, we may be doing the consulting on the employee benefit plan, where there are no commissions built in.
It's literally a quarterly invoice that we send out to them. It's entirely up to the client how they want to pay us. The fact that a lot of it is billed in commissions is because it's more convenient for the employer to be able to pay us that way.
That's coming from the health insurance?
Not always.
Not always.
A lot of times it's not even the health insurance. It could be in the ancillary or the voluntary side. There's ways we get paid for different parts that we're being quoted. Again, entirely by the direction of the employer. We don't care how we get paid. We just want to get paid for our value.
Got it.
On the health exchange side, we have about 50,000 enrolled lives in our exchange. Again, I want to reemphasize to you that we've never gone out and built our own exchange. We made a decision a long time ago, that was not our play. We wanted to stick to our knitting, what we were good at. What we're great at is being great advisors to our clients. So when you build your own technology, that's your product. You no longer are a third-party independent advisor. That is your product. We've seen some of our competitors struggle with that, the decision they have made. We feel very good that we can partner with any technology solution that makes sense for our clients. Give you a quick example. We have an HR and benefit technology practice.
The leader of that practice does a market study every year, looking at over 900 different technology plays that are going on out there. We try to find out what their value prop is, how they price it, what the reputation is on quality, what their disaster recovery and backup solutions are, et cetera. When we go to a client, they're saying, "I'm looking for you to help with something." Whether it's been admin or HR tech, whatever it may be. What are you looking for? If an exchange is one of those answers, we can give them that solution. If the answer is they just need a better ben admin system, we'll find that for them based on this study. What we're not leading with is an exchange to be a product to be sold.
Our clients appreciate that independent input, the fact that we have people looking at these technology and data solutions that are going on regularly gives our folks those right solutions.
Just as a follow-up to that, because the 50,000.
Oh, hi.
Sorry about that. As a follow-up to that, the 50,000 number really hasn't changed in several quarters now. Your clients aren't interested in that. What are they interested in? If they're not buying private health insurance exchange, what are they going for? Is it a high deductible? Where's the migration?
Well, what you're seeing is. You're asking a lot of questions. First of all, you may not be aware, but we do a lot of thought leadership. We have an annual national benchmarking survey where we actually survey. We have over 4,000 respondents annually on this. It's the largest survey in the industry. We ask this question, "What are you doing to control your costs?" What we're seeing out there is that people are realizing with low unemployment and a war for talent, there's only so much cost shifting that can be done out there. All right? We are definitely in the business of the private exchanges, but it is one of those things we'll find the right solution. You might want to answer your question on how do you define an exchange? There are some people who are very stringent on that discussion.
I can assure you that every single day we're talking to our clients about their ben admin, their benefit enrollment solutions. Some may fall under that exchange definition. Some may be something more of a better solution for them. All right? You have other clients that are saying, "Well, what's the value of an exchange?" The choice, the engagement, and all that kind of stuff. In their minds, they're already doing that. What they need is a better technology that may not be a Liazon or something to that effect. We find the right one for them as well. We don't classify it as a private exchange, but we're helping them build the value they want. In their world, they're bringing defined contribution to their clients, and that's what they want to do. Again, I wouldn't measure it as a success or a fail.
That is an entire business of which the Gallagher Marketplace, our private exchange, is a part of, that is growing for sure. Okay?
Any other questions for Bill?
Just curious on an underlying basis, a little bit better economy. How much of your business is priced based on straight payroll? Are you seeing payroll starting to move up as the economy gets better, presumably wages getting better, more hours?
Yeah. We see in geographies that are growing, we have job growth. That's a little bit of a tailwind for us. When you have poor economies, jobs being leaving, that's definitely more difficult to grow organically.
Could survive right now versus six months ago, last year.
Well, it's something good about what's going on with the economy, Our clients are really asking us to help them get the talent on board. I think that truly the defining is an overall sense of a shortage of talent among our clients, They need these different levers I'm talking about to help get those folks on board. They want to help reduce turnover in their unemployed population. Think about this. If I've got people coming in and going out the door because I can't keep them, I'm not getting anywhere, right? The demand for our services is increasing because it isn't just about placing benefits, the insurance. How do we improve engagement? We can measure engagement levels among our employees. We can improve the communications with employees as well for our clients.
Those are the things we're trying to make sure that our team, our consultants are fully aware of to bring those values to our clients. The vibe is good
Thank you, everyone. We're going to take a break until 10:10, and at that point in time, we'll resume with the IR meeting. Thanks. Is it good? All right, we're going to continue on with the day. Next up, we have Jim Gault, who's going to be talking about our international property and casualty brokerage operations. Jim.
Thank you, Ray. Good morning, everybody. About a year and a half ago, we did launch a succession plan, and I moved aside to this role of Chairman of Property Casualty business, and Tom Gallagher moved up and became the CEO of all of it, and Mike Pesch became the CEO of the U.S. Normally, Tom would do this presentation. He's been doing it for pretty much most of the last year, a year and a half. Tom's in London. He's been there for a couple of weeks. He's going to be there for a couple more weeks. I was asked to step in for Tom.
As I was driving in this morning, all I could think about was when I was in grade school and junior high, when a substitute teacher would show up, we'd goof on the substitute teacher, and I was the champion of goofing on the substitute teacher. I'm going to ask you all, please don't goof on the substitute teacher. If I was giving this talk six, seven years ago, we had a good business. It was $200 million, and it was basically a London specialty operation that was placing business for the U.S. brokers, our team, and it expanded into doing some wholesale placements and specialty lines for other brokers as well. It was and it still is a great business, and it's still the core of what we do in London.
We started a company called Alesco, and Alesco was an energy play in the U.K., Calgary, and Houston. Alesco has been nothing but a smashing success, and I'll touch on that in a minute. My point is that six, seven years ago, our international business was only $200 million. When you look at where it is today and where we've come in the last six, seven years, it's remarkable. Last year, the international P&C business did $1.3 billion in revenue. We have 7,000 employees. We're a worldwide business. Our clients are worldwide, but the preponderance of where we are and where we conduct our business is in three areas. It's in the U.K., Canada, Australia, and New Zealand.
That doesn't mean that we have made some investments in Latin America and Europe, but those really are just sort of incubator investments that we think will expand someday in the future. They're nice little operations, and there's good strategic moves for doing those. The fact is that all the business is conducted internationally, for the most part, in those three areas, and that's what I'm going to concentrate on. As I said, we did $1.3 billion in revenue last year with 7,000 employees, and we placed over $10 billion in client premiums with insurance carriers. The margin in that business is a good margin. It's in the mid-20s, and the organic growth was in the mid-single digits last year. It's made a huge impact on where we are today and where we're going in the future.
Before I jump into each country on a high-level basis, it's easier for me to just say that we're running those businesses in the U.K., Canada, and Australia, New Zealand, just like we do in the U.S. The template has been set in the U.S. For example, the actual business model is really no different, meaning that what we do for the most part in the retail side, which is most of what it is, we're going out and finding suspects. We're converting them to prospects. We're finding opportunities to quote on their commercial property and casualty insurance. We're sitting down with the client, deciding what we're going to put together for the client, and then marketing it and then proposing it and determining how much risk the client wants to eventually assume and what he or she wants to pass off to an insurance market.
We bind it, we service it for the year, and basically nine months after the renewal, or after we write the account, we start the renewal process all over again. Rinse and repeat. That's what we do and in all the retail space. Which is most of what we do internationally. We get paid the same way we do in the U.S. We get paid mostly on commission. We do fees, sometimes commissions and fees if it's legal, and then there's supplementals and contingent income that we get from the insurance carriers. When it comes to strategic planning, they follow the same template that we have throughout the company, which is we're trying to do four things every day, and I'm sure Pat probably talked about this, and most of you have heard this ad nauseam, if you're looking at familiar faces.
We try to grow organically, try to go through acquisition, try to get more productive every day, and then we want to support our culture. What they do tactically to support those things are the same things we're doing in the U.S. I would say that we're a little bit ahead in most areas of the world, they're kind of following a template that we have. For example, our niche practice groups that we have in the U.S., we are forming, as they would say in the U.K., niches within niches, and they do the same thing.
The experts, the people that have the knowledge in construction or public entity or property or energy, agriculture, we want to put those people at the front of it, best people at the front of the pack, and helping our producers who come up with those opportunities tap into that resource and have an ability to be connected with someone who really understands that business, the markets, and what the needs of the clients are. We also, on the organic side, we're pursuing white space there. White space, I don't know if Mike has talked about this, but just imagine you have a client, and there's everything a client could buy, and you put a list down, and you check everything that the client buys. In most cases, our clients buy about half of what they could from us.
That doesn't mean that they're buying it. In many cases, they're buying from somebody else, and in some cases, they're not buying it at all. There's huge opportunity in what we call white space in our international offices as well. That's another way to drive organic growth. We're also big in cross-selling as we build out our capabilities on the benefits side in the U.K. and down in Australia and New Zealand. We want to be able to connect those accounts that are buying from us in the other part of the house and see what we can do on the property casualty side and vice versa. We're also big in product development in international, depending upon what country we're talking about, using that expertise that I talked about, whether it be a niche or a niche.
When it comes to acquisitions, so far this year, we've done eight or nine acquisitions. It has not been a big number. In terms of dollars, we've done eight or nine thus far. It's only been about $9 million-$10 million in annualized revenue. When you take a look at the one we just announced in Switzerland, that's about half of what the revenue was. We're talking about seven or eight that total about $5 million in revenue.
What they are is basically, you probably wouldn't have seen a press release because we wouldn't have sent one out on a small one, they're small ones, book roll-ins, book buys, a producer or two that want to join us because they see that they can provide better services for their clients and utilize the Gallagher power to build a career for their people and for better service for the clients and better relationships with markets. It's the same strategy, by the way, internationally, the same issues in terms of perpetuation and why we buy competitors and why they're attracted to us. There's an unlimited supply, just as there is in the U.S. The third thing on the productivity side, again, it's the same template.
We want to get everyone on the same agency system platform, which we have accomplished and are in the process of fine-tuning, which allows for standardization and training that's consistent. That may sound like, so what? The fact is, when you grow by acquisition, as we have throughout the world, every time you do one, you are going to adopt, you're going to get some different way of doing the same process. We've standardized our processes, particularly in the back room, which has allowed us to use our India service center and also centralized accounting, that has driven out significant costs in the way we conduct our business. That template that we created in the U.S. is what we're using in the U.K. and building it out in Canada and in Australia and New Zealand, and it will work for them as well.
They're all at different stages in terms of how they're utilizing India, for example. It all depends upon how much has been integrated into the system. Finally, the culture and the cultural side, it's the same thing. If you go to an office, I've been to offices all over the world. I was in Australia and New Zealand in September, or pardon me, in February, you walk into those offices, and they look just like a U.S. office. They've got the Gallagher Way. They've got tenets from the Gallagher Way on the walls. You'll see pictures of the community service projects that they've done. You'll see that the Gallagher culture is unique, and you'll see that it is consistently being displayed throughout the world no matter where you are.
Finally, when it comes to differentiation, and many of those things I've touched on already. How do we differentiate ourselves in those countries? It's the same old story. We're competing most of the time against brokers that are smaller than us. We have an opportunity to bring in more power, not just in terms of expertise, but also in terms of the power that we have with the insurance markets.
If you ask an acquisition anywhere in the world that's joined us, they will tell you that it feels better when you have $500 million with a carrier when you have a sticky loss than when you have $5 million, because we have the right relationships at a higher level and can help them navigate more tough issues for their clients just by virtue of being a big distributor for some of those for our market partners. There's that, there's our services, there's the quality that we believe that we put out because of the way that we approach productivity. Finally, the one thing that we can talk about that no other broker can talk about in the world is the Ethisphere of recognition, being one of the most ethical companies in the world and the only broker in the world that has that designation.
Believe me, it is a big deal. Clients like to hear that about what does it mean? I've sat across from clients that have said, "Tell me how I can get it. Tell me." We actually had a client that we gave them advice on how they had to apply for that designation, and it took them a couple of years, but they are on that list. Clients care about this, and we are the only broker in the world that can talk about it. Let me go around the world real quick, and just give you highlights of what we're doing in the U.K., Canada, Australia, and New Zealand. The U.K., as I mentioned, six, seven years ago, really all we had was a specialty broker, and we had just started Alesco. Today, the U.K. is over $600 million in revenue.
About half of that is retail. The other half is specialty and Alesco. Let me separate those two because they are different businesses. On the retail side, we've got our niche practice groups that we set up. We're good at not-for-profit and transportation, public entity, education, construction. We're trying to get those people at the point of attack. Our competition in the U.K. tends to be those for local and regional brokers. We don't tend to run into the brokers ahead of us, meaning Marsh and Willis very often, except that Marsh now is becoming a little bit more of a consistent competitor with the purchase of JLT and Bluefin. The rates in the U.K. are flattish, which is good.
I'm sure Pat probably made the comment, I would too, that anytime the rates aren't going backwards, they're flattish, is good for us, and it's good for our clients, quite honestly. If they're flattish, that means that really, you don't have a headwind. Everything you sell helps fill that natural dropback that you get because your business erodes every year. You got to fill that. By virtue of adding more and more new business, you can grow. If rate's not taking you backwards, you have a much better chance of organic growth. The margin in that business is in the low 20s. We have launched all those productivity initiatives that I've mentioned earlier in the U.K. to drive out the cost and the redundancy and get quality, and get them better connected with our centers of excellence, for example, in accounting and also in India.
When it comes to the wholesale side and Alesco, as I mentioned, that's really the other half of the business. That's at almost $300 million as well. When you think about it, the total of it was only a couple hundred million dollars several years ago. Now Alesco, along with what we're doing there, has really turned into a powerhouse. Alesco is a really well-known branded name in the wholesale business. We now have real expertise there in marine and aviation. Well, both the wholesale and Alesco. Marine, aviation, fine arts, financial products, professional liability. The original driver of Alesco was energy. We're doing really well in energy. Real estate. We've got a great construction unit as well on the Alesco side.
We compete against, in that business, all the big brokers because those tend to be the larger accounts, both the wholesale and the Alesco side. You're going to draw upon those brokers that control most of the market. The big brokers tend to control some, I don't know what the number is, some 75%-80% of that market. We're competing against them all the time. The rates in that space, if we're going down, we feel are bottoming, which is good. Bottoming is different than flattening. Bottoming is if we think we're at the bottom and rate will probably not be much of a headwind anymore. The margin in that business is in the mid-20s%.
When you look at the overall organic for the London operation combined between the two, it's running about 6%-7%, and the lion's share of that is being driven by the wholesale and specialty side. They're just doing a much better I know if you're going to ask me, "Well, what is it?" They're doing a much better job. They're just really good at what they do. When you talk about Canada, that's about $150 million of revenue. Again, the same with organizing our practice groups. We have real estate. We're really good at residential real estate, particularly in Ontario, where we've got a powerful condominium presence and program, which has really good results for us. We're good at marine, construction, energy, transportation, hospitality, just to name a few.
We tend to compete in Canada against the top three brokers, but also Hub and BFL and Verity tends to show up every once in a while. Then again, the small brokers that we tend to run into a lot because being a middle-market broker, you're going to find lots and lots of the smaller regional brokers that handle that business. The rates up there are flattish. Again, we think that's good for clients, we think that's good for us. The margin in that business is in the mid-20s%. We think we can probably tweak that a little bit. We're working hard on that as we've launched the agency system over the last two years, and we get our back room standardization to be more of a common usage in Canada. The organic up there is flat. We've done one deal, one acquisition.
It's not particularly large. It was in New Brunswick. Again, we're very much active and alive in the business up there. We do believe, as I mentioned a minute ago, that we probably can improve that margin a little bit. Australia and New Zealand finally is a $300 million business. It's almost all retail. We do have a really good funding finance operation in Australia that does contribute some nice dollars to the top line and to the bottom line. We're really good at construction, transportation, mining, energy, professional liability, agriculture. In New Zealand in particular.
What's a finance operation in Australia? Please forgive me.
Well, finance meaning finance risks, meaning finance like E&O or financial risks that require insurance products. In New Zealand, we are the largest broker, the growth rate there is really strong. In Australia, where we've finally been able to singly brand the 30-some-odd offices that we have throughout the country and start to connect the dots with management now that's been in place for almost two years. We've seen a turn from actually being a negative organic grower to a positive organic grower. It's really pretty exciting what's going on there. The rates are up a little bit, which is helping us, mid-single digits. That's a little wind at our back, particularly in Australia. The margin in New Zealand is as good as we've got in the network, we're not working so hard on that.
It's more Australia has room to improve because that margin is in the low 20s as well. Again, all those things that we're doing in the States to drive margin improvement and that we know are successful, we're in the process of doing those same things in Australia as well. That's kind of my preamble. Again, I'm a substitute teacher, I'll try to answer the question as best as I can. Yeah, go ahead.
I just wanted to go back to your comments around the Alesco and your growth. You talked about organic in the U.K. running 6% and driven largely by what you're doing in Alesco and specialty. Can you give us some examples and talk to us about how you're able to win business from the larger brokers, and sort of walk us through? If Marsh or Willis or Aon were sitting in this room, they're going to tell us they're not losing business, they're winning business. Can you sort of benchmark it?
I'm saying our competition in that space is the larger brokers, but it's also Howden and JLT and others. It's not exclusively the big guys. I'm not standing up here telling you that we're taking business every day from those guys. What I'm saying is that that business is controlled by the larger brokers because the complexity of it and the size of it. Take energy, for example. You're talking about big refineries and petrochemical accounts. All that stuff goes back into London, and it requires a lot of expertise. Over the last six, seven, eight years, we've hired some really good people that understand. By the way, they've come from some of those guys ahead of us, and they've done a really good job.
In spite of sometimes the cost of energy goes up and down, and it does have an effect on some of our options. There's no better way to explain it, Greg, other than just to say we have some really damn good talent.
We're attracting good people. People want to work for us because they see us as a growing, vibrant player in the game, and they see opportunity, career path, and everything else. It's no different there than it is here.
Okay. What's the opportunity for the Canada organic to improve?
I think there's a lot of opportunity there. I was up there a couple weeks ago. I was in Winnipeg, 2 offices in Calgary and in Victoria. With the rates being somewhat flattish, and with the way with which we're trying to continue to connect the dots with the way we want to run the business, there's a lot of excitement both within Canada sharing some of our resources, but also just some good cross-border things going on between the U.S. and there. I just think it's, to use the 5-year-old and say, "Hold on, pickles." It's going to get better
I mean, maybe this year.
Probably 2 o'clock this afternoon.
I will actually.
Okay.
I will go to you here. In terms of the margins, you guys have spoken about the U.K. and Australia as two areas where you've been looking to get the margins kind of to that mid-20% where, clearly, all the other regions are running. You did mention in your comments about launching a productivity initiative within the U.K. retail business.
Just how do we think about the margins in those two areas, like improving and what kind of timeframe, from your view, do you think it takes to get them?
Yeah. All I can say is that it took us several years in the U.S. to improve our margin through those processes. You've got to change people's attitudes and minds, and sometimes you just can't. You move them out and you bring in people that want to work in the new systems that we have. It takes a while. I would say, in the U.S., it took us probably four years to get three or four margin point improvement, and I don't think that the U.K.'s got any lock to do it any faster than that. Clearly, we see opportunity in there. I would say there should be improvement there and in Australia over the next couple of years, one or two each year. It should be.
Actually, I think that there's more opportunity in Australia for a lot of reasons than there was in the U.K. Maybe it might be a little bit faster there. There's a lot of work to be done. It takes a long time to get people to agree that this is how we're going to run the business.
If we looked at the margins of Australia and the U.K. a year ago, how much of improvement have we seen over those past 12 months?
That's a question for Doug.
Yeah, you ask Doug that question.
Okay.
I will be the substitute teacher who gave the wrong answer here.
You talked about the M&A internationally. Is it as suited as the U.S. for tuck-in acquisitions? How about competition and how it compels on M&A? Should this be a faster grower from a M&A standpoint or slower than the U.S. for any or all of those reasons?
Again, ask Doug the question about the actual multiples in those countries. I will say this, I said we've done nine this year and a total of nine, $10 million in revenue. For the most part, they're tuck-ins. We've done four in Australia and New Zealand that $250,000-$300,000 in revenue. There's an unlimited supply of those margins. No matter where you are.
Is that sort of slower pace, though, cumulatively, is that international just grow a little slower from an M&A perspective?
I don't think so, no. I just think that we've been internally focused on some of those areas to get our act together and run our business the way we. Remember, we believe they've all been integrated. We're not talking about integration anymore, but they've been focused on that, right? Integration, by its nature, is try to get up to Gallagher speed. They're all up to Gallagher speed now. I feel that you'll see more and more deals will get done and probably larger ones in the future because not so internally focused on getting integrated. That's kind of a plain vanilla answer for the whole world because, meaning those three areas.
Larger than $250 thousand, but we don't have any large acquisitions on the horizon internationally.
No. No. No, but they come up at any time.
$250 thousand.
Yeah. $250 thousand, that's right.
Thank you for the clarification, Doug.
$250 million is a big difference.
Yeah, that's right.
It can be.
Jim, in your global hat, both U.S. and in your international operations, private equity has been taking a very active role in M&A. I think there's some 27 vehicles currently in the U.S. Yet, the body language, if you want to call it that I'm picking up from your management team and then also frankly from some of your competitors is the pipeline's really strong.
There's a sense of optimism that there's going to be some transactions, better transaction buying this year than maybe in the preceding year or the older years. What's changing? Why? With all the competition and I'm just going to go back to this thing, and maybe this is a question for Doug, but I know you guys tell us you're buying, you're doing deals with in the single digit, high single digit, mid single digit range EBITDA. It just seems like everywhere we turn, we hear about these private equity deals going out in excess of 10 times. How do you reconcile that from your perspective?
Well, when it comes to the reconciliation of the spread, I'll leave that up to Doug.
Yeah.
I go back to what I was saying before, which is when you're doing all the big deals we did over the last three or four years internationally, when you're trying to get them up to speed and put a Gallagher G on the door instead of whatever the name was before and get people to buy into the culture and all those things, you've got to get your house in order. This is what we've been doing, right? Now that they're fully integrated and they've got the G on the door. People understand who we are and why they've joined us and what it's about, so it's an attraction to do more deals. That's why in New Zealand and Australia, we can do lots of little book roll-ins constantly, we want to raise the game a little bit if there's anything out there.
I just think naturally, the word is out, right? The brand is out. People want to join us. I'm as bullish as anybody you talk to about no matter where we are in the world, that we've got a great brand, and we're a great solution for the right sellers. Not all sellers, but the right ones.
Thanks, Jim.
Thanks, Greg. Thanks, everybody for being nice to me.
Next up, we have Scott Hudson, who's the leader of Gallagher Bassett, which is primarily our risk management segment. Scott, the floor is yours.
Scott, it's my fault.
Hey.
How are you? Good morning, everybody. As Ray said, I'm the president of Gallagher Bassett. Did I hit me yet? Is that working? Okay, maybe it helps me. Got it. I'll try again. I'm Scott Hudson, president of Gallagher Bassett. What I'll do here is, as I always do, I'll dimension the business for a couple of minutes. Like everybody else, I'll talk about organic growth and what we're doing to drive that forward. M&A activity, a little less prominent for us, but we're picking up the pace, so I'll mention a few things there. Productivity and quality, and then I'll end on culture, and then open it up to you guys for questions. In 2017, we were $750 million. That represents just over 15% of the Gallagher enterprise.
Another way of thinking about us is, we pay out over $9 billion in insurance claims. If you look at us in the context of an insurance carrier, that's a well over a $10 billion insurance carrier. We don't take risk whatsoever. We're basically working as the stewards of others' enterprises, others' reputations and businesses and employees. We serve four different customer segments. The traditional one is our, what we refer to as risk management, the large commercial entity, taking a fairly large deductible or a self-insurance stance. Well-known companies, Waste Management, McDonald's, Hyatt Corporation, on and on. Public sector entities, could be small local authorities in the U.K., could be state governments that have work comp-related programs, State of Connecticut, State of Nebraska, State of Oklahoma, State of Minnesota. Could be schools, Miami-Dade Public Schools.
Could be large state governments in Australia, State of Victoria, State of New South Wales. A number of different types of public entities. Insurance carriers, you heard me talk about this a fair amount, but that's a growing part of our business, where we're having conversations with carriers and saying, "We're a legitimate, actually high impact alternative to you handling claims yourselves." Then the alternative market solutions, whether they're MGAs that kind of take claim handling into their own hands, or whether it's a captive organization that takes responsibility for handling claims. We talk to them and say, "We're your claims solution as well." In terms of the products itself, we're still predominantly work comp, but that continues to shift kind of every day and every month. Over 60% of what we do is comp.
The rest of it kind of spans liability, and then we have a smattering of property. We're still not a big property player. Interestingly, though, I say that in the U.S., that's not necessarily the case. If I was talking to our team here down in New Zealand or Australia, we're actually far most prominent on the property space down there, somewhat on the heels of a recent acquisition. Just a reminder in terms of how we get compensated. There's a few different ways. Some of it's a per-claim fee, whether it's the life of a claim or the life of the partnership we have with a client. In other cases, we've got a large enough operation where we may have, with Costco, 70 to 80 people.
That's just an arrangement where we would provide those people and then put a multiplier on top of that to compensate us for both expense and our profit. Then, with a number of our organizations, it may be a percent of premium, whereas it'll be 3%, 4%, 5% of premium, which obviously should cover our cost and give us, hopefully, a healthy margin there as well. If you think about our competition, I've said this many times, it varies a little bit by where we play. In the U.S., there's a handful of kind of well-known TPAs that have kind of been doing the same thing that we have for a number of years. Sedgwick, Broadspire is part of Crawford. A couple that are connected to insurance carriers in the form of ESIS and Helmsman with Liberty.
CorVel, which was a managed care company that's now moved into the claim handling space. We've got just over 5,600 people handling claims throughout the world. Where we're primarily located, as I said, is in the U.S. We've got a large contingent of folks in the U.K. that leaks out into other parts of Europe. Then we've got a significant operation both in Australia and New Zealand. That said, because of some relationships we have, though, we do have clients where we're actually handling claims throughout the world, maybe upwards towards 50, 60, 70 countries. Our expectation is we'll continue to expand our own footprint there as well. Couple of concluding comments in terms of just mentioning the business Mid-single-digit organic growth over the past five years.
That wasn't necessarily the case, as you guys know, last year, but we've picked up the pace heading into the fourth quarter of 2017 and had a strong first quarter moving back into that mid- to higher-single-digit range, things continue to look positive for us. Margin, low to mid 17 range. We feel good about that. We have done six acquisitions to the tune of about $25 million. I'll talk about this in a little bit more detail in a minute, but over the last few years, we have been acquiring. There was one even in the first quarter of this year. The expectation is we're starting to see a pipeline that we're building, and would like to see further acquisitions down the road.
When we think about organic growth, and how we're trying to position ourselves to grow our business, it's a couple of things. One is, there were the tides rising, the fastest growing segments in our business. I mentioned the core risk management, where it's been kind of the traditional hotbed over years for us. There aren't a lot of new McDonald's coming into the marketplace. That said, we're out there fighting each and every day trying to take those from our competition. The part of the business that is growing is the insurance carriers. It's a tough sell at times. We're starting to see a continued uptick with that, where there's interest in that, but I would expect that will be a significant driver of our growth both this year and well into the future.
The alternative market stuff is a place where we just haven't historically played a whole lot. We've got a great captive operation, and to the extent we can continue to turn some of their way of thinking into our direction, I think we'll see significant growth with MGAs as well as captive operations. Kind of the second area where we're trying to drive growth is with the product itself. I mentioned that we're predominantly a comp player, but there's a lot of efforts underway to get bigger and better and more prominent in the liability space. We've handled general liability, we've handled auto. When you think of general liability, it's a lot of premises type, slips, trips, and falls and that sort of stuff. We're starting to advance into some specialty lines. We've got a group inside GB that handles medical malpractice.
We recently acquired a company that's big in long haul trucking liability. What you're going to see in the not too distant future, we're already starting to do it today, is positioning ourselves as deep experts in those areas. I think there's a lot of untapped potential within other product lines. The comp piece, where we've been for a long time, pretty darn competitive, fairly mature. I think on the liability side, there's a lot of potential upside. There's geographic expansion, which is, although we can handle claims on behalf of clients throughout the world, there's many places for us to go that we aren't today, where we don't have people. I would expect that kind of behind the leadership of Jon Winsbury, who heads our international operations, we're going to be continuing to look. Patrick, did I just go off?
Yes.
I don't think that's me. Just John. Hello? Hello? You going to make me hold that thing up to my ear?
Go back to this one.
We're back.
Sorry.
Hello?
Hi. We're back.
Okay, we're back. Apologize for that. We were talking about geographic expansion, where we can plant additional flags for Gallagher Bassett throughout the world. The one thing I'll preface that with is, we're only going to go somewhere where there's sufficient volume of claims, because we've got to build an operation of scale, both in terms of systems and technologies and operations. Occasionally somebody will come and say, "Can we handle a half a dozen claims in XYZ country?" That just doesn't make a lot of sense for us. We have to have line of sight towards the potential to build something of significance. The fourth driver of our growth is kind of the cornerstone of who we are and what we do, is we got to deliver one heck of a great outcome on a claim.
More than anything, if we can prove, and I believe we are pretty darn good at this, if we can prove to the buyers that you're going to get a better result with us, that more than anything will be the primary driver of our growth, both today and well into the future. Shifting gears from growth to M&A. As I mentioned, we've picked up the pace a little bit recently. Just this year, a company by the name of TriEx down in New Zealand. Smallish company, but got us into the occupational health and workplace safety services. We were in the personal leisure space in New Zealand. This is an opportunity to kind of broaden our service offering down there. Last year, if you go back into 2017, there were three companies that we purchased.
One was National Transportation Adjusters, a smallish company. Smallish in size, but pretty darn good in terms of expertise and brand throughout the U.S. They're in the transportation business, long haul trucking. In the U.K., we bought a company by the name of Strada that specialized in uninsured loss recoveries. That's been a huge win for us within our motor offering. Also back down in New Zealand last year, at the beginning of 2017, we bought a company by the name of Symmetry that got us into property, motor, and marine in a pretty significant way. Just as a reminder on the M&A front, we're probably far more interested in buying additional expertise that expands what we do, more so than buying volume. Right now, our primary way of getting volume is taking it from the competition.
At the moment, we don't necessarily go looking for ways just to add volume or scale within existing product lines. Productivity and quality. Let me start off by saying two things on the productivity and quality front. One is, and these probably deal more with quality. As a reminder, just another reminder, we're, in terms of overall profitability, we're the 17%-17.5% when it comes to margin, and that's expanded nicely over the last five years. I do want to mention a couple of things on the quality front. Recently, I think I mentioned this last time, is Advisen released their biannual survey that basically said, here in the U.S., according to risk managers, the guys who buy our services, we're the best. We are ranked the highest quality claim handler. That's not just within the TPA space.
That was against carriers. The ones that you could all list, the well-known ones that have very strong reputations when it comes to handling claims, we were at the top of that list. I think that's a pretty strong statement in terms of the franchise and the enterprise that we're building, not just here in the U.S., but throughout the world. The other thing that's getting a fair amount of commentary is our analytics capabilities. We have a tool that we provide to our clients that they use, as well as our professionals use, by the name of Luminos. It's essentially the tool that you'd use to kind of evaluate the performance of your program, to know whether the claim handling is indeed delivering the great outcomes that we profess to be able to do.
That tool was rated the best among our competition. I think it's a statement that the investments that we're making are actually starting to pay some dividends. A couple of things around just overall productivity and quality that the primary drivers of it is to the extent we can take advantage of scale. We're doing this. What we're doing in the IT area, what we're trying to do in the operations area is make sure we're not building separate and distinct operations around the globe where there's opportunities to do it once. If we're building a call center for intake, let's do it in one place. Let's do it the same way around the globe. We're starting to see the ability to do that.
At the end of the day, I need a guy handling a claim in Australia. I need a guy handling a claim in Florida. There's other aspects of that in terms of the backroom financial operations, some of the call center operations where we don't have to replicate those. Global integration, even on the product development side. Believe it or not, some people don't necessarily always see it this way, the way a work-related injury claim is handled in Melbourne, Australia, is not that different. There's a different regulatory environment. There's some nuances with the medical system. You still got an injured employee, whether they're sitting in Miami, Florida, or whether they're sitting in Melbourne, Australia. We're finding opportunities to make sure that we're doing the way we develop products consistently across the organization.
Technology is helping us, whether it's our centralized service centers and the ability to do things now long distance, whether it's tools that are making our people more efficient, we're looking into those all day long. The other thing is we're using our service centers. The service centers that Vishal Jain and his team are building both in India. We actually just started a pilot where we've got nurses in the Philippines. We've got significant operations being developed in Las Vegas. That's where the call centers are. A lot of things as it relates to thinking about how to make our people more productive, at the same time, deliver a higher quality product. The last thing I did, just in terms of kind of productivity and quality that's so important for us is the data.
The question we get asked every darn day is, do we have good, secure, tight controls around our data? That's absolutely essential given the nature of the data that we're handling on behalf of our clients. I would put our operations from a technology standpoint up against anybody's. When clients ask, a lot of the large. The one reference I always make is to Halliburton. They came in and kicked the tires in a pretty significant way to make sure that our data was secure, we got the seal of approval from an organization like that. We feel pretty darn good about not only the capabilities that we're building, but the fact that it's a very, very strong foundation. Culture. It is a competitive advantage. You hear about it all the time.
I'm going to share one interesting story just to kind of highlight it for us. I just was looking at the Business Insurance this month, June 2018, breakout awards. These are the kind of the new big guns in the insurance industry. We've got a guy from Gallagher Bassett, Joe Powell, who's our Vice President of Analytics. How this relates to culture is Gallagher Bassett is no longer just a bunch of claims professionals. We're bringing in new and different talent, young talent in a lot of places. Joe came from Bain, I think, three years ago. He's a self-described technology geek. In terms of the things that we're doing around both the use of data In terms of the application in our business, the tools that we're building.
In a lot of respects, if you start looking at us as an organization, it's not just a bunch of claims professionals. The technology team that we're building, the analytics professionals that we're bringing into the organization, it is a little bit of a new and different type of organization. I'm pretty excited about the talent that we're bringing in, and that in and of itself is driving a pretty significant change, both within the culture that's quite exciting, and it's starting to, in a lot of respects, rebrand who we are and enable us to attract some people that maybe otherwise we wouldn't have done in the past. With that, Ray, do we have any questions?
Any questions?
Scott,
Hey, Greg.
The margin profile that you guys have.
Yep.
It seems like you're, among your peers, producing some of the best results that we can sort of see in the marketplace. Can you talk about what structural disadvantage that might present to you from a pricing perspective on a longer term basis if some of your peers could be running at half that margin? Does that present some competitive headwinds? Obviously, it hasn't to date.
It hasn't. If you look at our growth just this past quarter, it's pretty darn strong. I will say that the pricing challenges like in the U.S. work comp market, in some respects, I would say may be a reflection of just some of the challenges some of our competitors are having, not necessarily that they have a significant cost advantage. I guess what I would probably say, Greg, is that's something we're keeping an eye on. At this moment in time, it really hasn't been an issue. The other thing you got to be able to draw a distinction to is the nature of the buyer. When we're talking to an insurance company, it's a bit of a different discussion in terms of their strategy, their business, how they're positioning themselves. I would say they're somewhat less price sensitive.
Not that they don't care about price, it's a different discussion in terms of their overall strategy and their business because it's so integral to it. You go down to Australia, where we're working right now, the competitive landscape, the whole notion of a TPA is still a little bit of a different game. You go into New Zealand, what we're trying to do in the U.K. In some respects, the markets are a little less mature. In the U.S. where the market is mature, it's competitive, in areas where we're breaking new ground. The other way, probably be a little cautious how I say this, when I talk about the specialty lines, those are actually higher margin areas.
Moving in where people are buying expertise, and as much as I'd like to say our work comp product isn't a commodity, because I don't believe it is, on occasion, people buy it that way. I think moving into specialty lines is a way to protect margin and potentially expand it a little bit. I think the international growth is a way to protect margin and potentially expand it a little bit, I think with the other segments. At the moment, I don't see it as a disadvantage at all. We'll keep an eye on it, because we're going to win business. We're going to win business, if at some point it's a problem, then Doug and I'll probably be having some conversations about that. Right now, it's not a challenge.
Yeah. Just a question on frequency trends in workers' comp. Last year, I think they were down, they've been declining for years. What have you seen year to date? Any change in that, or is there a continuation of-
Let me, just to clarify, there's kind of the broad market work comp frequency, independent of Gallagher Bassett. Then there's us and whether we're seeing growth within our client base.
Yes. Please comment on both.
The first one, I don't think anything has changed whatsoever in the sense that there's been, I don't know, pick a number of years, 60, 70, 75, 80 years, there's been declining frequency within workers' compensation. The workplace is getting safer, technology nowadays is helping it. That's not going to change. We're playing in a space that is a bit of a challenge from that standpoint. One of the ways we look at claim counts is we look at our existing client base and just see whether or not claim counts are growing there. That's interesting because it's more a reflection about their economic strength. Do we have a client community that are growing their business? Is Costco opening new warehouses? Is McDonald's opening new restaurants? We have seen an uptick.
Last year, it was close to flattish, maybe leaking up in the direction of 1%. We have seen, over the last probably four or five to six months, moving in the direction of 1%, maybe 1.5%. There is a little bit of an uptick that might help us a little bit, but not like it may have been five, six, seven years ago. It was like 3% or 4%. That's primarily on the comp side. Liability side is probably growing a little bit stronger. There's nothing that's going to fuel our business at the moment. In some respects, it's probably like the brokerage business where rates are flattish. Claim counts are not the thing right now that's going to propel our growth. We're still going to have to win new business. I'll say one last thing.
On the comp side, where you are seeing a continued increase in utilization is within the managed care suite of services. The actual number of work comp claims may not be growing, we're still working hard with the different suite of services that we have, whether it's the nurses, whether it's the pharmacy programs, to try to contain costs within the work comp space.
Hey, Mark.
Hey, Scott.
On the insurance front.
Yeah.
It sounds like you're optimistic about picking up share from the carriers, presumably outsourcing a bit more of their claims.
Yes.
Is there some turn in the market? I think this has been something that's been a long story, you're having some good success lately. Can you attribute that to any broader issues, or you're doing a better job?
I'm not sure. Some of it is the carrier is getting more comfortable with the story, it takes time. Whether it's changing leadership, that is a factor. We have to burn this into the insurance marketplace mind that a TPA could be an alternative solution to handling claims. That will take time. I think our operation, we have a dedicated operation for carriers. We established that three or four years ago, it is different. At the core, it's still a work comp claim or a liability claim. The way we face off with the carrier, the degree of integration with their operations, their underwriting people and so forth, is different. It looks a little bit different. We're getting better. Every single day, Don Griffin is building a better product for us that probably is more enticing to a carrier.
The other thing that's happening is we're getting better in terms of selling. We're sitting down there with Suncorp in Australia, we're handling their catastrophe claims. Now we're being a lot better at having a conversation with them on other lines of business and at least piquing their curiosity, that now we're doing three or four or five different things with them. We're still in the first inning. That's why I think if you just look at the volume of claims that are in the high-deductible self-insurance space versus handled by carriers, the numbers aren't even close to one another. Where the real upside for us is to continue to win that game.
The other place I think I've mentioned to you guys in the past is, it's the organizations that can avoid or not have to build their own claim operation. I think we probably have somewhere between five and 10 InsurTech players that are using our claim operation as opposed to building their own.
Yeah. What's the vibe there in the alternative market, where you've got more of a virtual insurance company, you're doing more wholesale back office for them or claims for them?
You said, what's the vibe?
I think, yeah. What's the vibe, baby?
Well, it's
How are things going? Are you gaining momentum there?
Well, we're at the mercy of them actually selling their business. I wouldn't say the thing is it hasn't skyrocketed yet. As I said, we probably have, I want to say it's seven or eight pretty well-known ones. There's some that you'd know them all. The volume of claim activity coming from them yet is not changing the trajectory of our growth. I would anticipate over time that a few of them will break out, and we'll see. I like the fact that we're in the game, because it's a segment of the market that if we weren't there, you'd probably feel a little bit uncomfortable that there's an opportunity that we might be missing. A lot of it tends to be as you would expect. It tends to be small. Some of it's personal lines.
We're actually leaking into the personal line space, but small commercial. We're not talking large commercial-type deals.
You mentioned InsurTech, and you hadn't really talked about that in your other beginning comments. Just if you could close out, just walk us through how you see technology in your group, in your business from there's an automation component of it, right?
Yeah.
That you can further automate what you're currently doing. There's this holy grail of AI out there that's actually wholesale replacement of existing workflows.
There's three pieces.
Yeah.
We think about it, there's three components. If you think about our architecture and what we're building, there's the technology to handle the claim as efficiently as possible. Whether it's just advancing the state of the art of that technology, we just put in a new liability system on the backbone of a provider by the name of FINEOS down in Australia. We're doing that sort of stuff. That's the core claim handling, where you record the claim, you process payments against it. That's one piece of it. What we're doing in that world, inside Gallagher, you'll hear things like RPA, robotics, where we're actually using robotics also to process work more efficiently within our operations. That's all about making it more efficient, making sure we're getting good capture of data. The second thing is decision support.
This is where you start moving into a little bit of the machine learning AI world, it's how we basically take advantage of the vast storage of data that we have to make better decisions at the points in time throughout the claim life cycle. There's 100 decisions that go on in a claim. Do I extend the investigation to learn more about this? Should I involve a nurse professional? Who is the best doctor to involve in this claim? Who's the best lawyer to involve? All of those things have artificial intelligence applications that we can bring to the party, we're building those things, we have them right now. We've got a number of decision support tools that have been put in place throughout our operation.
The third piece to the puzzle is what I've described as Luminos, which is using the information where you've got different types of professionals kind of peering into it, trying to gain insights on why is claim volume increasing in this part of this client's operations, or why are our results not quite as good, starting to ask the questions and reconfigure the way the program works.
Is that triage? More like a triage?
To me, it's just good, strong analysis. It's putting the right people with the right data that have the tools that do interesting analytical exercise against it to try to figure out what's driving something. What's the underlying root cause of why something is happening, then we'll reconfigure the operation. The other piece, which goes back to the operation, is mobile technology. If I had my phone with me, we've got lots of things that we're doing to basically interact differently with whether they're our clients, whether that's the person who had the claim, because that's the way people want to be interacted with. We're investing technology-wise on kind of multiple levels and multiple tiers. All of it's happening. Thanks, guys.
Thanks, Scott. The next up is Doug Howell. He's going to be talking about clean energy and probably CFO commentary. Doug, next 30 minutes are yours.
Hello, everyone. Thanks for joining us today in person and on the phone. We've got about 45 minutes or 50 minutes together. There's a lot of topics that came up this morning that maybe I'll just plunge into on a couple of things just to provide some clarity. Let's talk a little bit about data and talk about technology just for a second, since Scott left off on that. Really, in my opinion, first of all, data, it was once described to me in a very sleazy way, is that when humans have a theory, data helps confirm it or disprove it.
Now we're into a new world where data can create theories that humans may not have thought of. Then we can spend time thinking about that, the output of the data, to see whether it creates new ideas, new theories, new hypotheses that we can explore. In our case at Gallagher, data is used in so many places that it's almost indistinguishable from the daily operations. Mike Pesch talked about SmartMarket, in fact, Gallagher did also. SmartMarket is an outcome of a hunch that carriers would like to spend their time more on risks that they have an appetite for. Our producers would like to spend less time with carriers that don't have an appetite for the risk that their clients are going to have.
Also, every client, every line, every bit of information exposures are a little tough to get it in some cases. By and large, we have that in our systems now. We have it for about 96% of our operations worldwide. It's actually in our data warehouse. A risk at any place in the world, we can now slice and dice and understand it. We use that data to help our customers. Taking that to the next step, we talk a lot about Insurtech, and I want to make sure that we divide our thinking the way, or you can segment your thinking the way you choose. We choose to think about Insurtech in two buckets. Is it distribution tech or is it service tech?
In our case, when we look at 1,000 different blooming flowers of opportunities that are happening around the world, we divide them into that and say, "Can it help us sell more? Can it help us service better?" We compare it to our own technologies. I will tell you that we have technology that we have developed already inside of Gallagher that far outpace what is now being trumped as being, sorry for that word. As being touted as being revolutionary technology that's going to revolutionize the insurance space. We compare it, we look at it, we tear it apart. We compare it to ours. I'm telling you that we have technology that far exceeds some of them that are in the marketplace right now.
I can also tell you that our process of standardizing our operations over the years and moving work into India and other offshore and onshore centers of excellence has allowed us to move information there. That's really the innovative spot for our technology innovation. We work first into our service centers, standardize it, and then apply technologies to make it more efficient. That's on the service side. For instance, years ago, 12 years ago, we created an application called the VIN Checker. We created a technology that actually you can put a VIN into the car, and it will tell you whether you got a transposition in it or it's not an accurate VIN number, because there is a code.
The fourth digit times the fifth digit has to equal the sum of the last two digits, or convert that into a digit out of the alphabet, and therefore you'll have the code. I don't know how we did it, but somebody figured out the code on that, and so now we check all VINs. That's improved our certificate or our auto ID issuance dramatically. That's service tech, in my opinion. I do believe that the predictive analytics that are going on, Scott Hudson's business in Gallagher Bassett is way out in front of us. The predictability of an accident in the workforce or the predictability of a claim arising in a state versus another state is very high and very sophisticated right now. That's a belief in creating competitive advantage. What's our strategy on these?
Watch, learn, monitor, understand if they can help us, and if not, quickly move away from it. If they can help us, offer to partner with them because we have the domain knowledge. The idea, like Pat said, of us just putting $70 million into a fund and having us go off and sprinkle it around on all the followers like pollen is not something we're going to do. That is not our strategy. I think that we've proven that chasing some of the most exciting new innovations, I'm happy you heard Bill talk about Gallagher Benefit Services, that we did not spend a ton of money on exchanges. We offer a lot of alternatives for our customers. We're watching and learning when it comes to that. We'll get back to that point, I'm sure, in Q&A. Other things is M&A.
There was a question about why is it that we can still buy at seven and a half to eight and a half times versus PE firms chasing prices that are 10-12 out there. Here's the reason. First of all, there might be a size sorting. The smaller the agency, typically, the less you'll pay for it as a multiple. Let's take that out. I'll use a classic example. My daughter, 25 years old in Los Angeles, is trying to bid on a little bungalow. Bungalow happens to be owned by a gentleman next door at 81. She bid $100,000 less on the property, and he sold it to her because she wrote him a letter that said, "I'm a young, emerging professional.
This is going to be a home where I want to perhaps get married in here, and perhaps children in." The 81-year-old next door said, "I don't want to sell to the other people." He took $100,000 less on his property because she wrote him a letter. There are a lot of people like that guy in the world, but probably none of them are in this room.
What the heck are you saying?
I don't want you to be my daughter's neighbor. The point is, people will take less price if they see themselves living there, and he's an optimist because he said that, "I can't wait for the next 10 years of being your neighbor." He's 81. There are so many people that actually, it's not always about the money. We find those people that want to join us for our capabilities, our creativity, the excitement, our internship program. We talk about that a lot. Our emerging technologies that are to help them sell insurance and be better. They want to live together with us, and they want to grow and live their life, and they see us bringing all those things that a good neighbor or a good family might bring to their life, and they'll actually take two turns left for the price.
They get to live their life with us and do the things that they want to do, and maybe have their children come into the business. There are lots of them out there, and they're really solid people, and they have the culture that replicates ours. We say this a lot, and I don't know if it was said earlier today by Pat, how do you keep the culture alive when you got 30,000 employees? It's hard to keep a family culture alive, and what we really are doing is we're buying and hiring people that share the same values and culture that we think is important or that trade with one another.
There is a difference, I don't know why it's hard for people to grasp that we can buy cheaper because of our capabilities, our culture, because of the success that we have going, and people want to be a part of it. That was something else. The other thing I wanted to talk about was, I want to go through organic a little bit because the question was asked is if you get a little bit of a tailwind. Tailwind for us right now from rate and exposure combined is around a half a point, let's just say. A year ago, or two years ago, probably, it was a half a point strain. Last year was probably more flat. We've kind of gained a full point, and lo and behold, in 2016, our organic was probably three and a half.
In 2017, it was four and a half. We picked up some steam there. Some of that was because of our international operations also that went from having actually negative growth. If you remember that Australia had negative organic growth, they're killing it right now. They're absolutely doing well. I think they've posted 5% organic growth year to date, something like that, compared to a 7% strain a couple of years ago, because now they have a culture of selling. They have a culture of being expected to grow and wanting to grow and giving people when they want to grow. The headwind that we had two years ago, last year a little bit, this year it's turning positive. It's also important, and Mike closed with it upon reminder, that customers will opt out from buying more insurance when rates go up.
The same reason, if you go back when rates were going down 15% a year, we were still organically growing. We were at negative organic growth of 2% when rates were down 15%. It's because when you show up with a price that's 80% less than it was last year, a lot of times they'll buy more insurance. They'll bring their deductibles down. They'll increase their exposures on it. They'll add coverage that they may have opted out in the future. You get opt-out when rates are going up a little bit, and you get opt-in when rates are going down. It creates a little bit of a stability as you go. How to quantify that is kind of tough now, but we're getting there, right? To actually quantify that.
I know rate and exposure combined, half a point of growth for us now. Places where we have really good growth, you heard Pat say Australia and New Zealand are killing it right now. Canada's doing decent. The U.S. across all lines is doing pretty well. Our wholesale business in the U.K., $100 million business. We're retooling that mainly because we didn't have the data as we put together a bunch of small wholesalers there. That's coming on. London specialty is having a flattish to a softer market there. There's not really many places in our, as I look across our 700 branches around us. We have some that aren't growing because they lose a client, et cetera. By and large, there's a lot of green on the page. There's growth across all geographies.
Those are a few things that I wanted to clear up in terms of questions that just to provide a more of an analyst view of some of the answers. Is there anything we should stop on? I want to go into Queen City, I want to go into cash, I want to go into further M&A. I'll mute. First hand up, I guess.
Thanks. In terms of, you were breaking down the kind of one of your closing comments about the fact that someone might set a certain budget right, that they don't want to increase depending upon the change in price. Can you help at least us understanding what % of your business are you seeing that phenomenon where someone's not willing to spend more on coverage when you're seeing the deductibles go up as prices increase?
Yeah. Here's the thing, I can tell you why. I can't describe human nature. That's human nature. Who wants to spend more on insurance tomorrow? Nobody. I can describe that, right. Just like, gee, how many of you want to go out tomorrow and spend more on your cell phone? The answer is none. Here's the thing. I'll go back to my daughter example. I was pretty happy on those two lines until they got to be 14. Now I need four lines, right? My exposure on the cell phones grew, so I had to buy the extra line. I then looked for ways to maybe find a plan that was cheaper for four lines relative to if I just added two more. Yep, they'll do that. They can't control exposure. Like they add a truck they can't control.
You got to insure it. They might bring down their deductibles. I would say it happens to every single person that we sit down with that they say, "I don't want to spend more on my insurance this year than I have to." Right? Have to is a different thing. If they get busy, they buy more trucks, they buy another building, they have more employees on payroll. Economic activity leads to their inability to say, "I can't let my insurance go up." Right? Our guys and gals are really great about making sure they come in with that premise, is what do we want to do? We want to give you the right insurance program for your needs today without breaking the bank.
Some of it's human nature, and some of it's just our own doing and saying, "We've got solutions to have your insurance premiums not go up too much." That's what a broker should be doing, because we're representing them.
A second question on M&A. If I look on page five of the CFO commentary, can you give us the acquisition roll forward?
Yeah.
It seems like the second quarter in terms of announced deals was actually pretty high, higher than I would have thought it would have been. Can you just comment on, I guess, the deals and the revenue that actually came through in the second quarter? Because when I think about the Q2 and the first quarter, that's the roll forward. Those numbers $37.5 million and $50.5 million-
Yeah.
-are pretty high.
Yeah. Here's the thing is, I don't know. I think that the number of deals that we've actually closed through June 12 is it 37, Randy? Do we say that in here anywhere?
We don't say that.
It's 37. I'll tell you, it's about 37. The Pronto acquisition deal is a sizable deal. It's over $100 million worth of revenues for us. I want to talk about that for a second because that's a terrific program. That's contributing to a large portion of that would be the Pronto acquisition when it comes to revenues. Does that answer your question?
Yes. That was just we're thinking about that kind of roll forward evenly or just Pronto mainly?
No, it's non-standard auto. The revenues are pretty well straight lined through.
Okay.
Remember it closed beginning of June.
Yeah.
Right. We only get a month this quarter. Let's talk about Pronto just for a second because I think it's a really exciting opportunity for us. I want to make sure we frame it. Joel Cavaness' post-op program business is exactly what Pronto is. Pronto is a program where it has identified a specialty niche, small size policies, many times in an underserved insurance line or market that have a special way of promoting the product, servicing the product. All right? Therefore, it's a program. It's a non-standard auto program. Joel has a lot of mobile home programs. He has small bar and restaurant programs. He has cyber programs. These are specialty carriers will come in and say, "I have an appetite for mobile home business in Oklahoma." Why? I don't know. Because they strive.
That is one of those things that they know because they understand that there's a premium there that people will pay for the risk that's going to hit every few years. We have programs like this throughout Gallagher where we have an airplane hangar program. Private airplane hangar program that we have, which just does nothing more than you're up to all the little executive airports or countryside airports, there's hangars on them. We have a program that insures those. We have programs that insure storage facilities. Pronto is a program where we have carriers and reinsurers that have an appetite for non-standard auto risk, and it has a unique way of distributing it. I will reference back to Goosehead. Goosehead is a unique way of distributing a homeowner's product by and large. Right? Pronto is a unique way of distributing non-standard.
We think that because of our other things, I think there could be natural extensions to that relationship with that family, as it's an emerging middle-class type family, that we can put other products that we have. We have renters insurance. We have homeowners insurance. We have flood insurance. We have small commercial insurance, a few other programs that we can offer through the Pronto relationship and distribution. That's a nice size deal for us. It's going to be a great partnership. It's $100 million-$120 million worth of revenue. It has excellent margins. It's a nice program for us.
Do you have the confidence it's a multiple paid there after looking at the data?
Yeah. We paid less than 3x revenue for it.
Thank you.
So.
I think on the earnings call, you guys talk about 4% being the newer term focus for margin expansion versus 3%. I think that was a shorter-term thing versus 3% still being a longer term. Is that because there is opportunities for reinvestments nearer term, or are you seeing wage inflation, or what is causing that threshold to be a little higher?
All right. Let's clarify what I think I said, that I may have butchered when I said it, is that I think it is very difficult to expand margins below 3% organic growth. I used to say anything over 3%, pretty easy to expand margins, especially if it was repeating. Of all the things that you said, and I will repeat them, there is a number somewhere between 3% and 4% on any given quarter, where it might be a little more difficult to expand margins. If you said, "Doug, we are going to post 3.5% organic growth for the next 12 quarters straight," there will be margin expansion at that level. Truthfully, I might even be able to say at 3% organic growth over the next 12 quarters, there could be some margin expansion, right? Why is that different than the firm statement before?
I do not know if it really is. I think it is interpreted as being that way. Why are we excited about there is wage inflation, but I think we have a good mitigator in our offshore centers of excellence in our lower-cost labor locations. I think that some of the professional positions are getting more expensive to get. Anybody that is IT or data, even accounting and finance, it is harder to attract people here 10 years after the Great Recession. We are having to pay more. One of the things that I am watching very closely is replacement levels for salary. Termination versus rehires. There is a premium you are paying for new hires unless you can bring down the experience level and hire at a less experienced level and bring them in and train them up to do that.
There is wage inflation out there, but I believe that we can bend that curve because we still have substantial opportunities to push more work. Standardized work is still pushing more work off into our centers of excellence. Investment opportunities. One of the great things about these days is because you get to hear about the excitement that the team has about all the great things that we are bringing to our clients, and that takes money to do it, to be honest. In order for us to harden our environment, the IT environment, in order for us to consolidate operations that are not integration, but we just decided to consolidate, in order to put more people that are doing really smart things for our customers, that takes a little bit more money.
All of those things chip away a little bit at that in that 3%-4% range. There is that break point there. That doesn't mean long term. Boy, if we were to have just a little pullback in the economy, just in terms of the hot labor market right now, sure, 3%, we can A repetitive constant growth at 3%, we'd have margin expansion. James?
The SmartMarket, again, can you size the amount of fees that the company generated from SmartMarket in 2017?
I don't even know if it's $10 million or $100 million.
It's more the former than the latter.
Okay. What are the margins on that? Is it 100% margin?
No. The question is, and I'm just going to use a number, say it's $10 million. Just the size, the prize, and I know there was reluctance to give that, and I don't know why necessarily, but let's say it's $10 million that we collect from 20 different insurance. It's not a big number per insurance company necessarily. I'm saying that we actually put our concierge on point for that. Just providing data to an insurance carrier doesn't necessarily lead to value for the carrier. They need to understand what the branch is, who's the branch manager, how do I get in contact with them? It is not 100% margin type. I mean, we do have people that run that process, right? There's data analytics folks that slice it and dice it and do it. Is it 50% margin? Sure. Is it 90% margin? No.
It's somewhere in between there. If it's not $10 million, it's $15 million. That's been growing over the last three or four years here. It's not like it's just something we did in one year. We still have further opportunities for that because we think if we now can demonstrate that it's a superior way in order to bring value to our customers, that we actually can align our customers with carriers that have an appetite for that risk. If they have an appetite for that risk, odds are they've got a better policy for our customer. That's what we're really trying to do. The better terms and conditions, better amendments to it, service capability, specialty. If the claim is handled by the carrier, they may have specialists in that particular line that they're very good at. We know how specialization helps.
I mean, Scott Hudson talks about that with Gallagher Bassett. You can customize and tailor your claim handling to the line of business or the industry that line is, you will deliver a better and superior claim outcome. That's what Gallagher Bassett does all the time. They segment, they specialize, and they deliver a superior outcome. There's carriers that do that on certain lines of business, too. If we can get our customer into that line of business, to a carrier that wants it, they will receive a better policy and a better claim outcome if they have an accident or a loss.
Did I hear Pat correctly, you're at 400 interns, up from 300 last year?
Yeah. Here's the way, a couple different ways. We have about 400 here, but we also probably have another 100 internationally. I'll tell you, we got 50 kids in our I shouldn't say kids, young adults in our finance and IT internship program, too, that we've got. I actually believe there could be as many as 600 different summer internship kids running around our offices around the world at this point.
Is that up from 300? Is that the right?
Yeah. Last year was probably, on the same comparison, let's say we have 600 this year. Last year, on a comparative basis, we had 450. It was good.
What's your total broker count?
6,000-ish, something like that.
The HireRight, Joel Cavaness seemed pretty enthusiastic about the impact that's having on his business. Is it meaningful and is it ramping up?
Was it Joel that said it or was it Mike Pesch that said that? Was it Mike Pesch?
Both said it. It was Joel.
Yeah. Are you talking about the program where we bring folks in from other industries?
That's right.
Yeah. Actually, it's more than the tip of the pen. Let me put it this way. I think that we've discovered that there are some industries that well align with this, you can transport into the brokerage business. Is it a meaningful number? 50, 100, something like that. We're not quite there yet, but when I got to Gallagher, we had 20 people in the internship program. That was 15 years ago, and we're at 400. How would I like HireRight to go? HireRight would be terrific. I wish we had 500 people in HireRight.
Right. It could be meaningful.
No, I think.
Small.
just germinating. I think there are roots in it, and we're starting to learn. I'll share in one of my past lives, it doesn't really exist anymore, but the insurance carrier knew that you went into the white good salespeople at large stores that used to be known as Sears and Montgomery Ward and that type of things, and they would go to the salespeople in that area, and they were very successful at recruiting them out of white good sales into coming in. That was primarily selling Medicare supplement and senior products. Appointment setting during the day was appealing to them. They cracked that code, and they hired a lot of people in that. I don't know if they still do it. It's been a long time since I've been there.
Theoretically, if you had a business like Pronto and there were public companies out in the marketplace that were trading at high valuations for that sort of thing, would you ever spin off an operation, just take advantage of that arbitrage?
The question was, would we spin off Pronto because of Goosehead's high multiple? Never say never, but gee, we just got married. The deal's two days old.
I understand.
Terminating a marriage two days into it doesn't generally work very well.
No.
Can be very expensive. Listen, we really like that, and I like the distribution play, and this is what I really like is Pronto is the anti-technology play at this point. This is proving that there is a marketplace where they want to do business face-to-face. They want to get in and get out. It's the name of the company, but it's also how service is provided. If you talk to the folks, in and out, pay your premiums, get your insurance, get the policy issued on the spot, and get out of the store. That's exactly what they're doing. It's simple, easy, and many of the similarities that happen in Goosehead are also apparent in Pronto. Goosehead has both a franchise model, and they have a captive model. A captive store model. Guess what is Pronto?
The franchisees are really just really, really great branch managers that want to own a piece of their shop, fine. If you want to be able to pay for your storefront, pay for your employees, it's hard to get the franchise fee up front, but if you have it, and you want to do it, and you want to run your own territory, we're totally fine with that model that Goosehead is also, the way I understand it. I read what you do in the filings. I think Pronto has a really great opportunity with joining with RPS because we bring new markets to them, we bring new products to them. I don't want to derail that and say it's going to be a full-service store.
Trying to convert a grocery store into a QuikTrip or a convenience store doesn't work very well, and converting a convenience store into a grocery store doesn't work very well. I want to make sure that we're pure to our form there. Plus, they're all products that we can cross-sell, and I think that we have the opportunity to grow that, the storefront on that. I live in Sioux City, Iowa. I was just back there to see my mom for her 89th birthday. It is so Hispanic in Sioux City, Iowa, right now that any place you go. The number of storefronts that have English on them is by far fewer in count than those that have Spanish language on them. I can't wait to put a Pronto shop in Sioux City, Iowa, or two of them. I think that it will sell.
I think it's exactly the same demographic there, and it actually is a terrific spot because it sits on the Iowa-Nebraska-South Dakota border. You've got three different states there where you can actually have three different offices because insurance is a state sold business, by and large. These communities that exist like this, that have the opportunity to provide a terrific service to a burgeoning middle class and Hispanic and Spanish language communities is a terrific opportunity for us. Whether it's non-standard auto or homeowners or funeral insurance or whatever it is that's sold, that's really kind of irrelevant. It's the way it's distributed to a niche, and the product is almost secondary.
One of the reasons why you don't want me living next to your daughter is because I'm the nitpicking neighbor, right?
All right. Give me a nitpick.
I hate to do this, and maybe I took down the wrong notes from a year ago, but I was pretty sure you suggested, or someone here suggested that SmartMarket was between $20 million-$30 million of revenue last year.
It was.
It's a small minor item relative to your total income statement, but I had the wrong impression, that's why I'm bringing it up.
I think that maybe the idea that you wrote down or somebody said, and I believe on Advantage products, which is different than SmartMarket. SmartMarket identifies an appetite that matches customers with carriers. We have Advantage products, and Advantage products are special products that we have an umbrella and a professional lines policy program with five carriers where there's 34 special endorsements. There are Gallagher endorsements that you do not get those An endorsement is an amendment or a special feature. Let's say an add-on feature you do not get unless you trade with a Gallagher broker. We have tailored and customized that product. The Advantage program might be another $10 million, something like that, where there's additional product enhancement commissions and fees that we get because we've developed a superior product for those, which would be a little bit like a program, to be honest.
It's just on the retail side. That might be what's filling the void.
Okay. When you think about it, you're obviously merging these two concepts together.
I think that the person that told you the $20 million-$30 million merged the two concepts together. When we were talking about SmartMarket, I was bifurcating that in my head. That might be the answer.
Thank you for the clarification.
You can be a neighbor, Greg. You're a really great guy.
Just stepping back, there's a lot of commentary around Insurtech and stuff. You're the master of Gallagher's budget, can you provide us a perspective around technology spend in 2018 versus 2017 versus 2016? Obviously you're growing, there's going to be increased spend, give us an idea of how you're viewing the budget from a global basis. Thanks.
Technology spend on innovation versus I think that we're spending about 1.5% to 2% of our revenues on technology related costs. That might include communications, so our phone lines. If you think it's, for instance, say it's $75 million, something like that. The IT salary and development component might be $25 million, equivalent another $25 million in the divisions, and $25 million on special projects, something like that. Innovation or modernization or hardening of the environment, it's about $75 million, something like that.
Perspective on how it's been in prior years?
I don't think there has been a significant uptick if you remove integration. We had the integration of those, I think there's been about a $10 million a year uptick in the numbers over three years just to harden the environment. I think that this is something that I always say, because we just spent $50 million and made it the most hard environment in the world, and they said, "Well, hardening evolves." Just every time you harden the environment, there's something new that's got to come out. I think that there's a pace and bandwidth on this that chasing too much of an emerging idea, I'd rather follow fast on ideas than I would necessarily trailblaze the ideas, to be honest.
One of the other things too, just so you know, we didn't mention it, on some of the Insurtech startups that are on the distribution side, Gallagher Bassett pays their claims. We have the ability to get the claim paying aspect out of it. I can tell you it's not a lot of volume.
You've been pretty active in using your own stock to fund M&A transactions. Can you talk a little bit about your strategy going forward around that, and also how you think about the potential drag it has on EPS?
Actually, we haven't been. If you really go back over the last three years, we've issued zero stock in M&A transactions that we haven't repurchased since then. We did in 2014 issue shares when we did the four large platform acquisitions in Australia, New Zealand, Canada, and two in the U.K. We really have actually, I don't know if we're at negative on stock issuance over the last three years because every time we will use stock in a tax-free exchange, where we give the shares to the sellers, and we may buy back in the market, pre-buy it or later buy it to try to not do that. The answer to you is we haven't, but would we is the next question. We're really trying to do everything with cash and debt at this point. I think we just raised $400 million.
I think it funds today, as a matter of fact, or yesterday. It might be in the bank. I think we use that. We're running fairly conservative debt ratios on a covenant basis of 2.5, 2.6. There's a little more for borrowing there, as we grow, our EBITDA grows, and therefore our borrowing capacity, and then we do M&A. Would we do stock if our M&A appetite were bigger than our cash and debt capacity? Yeah, probably. We'd probably use some. Again, if we're buying deals in the 7.5 times-8.5 times, because they want to be our neighbors, they want to be part of our family, and the stock's trading at 11, 12 or 13 times, there's a nice arbitrage on stock.
We haven't really done it in the last three years, and that would be the last place that we'd go in terms of doing deals. I feel pretty good about our cash position right now at this point. We're at $350 million on the balance sheet, I think here at the end of May. We did the debt placement. We did spend money on Pronto. We've got acquisitions that are in the pipeline. I think we're pretty well set for the rest of this year at this pace.
I wanted to go back to the margin discussion. If we think, and I know I'd asked this earlier about the U.K. and Australia, just where the margins sit today, the improvement that you've seen maybe over the past 12 months, and then the improvement that we should see over the next 12 months.
Let's walk around a little bit and talk about margins, because I kind of do that. I think in the U.S., Mike Pesch's business, Bill Ziebell's, Joel Cavaness' business are high 20s type margins, and we feel good about that in the current construct of where they are. They still have another push that they can do to move more of their middle office layer work into our centers of excellence, there is an opportunity there across all three of them. Is it meaningful? Probably enough to control some of the wage inflation that might be through raises and everything. When you get to Canada, there's a tale of two cities in Canada. We have a two branches that have really nice margins, upper margins.
We've got a two of them that we're centralizing a lot of their accounting, IT, middle office is starting to move into centers of excellence and stuff. Canada's a $150 million business, and let's say half of it has five points of margin improvement. You got $70 million on five points and $70 million, you're picking up another $4 million, right? When we go to Australia, it's a $150 million business. There's probably five points over the next two years on that. There might be on $150 million down there, another five points, pick up $7.5 million. We're just talking about margin expansion, Greg, that those are the opportunities. We've got some opportunities in the U.S. businesses. There's opportunities that should help them avoid wage inflation.
In Canada, there's probably half the business we've got five points on it, and that's call it $5 million worth or $4 million worth of additional. The Australian, maybe double that, there's $8 million. In the U.K. retail, across $400 million, there might be five points of opportunity there over time to pick up another $20 million. We're kind of in that $30 million opportunity to get margin. Now, there could be another reset. Maybe there's something that comes up that allows us to spend a lot less on back office that could contribute to that as we do. Those are the pockets of opportunity for margin expansion. Now, if organic comes, that three, 3.5, four could be some further margin than just because of the organic growth. If we start pushing organic above 5%, it just will match what. There'll be margin expansion in that.
I missed that, sorry. That's obviously I was on a different topic a second. This is the $30 million points at the end of the year?
No, I'm saying between what's the size and the prize in margin expansion. If you just bring the other locations up to where we've seen in our more mature Gallagher organization, there's $30 million more that could hit the bottom line.
Sorry, that $30 million is $7.5 million in Australia, and then how much in Canada do you think?
$4 million. I basically said between Australia and Canada, there's probably $10 million. Right? Then in the U.K., there's probably $20 million.
There you are. Timeframe, we are looking at about five years?
No, I think we should be able to be at those ratios by the end of 2019.
Okay.
Absent something else happening. I think that the projects that we have in place, the ability to get. We got to inculturate first. We've got to invigorate because we want people to sell insurance. We want to then work on. The first thing is to motivate the production talent, motivating the production talent while you're ripping out costs in the middle office or the back office layer would be demotivating to them. We've got to get the culture of selling going first, and that's happening. Next thing is you go in and you have to bring technology and resources to bear, and that takes a while.
It takes a couple years to get them to be selling like a Gallagher organization, and then it takes a couple years more in order to get an organization to start really grabbing on to the opportunities to improve their middle and back office operations through offshore centers of excellence and some other centralization and technology opportunities we have. Right now we're through that. We're through the sales culture. We're through talking about that I'm old little Giles on Gallagher. I'm through talking about whether I'm OAMPS or Crombie Lockwood on Gallagher. Those type of things. Although we still trade as Crombie Lockwood in New Zealand. They view themselves as Gallagher folks. Now we're at the process of the work of trying to pull out middle office costs and then redeploy that in production now, to be honest.
There will be money that naturally, when we get our margins up, that would go to shareholders.
Maybe half this year, half next year?
I think in the pace that we're on right now, I would say it's probably more next year than it is this year. It's a step function a little bit more that you work on it. In fact, you're trying to drive up your costs a little bit when you're doing this, and then all of a sudden you get into the harvest period. If you go back to the commentary, I don't know, three or four years ago when we first were bringing offshore centers of excellence to the U.S. and standardization, I said, now we're at the point where we can harvest some of the gains going forward.
If you go back to my early comments that we're burning about a point of margin for improvement initiatives because if you go back pre-large acquisitions into 2008 Really 2010 through 2014, the commentary on the transcripts was, is we're burning about a margin point for improvement, but we didn't put it out as an adjustment. They just know there's a program. How much are we spending today on margin improvement initiatives? Easily a half to a point of margin at this point. If you just look at If you really wanted to go in and say, "Stop modernizing, stop bringing efficiency, just cocoon." Not for the life of Gallagher, but just no new innovation inside the organization. There's easily 50-75, maybe even $100 million of costs that we're spending to get better.
All the other brokers would say the same thing, is that they're spending money to make themselves better for the long run. In a consolidating market where there's opportunities where resources and capabilities and skills are emerging to be more important than just pure relationships, all the big brokers that are investing in themselves are going to succeed because it's almost impossible for the smaller brokers to be competitive in service and in quality and in market reach. They'd understand. They just can't do it. If you don't need that and you don't care about it, then you can buy from your brother-in-law all you want. That's something. There are people that actually care about getting a good price, getting excellent quality, excellent service, and a policy that fits their needs that are going to come to us.
Investing in these things. We still are investing all the time in making ourselves better.
Shifting back, I guess I have another question on the organic growth. You guys printed just about a five in the first quarter. Seems like judging from everyone's comments throughout the day, pricing and exposure is probably going to be about the same impact in the second quarter and maybe the remaining quarters of the year. Are there any quarters, just seasonally due to your mix, that would be positioned to show stronger organic than others? Or is it just that all things static you would expect to remain at about that five, is that what you're saying?
I think that I would be elated if we showed five for the rest of the year. If we could punch out five for the next three quarters in this environment, I think that'd be great work for this year, right? I'd also be happy at four and a half for the rest of the year probably, because it's not that. Sales sometimes are a random walk. I'd like to say it was predictable. We are really strong in higher ed. We're really strong in public entity. A lot of those customers have July 1 and have October 1 fiscal years. There is a history inside of Gallagher, if you go back, that domestically sometimes it used to be our second quarter was the biggest by far. With new GAAP, the first quarter is the biggest by far because of the benefits business.
I wouldn't say there's anything there. People go on vacation in August, and they go on vacation in January after they push hard in December. Those two months can be kind of our smaller months if you look at it. November, we lose a week for Thanksgiving week here in the U.S. In Australia, June is the biggest month because it's effectively the end of their year. We'll see how Australia and New Zealand do here in the next two weeks.
Just a question on clean coal.
Sure.
The 10-year duration of the clean coal plant tax credit.
Yep.
Is there anything that you're seeing or hearing that could potentially extend the duration of that?
The question is the generation period of our tax credit investments, for some plants expires in 2019, and some expire in 2021 because there was a 10-year life of those plants. The question was, do I see an extension coming because of those? Remember, that's the generation period. These credits will last us well into the late 2020s, in our opinion. There's a carryover opportunity. I would hope so. There are discussions that because this is not only for coal, it's for wind, it's for hydro, it's for bio, Section 45. I think that there is a movement afoot, if you were to ask any of your lobbyists, the government relations folks, that would think that a couple of year extension for this program might help continue innovation in the space.
I think that the current administration is pretty favorable to coal. I think there could be an opportunity there. Probably too early to know that now. I think you'd want to look at the extender bills that come out in the lame duck session. That's generally when something like this, you'd get technical correction extenders, and that would happen post-November, I'm guessing. I don't think anybody's going to want to campaign on extension of tax credits for tax Things I think that's done for the year. At this point, patches of the original bill, they'll take care of that in the lame duck session if we can get it done.
For us, as you know, I always say, don't look at the GAAP earnings, look at the fact that we're creating the ability to not pay taxes going forward in the U.S., or pay a small amount of taxes because those credits, those incentives will come back to us to reduce our taxes well into 2028, something like that. How we doing on time?
Almost there.
Almost there. Any other questions? I want to make sure that I hit the CFO commentary. Nothing really jumps out on that. You've already looked at it, you studied it this morning. Those on cash flows we think are strong for the remaining year. We do have a very large M&A pipeline. We talked about margin expansion on that. I could have a couple little charges that pop up on workforce and lease termination line. We still have some good opportunities to consolidate our real estate footprint in certain areas. That's coming up. We talked about roll over revenue. Talked about Pronto.
Can you go back to the cash flow statement?
Sure.
Tell us just from a big picture perspective, what you think cash flow will look like in 2018?
Sure. Great question. Let's end on cash flow because I think it's an important one. First of all, I've got a negative sentiment on the actual GAAP cash flow statement for brokers because I think that there are funds that get commingled into that are technically not restricted money. There are client monies that we're holding that are not in restricted states. Second of all, especially in the first quarter, we actually pulled forward our incentive compensation payment out of April, and we pushed them into March, because that way we could get the 35% tax deduction on them versus if we waited until after March 15th, we'd only get a 21% value on those. We pulled them forward.
Our first quarter cash flow statement, it looks abnormally low, and I think that we put language in there, if I'm looking at Ray and Seth, that explains that on our MD&A somewhere. Cash flows going forward, it's kind of like this. If you really think about it, what did we do? $1.2 billion of EBITDA last year, call it $1.15 billion if you pull out corporate, that's call it $1.15 billion in 2017. I'm just saying between M&A and organic, let's say we can grow at 10%. I'm not saying that. Could be 15%, could be 5%, it could be 20%, could be 0%, but let's just say it's up 10%. Now you're starting at about $1.2 billion to $1.3 billion. I think that we have interest expense that runs about $150 million a year.
We've got CapEx that's about $100 million to $125 million. That leaves us about $900 million of free cash flow that we get to either pay a dividend with or reinvest in the business with, say, dollars. Pay a dividend of $250 million, $300 million, something like that. Now you're down to $600 million to $700 million of just free cash flow in the business. All right? We can put debt on top of that, to move it to $1 billion of spending power that we can go out and fund acquisitions. Clearly, the next question that we'll ask is if we don't spend all that cash on acquisitions, are you going to buy back stock? The answer is yes. That's what we do with it.
I think that when you look at that, the ability to put another $1 billion of M&A spend at, let's say, at 7.5 times, well, you have the ability to go out and buy another $100 million, $125 million of EBITDA a year. That kind of earning power. You got to pay a little interest expense on that for the debt borrowing on that piece. By and large, that's kind of the cash flow position for us at this point, is it's. Oh, I forgot about $50 million of taxes in there. Sorry, I forgot the tax on it that we pay in taxes. Call it $650 million worth of free cash flow after dividend, and then borrowing capacity on that. It should be $200 million or $300 million on just that free cash flow.
Thank you.
That's that. The last thing for those in the room, we have a special pair of Gallagher socks for you today that as a culture, we did one of our sales events this year. We sold socks that have the Gallagher G on it. For those of you that are listening, you would like a pair of socks, call Ray and we'll send them to you with the Gallagher G. We raised about a half a million dollars selling socks across for a very worthy children's charity that we did as a way to give back and to show the culture that we have. For those of you, your door prize from Bob Barker will be a pair of socks. For the young people, that's the guy on "The Price is Right." True story, right? Thanks, everybody, for coming. Very excited about the year.
Very excited about the opportunities. Great spots, strong performance across the units with good opportunity to have further financial success is kind of the takeaway from today's meeting. I hope that you'll take away from today's meeting. Thanks, everyone.
Thank you