Good morning, everyone. My name is Raymond Iardella, Head of Investor Relations here at Arthur J. Gallagher & Co. I want to welcome everyone to our first quarter 2018 investor meeting, including those of you who are attending here in Rolling Meadows, and those of you who are listening in on the webcast. The format today will be similar to the past, with each speaker providing about 15-20 minutes of prepared remarks, and then we will open it up for Q&A for those of you who are here in the room. Note that we have handheld mics we will 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.
If you do have a question on the webcast, you can shoot me an email or shoot an email to investor_relations@ajg.com, and we'll hope to try to get that question answered before the end of the webcast. Additionally, we just handed out our CFO Commentary document, and we posted the same document to our website at www.ajg.com/march14materials. An 8-K regarding this information was filed this morning as well. Before we get started, I'd like to make a quick legal comment. Some of the comments made during today's meeting, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to risks and uncertainties that may be discussed today or described in our reports filed with the SEC. Actual results may differ materially from those discussed today.
With that out of the way, I'm going to hand it over to J. Patrick Gallagher Jr., our Chairman, President, and CEO. Pat?
Thank you, Ray, and can you hear me well out in left?
We got you.
Good. Welcome everybody, I'm glad I'm not in the room with you. I'm down in New Orleans with our Risk Placement Services group. They had their group meeting, their leadership conference, their awards dinner last night, I wanted to be part of that. I appreciate being able to participate by telephone. The goal today is similar to our other IR days. We want to go over our strategy with you. You have the heads of our operating divisions on the agenda in front of you that will be coming in each for about a half hour, 35 minutes or so, to update you on how their business is doing and to offer you an opportunity to ask any strategic questions you might have about those operations. My comments typically on IR days are around the same common themes.
There's four components that we have to try and continue to create long-term shareholder value. Those are organic growth, mergers and acquisitions, productivity, quality, maintaining what we know is a very unique culture, which is evident again at the meeting that I'm attending with Risk Placement Services. Let me just touch on those briefly. Our organic growth. I feel good about organic. I feel good about our organic last year. We had, as you know, a very strong fourth quarter, 4.5% organic volume for the year. I think what we're seeing is that our niche capabilities, our specialist capabilities in both P&C and benefits are paying dividends for us. Our verticals are comprising about 80% of the new business that we're producing, we're producing a good bit of new business. We're constantly looking at adding products and service enhancements, we're constantly recruiting for new talent.
We have our HireRight program, which I am very excited about. It turned out to be very successful, you can talk to Mike Pesch about that. That's our program of bringing in sales professionals who don't know anything about insurance, teaching them insurance, putting mentors with them, having them using their sales skills. Our internship is going to kick off this summer with over 400 kids in the United States. I think if you look at us globally, it'll be 500 young people that we'll be introducing to our business. We won't recruit all those, but that's always an energizing time of year. It's great to have those young folks get introduced to the best business on the planet. We have a ton of initiatives around data, including better knowledge to our clients around what's going on in the marketplace globally.
We're working hard in the organic area to continue to cross-sell and close out what we refer to as white space, which is items that are purchased but not purchased by us. A little pricing commentary through February. I know it's some of the fourth quarter stuff. Commercial rates are improving, but not at a huge clip. Commercial auto is up. It's up probably about 4%, but other casualty lines are up 1%, 1.5%. Workers' comp is probably down 1 point. Other property and miscellaneous is probably up. When I look at this, though, and you've heard me say this many times, when you're in a band of about a 1% up or down, for me, that's a consistent flat market. I grew up with hard and soft cycles, and that seems to have dissipated.
In a really truly hard cycle, prices are going up 25%-30%, and it's very difficult to get coverage. In a very true soft cycle, prices are coming down 12%-15%, and anybody can get coverage. It doesn't seem to be that way. It seems that pricing is pretty consistent around the world. It's all kind of same with what we put out on our fourth quarter conference call. As we sit here in 2018, I believe brokerage organic will look a lot like it did in 2017, maybe a touch of upside with the economy growing and employment sort of approaching full employment, a little bit of P&C pricing increases. Mergers and acquisitions, obviously a core competency of this team. The pipeline is really, really good. We continue to focus in on tuck-ins. That strategy
Creates really strong value. When we bring somebody into an existing office, the returns there are very, very strong.
This has worked well for decades in the U.S., and we see the same strategy going forward. As you saw last week, we did a small acquisition in Canada. As I said, our pipeline is solid. We've got over $350 million, $400 million of revenue in our pipeline, and we continue to believe that we can pay fair prices in the 7.5 to 8.5 times EBITDA range. When it comes to productivity and quality, what we're really proud of is that we're getting much better outcomes in terms of our services for our clients. That's very evident in our E&O results. Our agency experience has improved substantially over the last decade, and I think that comes from the operational improvements and primarily using our centers of excellence in India. We're always working hard to improve our productivity.
A lot of efforts going on in the company now around artificial intelligence, robotics, big data. As we continue to grow the enterprise at the level that we are, the opportunity to mine data just gets bigger and bigger, and we're attending to that very much. As we go forward, as we do acquisitions, we continue to harmonize our agency management systems. We're standardizing processes, and we're focusing on really being efficient when it comes to small business, then turning small business as a true area of growth for us. Finally, our unique sales and service culture. The culture is very strong. In the last month, I've been to Pune and Bangalore, India. I've been to our New Orleans Metairie office yesterday.
I've been with our RPS people at their global meeting just two weeks ago with our property/casualty, what we call our Gallagher Global Brokerage meeting, which is our President's Club in Chicago, and I will be with our benefits people in Florida next week. I can tell you that the unique Gallagher culture is alive and well. We're celebrating, as you know, our 90th anniversary, and I'm proud of the team because the idea for marking that was to celebrate by getting the organization to commit to contributing 90,000 hours of community service, and we're well ahead of the curve in terms of delivering that this year. I'm really, really proud of what the team's doing there. Our culture continues to be a big differentiator. The tenets of The Gallagher Way are posted everywhere around the globe in our offices.
This is a document that resonates with our people. As I think you probably have all seen, we were once again selected by the Ethisphere Institute as one of the world's most ethical companies, which has become a very important recognition to our people in the field and to a commitment that the company has to always act in our clients' best interest and very ethically. When I look at the four pillars, I think we're well positioned to deliver on each component. As I like to tell our people at these meetings, even at $4.5 billion last year in operating revenue, and even at $1.2 billion, these numbers boggle my mind. You have to remember, when I started in 1974, we did $6 million in revenue. We know we're just getting started. We're excited about 2018, and frankly, very excited about the future.
Ray, I think I've probably got a minute or two if anybody has a question. Yep.
Good morning, Pat. This is Greg Peters, Raymond James.
Hey, Greg. How are you?
I noted with interest your comments around big data, AI, robotics, and I was wondering if you could just spend a minute and provide some additional color and detail around what the organization is doing in these areas.
Well, there's two things. Number one, there's an awful lot of activity afoot. I think you're probably familiar with our cyber program that we kicked off two years ago. We have a non-touch cyber quote program for medium to small business, which is basically three questions. You get a quote in 30 seconds. You can bind in the machine issues, and it's all just done electronically. We have a lot of efforts to additional products in the world of digital. More importantly than that, we're finding that people all over the globe are finding ways to use AI and robotics. What we've done is we've set up two groups. One is internally watching and helping and shepherding any effort that is related to robotics, big data, or AI through a monthly meeting of all CIOs and the operating people saying, "Okay, what is out there?
What are we doing, and who's learning what about this?" We've got actually two or three areas where robotics has already played a very key role. One is a Gallagher Bassett effort in Australia. We had a big data entry group, and we were able to robotize that. Another was an MGA that basically does small trucking firms. Representing three or four companies, they had to really do the quotes manually, and we were able to robotize that. There's a lot going on in just the true basics of business in looking at how can we, in fact, use rapid robot deployment and AI. In addition to that, when it comes to data, we're hiring people left and right, basically to be our data engineers and to help us.
For instance, we can talk to Mike Pesch about this next, he has a chief digital officer who is already putting up dashboards that our people will be able to, one or two clicks, go into their producer's book of business and see what have we cross-sold and what is still what we refer to as white space. In addition to that, we have a data executive, a data group That is basically mining. We're putting in every piece of data that we can relative to our customers into a system called OneSource, and it's allowing us to sort in all kinds of ways. At the end of the quarter, for instance, when we say to you that we know that late exposure has contributed this much to our results, we're really getting refined at getting that information. There's a lot going on.
In addition, Insurtech, as you know, is absorbing tremendous amounts of investment capital. I don't know if you in the room saw the results for Lemonade yesterday, but it's pretty funny. Anyway, we have a group of people that are keeping their eye on Insurtech investments, and we think that we're a perfect partner potentially in the future for some of these because of our domain knowledge. As I said, we have a group focused on internally, how can we help a 1,000 flowers bloom, and we have a group focused on the external, and then, of course, that relates up to my table monthly.
Greg Viaccaro is going to be spending a lot of time this afternoon talking about that, so we can get the follow-up questions for him. Next question from Elyse.
Thanks. Hi, Pat. It's Elyse Greenspan. How are you doing?
I'm good, Elyse. How are you?
Good, thanks. My question was just going back to some of your commentary on the organic growth. It seems like you guys are keeping the outlook tilted towards the full year, but nothing really was one-off. If we adjust the fourth quarter, you get to about six. I guess this is a two-part question. Would you be surprised if the growth came in closer to the fourth quarter level as we start 2018? My second question is, when you think about the environment in the U.S. versus international, a lot of your peers in Australia, after you reported, pointed to this continued hard market confirming what you saw. Shouldn't that be a strong source of your organic growth as we think about 2018?
Yeah, I think Australia will have strong organic growth, Doug's got the numbers in his head. I don't. You can grill him a little bit on what that could mean. I think if you take Australia and you get an extra point or two there from a hardening market, it still doesn't impact the global numbers that much. To answer your question, look, I was frankly surprised by our organic in the fourth quarter and very pleased. I continue to believe that with the strength of our verticals and with the sales culture that we have and with the recruiting and the buying of operations that we're doing, that frankly, 4 or 5% ought to be a laydown. We've had threes and twos and ones before, and those, quite honestly, are very disappointing to me.
I look and say, I think in the first quarter, it's fair to tilt you towards about what happened last year on a full year basis. Would I like to see six? Yes, I wouldn't predict it.
One more question.
Hey, Pat. It's Mike Zaremski from Credit Suisse. How are you?
Good, Mike. How are you?
Good. Feel free to tell me I'm crazy for asking you this, you are 65 or 66 years young, and I emphasize young sincerely. I'm curious, there are a lot of people that do tend to retire around that age. Is succession planning something the company and you and the board are thinking about?
Mike, it's a great question. I wouldn't tell you that's a crazy question at all. First of all, we've got a very strong board who understands their responsibility, succession planning for Gallagher is a huge strength. It's not a weakness. I'm not denying to the board at all that at 66 years old, I'm not going to live forever. I feel as good today as I did when I was 35, I'm probably more excited to come to work today than I was when I was 35. The board is very supportive of my maintaining this role. Having said that, we have extensive succession plans. We're not making them public. As you may notice, including today, I'm very proud of this, by the way, guys. Everybody should hear this.
You'll be hearing from Mike Pesch, Tom Gallagher, Bill Ziebell, if you think about what we've done over the past 18 months, we've done a complete generational handoff. We've handed the baton from Jim Gault, Jim Durkin, and Dave McGurn in our three main operating brokerage divisions, we have not had one negative ripple. Now, my competitors can't say that. I look at that and say, the handoff of these people moving to chairman and having new CEOs come in underneath has been seamless. The teams have stayed focused, I think you'll find when you see Mike, Tom, and Bill, clearly seasoned executives that'll take our company to the next level. Yes, the answer to your question is, if I get hit by a beer truck, the board knows what to do.
We can fill the energy assignment. Thanks. Thanks, Pat.
Thanks, Pat.
Yep. I think we're out of time, everybody. Have a great morning. Ray, I'll check in with you probably this afternoon.
Okay, sounds good. Thank you.
Thanks, guys.
Next up, we have Mike Pesch, who's going to be talking about our domestic retail P&C brokerage operations. Mike, the next 20 minutes are yours.
Pat, is this on? Okay. Good morning, everyone. I'll take you through a quick lap of Gallagher Retail Property Casualty here in the U.S. Like Ray said, I'm Mike Pesch. Took over this role in December of 2016, and I'm excited to be here. A quick little bio on me. I have been with the company for about 27 years. Started as a college intern and started out, like many of us do, as a producer here in the Chicagoland area. I know what it's like to walk in the shoes of our production staff, and through that timeframe also took on some leadership roles, spent some time in our M&A group, and now I'm responsible for our retail business here in the U.S. What is that all about?
Retail business here in the U.S. is about $1.3 billion, just shy of $1.3 billion in annualized revenue, mid-to-upper 20s margin growth business. It's kind of been our flagship for many years. That's how we started. It encompasses about 33% of our brokerage overall and about 27% of the overall company. I'll keep the same theme that Pat had in terms of talking about our four pillars and dive in a little bit deeper into each one of those pillars. By and large, 2017 was a good year. We finished, as the company did, pretty strong in the fourth quarter. Specifically, December was a strong month for us organically, and we're hoping to continue that track into 2018. I won't go too much deeper in on the market, considering Pat kind of touched on a bit of that already.
I would echo a lot of the same comments that Pat shared with you in that we're not quite seeing a true hard market, but where we are seeing some hardening, we're seeing it. Anyone that has cat-exposed property, anyone that has cat-exposed property and also had a claim, they're seeing some difficult placements, some capacity. They still have capacity, but certainly pricing is increasing anywhere between 5%-20%, again, depending upon where that property is located. If they didn't have any claims, it's a little bit less from a pricing standpoint. Like Pat said, auto, still a challenge for a lot of our carriers. We're still seeing some firming there, on the casualty side, both comp and casualty are pretty soft pretty much across the nation.
In terms of specialty lines, D&O, we saw some hardening in terms of some of the lower layers of coverage, there was plenty of capacity in the marketplace to replace that. We're really not seeing overall increases from that line of coverage. Overall, I'd say there's positive momentum. It's certainly not a massive tailwind, it is definitely in specific cases and specific geographies can be impactful in a client's business. The business here in the U.S. is about 4,600 employees. We're pretty much operating in every major jurisdiction that you have in terms of large cities. Our focus is, like Pat said, on four real criteria, organic growth, I'll dive a little bit deeper into that. Mergers and acquisitions.
I won't go too far into productivity because we do have Vishal Jain here who's going to walk you through some of the specific things we're doing from a productivity standpoint, I will touch on our small business like Pat had alluded to a little bit earlier. Of course, driving our culture. From the organic growth standpoint, Greg, you asked a question about data, Pat mentioned that we hired our first Chief Digital Officer here in the U.S. last year. It's a really important thing for me. 85% of the time that we compete, we compete against someone who's smaller than us.
Because of that, we feel we have a very strategic advantage, not only an advantage because we have access to more carriers and we have more expertise at the point of sale, data is a really impactful thing for us in how we're going to compete against those folks in the future. Most of the companies that we work with, most of our clients are middle and upper middle market companies. We do have our fair share of risk management type accounts, but most of the time it's a CFO or CEO who's procuring the insurance. Because of that, they rely on us for just about everything, and that's where data can be really impactful.
From that perspective, Steve Rue, the gentleman that I hired, extensive background in building networks and using information, the information that we have in our systems in Epic, and Pat mentioned OneSource are truly going to help us be able to guide our producers and ultimately guide our clients to make better decisions around am I buying the right coverage? Do I have the right retention by comparison to my peer group? What does the rate environment look like in my geography to my next 20th closest peers? What limit of insurance I should buy? That's the most basic question that many of our clients ask us, and we'll be able to give them with very specific benchmark and peer information exactly what others are doing. It is a little bit like the Amazon effect. People buy stuff, they want to know what others are buying as well.
Not commoditization of the product, truly being able to give really good advice based upon what others are doing in their industry, in their geography. I'm excited about our future. We launched internally a thing called Gallagher Drive, which helps us take that information and put it in the hands of our branch managers, our producers, and then ultimately our clients. I'm excited for that. That kind of tail spins into some of our key initiatives. Pat mentioned white space, making sure that there isn't a door open to the house, making sure that we're selling every possible line of coverage, things that people don't have to buy but probably should buy. We talk about cyber. Pat mentioned it earlier. Cyber is extremely important today. We read about it every single day. No company has the perfect defense against a cyberattack.
Our ability to make sure that our clients are aware of that and have access to capacity and make sure that we have our producers out in front of that to coach and educate our clients on what to do, and also how to prevent some of those attacks. We have some services and resources, partners that we've created to help our customers make sure that they can avoid that sort of thing. That's really important. He also mentioned cross-selling. Bill and I have known each other, Bill Ziebell and I have known each other for a long time. We have some very specific initiatives that we're rolling out to make sure that his folks understand our value proposition, which I probably should have started out by saying. About two years ago, we rolled out internally a brand called CORE360, and it's also an external brand.
It allows our team to communicate what we do that's different than our competitors to our customers. I'm wearing the logo right here, and this is six cost drivers that help us walk a client through exactly what could possibly impact their business. It's not just about price. It's about all the things that ultimately affect that price, from safety and loss control to claims mitigation. Making sure that Bill and his team, as well as our producers in the retail P&C side, understand that value proposition to connect the dots to drive more value to that customer is a big exercise that we're going through today. Rate-based, we talked about cross-selling, commission adequacy. Again, using our information to make sure that we're properly compensated in the marketplace. We have more data about what our carriers are paying us than we ever had before.
We arm our producers with that when they're negotiating with our insurance carriers, and we believe we can get an extra point or an extra two points when it's appropriate. We disclose 100% of our compensation to our customers, and we have done so since 2005. The ability to use that information to arm our producers with that is really important. Those are some of the organic growth strategies that we've embarked on. We do believe that it'll help us continue to have a good track record from an organic growth standpoint. Talk about M&A. M&A has always been a part of what we do. I believe we're very good at it. Pat mentioned the sort of tuck-in acquisition strategy that we've always had. That's really important. We have 65 branch managers across the U.S., official branch managers. We have more physical offices than that.
65 branch managers. Their goal is to constantly be looking for, talking to local independent agents. There's a ton of them out there. Some would say there's upwards of 20,000-30,000 independent agents and brokers out there. It's not just about the top 100. Although we've been a party or at the table, we typically get invited when any of those go to market. We're building relationships with local independent firms that can be tucked into our local offices. It's a great strategy. They feel part of the organization. We've increased our capacity there. About a year ago, we hired five additional people whose full-time focus in GGB U.S., that's the retail property casualty division, is to go out and unearth and build relationships with those independent agents.
It's always been the responsibility of our branch managers, now we've added a little bit more firepower behind it to make sure that we're the ones talking to these folks. We're the ones introducing the great culture we have, what we're all about, why these folks are making their decision, a decision that they will never, ever have to make again in their life. It's their biggest asset. Building that relationship, building that rapport with these independent firms is really, really important. Having more firepower, having more people at the point of attack is really important. Productivity. Again, Vishal is going to touch on it a little bit more in detail, but I'm really excited and really proud of our team and what we're doing from a small business perspective.
We have what we call Gallagher Select, where we've really taken all of our small business, really anything under about $5,000 in commission to us, and put it in specific places around the country where we can service it better. Now we're building more outward momentum. We're hiring more talent to go out and actually hunt this business down. We feel we have a great value proposition. Not only are we using the carrier service centers, but we have our own service centers. We have a way to communicate with this customer, especially when bad things happen. When hurricanes Harvey and Irma blew through, we had a communication cadence to make sure that our customers knew what to do, how to file a claim. We've launched to those customers a thing called Gallagher Perks. If you're a small business owner, it's not just about buying insurance.
A lot of these firms want other things. What else do I get by buying insurance from Gallagher? We've formed relationships with discount dental programs and the ability to buy office supplies at a discount. This stuff is really meaningful to these small businesses. Now that we're adding value beyond just selling insurance, we think we've got a lot of momentum. We think we can continue to grow in small business. By the way, in our acquisition strategy, typically, we're talking to firms that $2 million to $15 million or $20 million of revenue, they come with a group of small business as well. The ability to go in and say, "Okay, we're going to handle your small business.
We're going to treat them like they're kings, then we're going to add value by giving them access to things like Gallagher Perks." It's a great value proposition, not only to our small business owners, but also to our merger partners, who many times in their geographies really truly care about their reputation in that area, want to add value, want to be a provider, want to be a contributor to the community. The last thing is culture. Pat talked about it. It's always important. We did our engagement survey internally here back in September. In the U.S., we had over 93% of our employees respond. We've got some really specific directives on what we're going to do to help continue to make this a great place to work. I'll share a couple stories with you.
First and foremost, Chatter, which is our internal way to communicate, share information, post something. I have a question about this kind of account, or I have an issue with this kind of industry. Every single day, there is a Chatter post about something. Most days there's 20 to 30 different posts. If you look at the statistics, each one of those posts gets a response within usually about four to five minutes, and usually gets between five and 10 responses. These are people from the network that have no vested interest, no interest in that account. They're just helping their fellow employees. When you do acquisitions right, when you hire right, those kind of things become very impactful. The ability for us to share information, share resources, share good ideas is part of our culture. Second thing I'll mention is Hurricane Harvey.
Not only did we have clients that were impacted, but we had employees who were impacted by Hurricane Harvey in Houston, also in Hurricane Irma. We crowdfunded internally almost $100,000 to help those people get back on their feet, our own employees. It was really important for us to take care of our own. Those, to me, are two great examples of what our culture means. Pat mentioned The Gallagher Way. I think it's alive and well inside of GGB US, and I'm really proud of it. With that-
Five minutes or so for Q&A?
Yeah.
Great.
Hey, Mike. Greg Peters at Raymond James. I noticed in your comments you said something about driving higher commissions with your carriers. You talked about the information, having more information about commissions you're being paid. Can you specifically talk to what levers you're using to get a higher commission rate from your carriers, and maybe provide some perspective? In 2017, on average, your commission rate was X versus 2016, et cetera.
Yeah, it's a great question. I don't want to be misleading. What I said was actually commission adequacy. When you take, for example, a placement, a general liability placement. We know in a specific geography, we also know in that line of coverage, in that industry, what our commissions are for other placements just like it elsewhere in the country. If there's a difference, if the average commission, for example, on a GL placement for a contractor is 12.5%, and our producer sees that the quote that's been issued by the carrier for the renewal or for a new piece of business is 10%, they use that information to say, "I think we're being underpaid here. By comparison to all of our peers, your peers as carriers, they're paying us 12.5%." We use it as a way to get adequate commission.
We're not going in saying, "We're going to raise the bar. You have to pay us more," pounding our fist on the desk. It's about being properly compensated. It's always a negotiation. Many times, as a producer, you have a contract with those carriers and it says, "We're going to pay X amount of dollars." When they get into the underwriting, it talks about, here's our quote, but for this quote, we can't pay you 12 and a half. We're going to pay you nine. It just empowers our producer to be able to go back and say, I still look at our universe in being inadequately paid for this placement.
Do you feel like you're optimized at this point?
No.
I'm sorry. Do you think we're being optimized at this point, or on the spectrum, are you 20% through the rate adequacy optimization, or where? Give us a perspective on that.
I don't have the specific statistics around that, each one of our branch managers gets a monthly report, that report shows them where are the renewals that they have coming up where there's possibly opportunity to go back to those carriers and say, "You're inadequately paying us by comparison to our peers." Usually in that monthly report for an average branch, there's 20-30 opportunities. Now, you're not talking about a lot of dollars here. You're not talking about in each transaction, thousands and thousands of dollars. When we compare those commissions, it could be $1,000 here, $1,500 there, and ultimately that adds up to a big number in terms of contribution to organic growth.
Hi. I was hoping, throughout your presentation, you also mentioned white space and cross-selling as initiatives to drive organic within your business. Can you help us size the opportunity? Maybe it's what cross-sell is going on within Gallagher today, what you think that number can get to and over what time frame, also just in your mind, how the white space is going to drive higher organic growth, can you just put some numbers around it and time frames so we can see how big this potential opportunity is?
That's a great question. It's a huge opportunity. We set a goal specifically in each branch this year in terms of our internal budgeting of what we expect from white space. The aggregation of that number for this year is close to $20 million. That's not all-encompassing. That's what our producers have said, "Hey, listen, I looked at my book of business, and here's a number, here's an account that should probably buy this line of coverage, and here's likely what it's worth." We've built metrics around the ability to help them understand that so they can visually in their dashboard. We use Salesforce as our client management system. Now that account, so it's an existing account, will have that line of coverage. Cyber is always the easy one. They're not buying cyber.
What are we going to do to help convince them that cyber should be a purchase that they should be making? Then it's a constant focus. From a cross-selling perspective, again, we have internal goals each and every year. We literally know, Elyse, that we could literally probably not call another new, fresh face from a client perspective and still achieve great organic growth just by talking to our own customers about white space and talking about cross-selling with our colleagues at GBS. I'm simplifying it, because it's not easy to sell cyber to people who don't have to buy it. There's no federal regulation that says you must have some way of risk transferring the possibility that you could have a cyber breach. We have to convince them. By the way, there's internal headwinds there as well. You've got IT departments.
Most IT people will say, "I don't need it. We're doing a great job in defending the organization against it." While it seems simple on paper to say, "$20 million, we should be able to go get this," there's still a process of convincing the customer that they need it. To give you the entire universe, it's significant. I don't have a number for you to say it's $1 billion or what have you, but it's a significant number that we monitor all the time to make sure that it's on the forefront of the minds of our producers.
If you had done the same white space analysis at this time last year, what would that number have been? Did you meet the goal?
Well, that's the whole concept of data. We didn't have a specific number in years past because we couldn't see within our own book of business where we had opportunities to grow. As our data keeps getting better and better, and we can compare and contrast it against other customers, it makes us stronger. It makes our ability to show our producers and ultimately our clients what they should be buying. This was the first year going into our budgeting process where we could clearly identify and get buy-in from the producers on opportunities that they should have in white space.
Time for one more?
Sure.
You talked about Gallagher Perks and the 360 value proposition. Are there services at some of your larger peers that, or some of your peers that focus more on the large market, they offer some consulting services and tertiary services that, I guess they're not cross-sold, but they add value to the client. If you're thinking out beyond 2018, are there certain services or elements, I don't know, taxes or something that you feel like that's where the industry is turning, and if we can do that, we'll have a better relationship?
Yeah. I'll tell you, again, we're not ignoring it. In fact, we have a whole strategy on how we're going after the Fortune 1000. We feel that one of my closing remarks is one of the reasons I think we win is because we have a very robust niche strategy. Having a really good niche strategy means you can go after specific industries and tackle any size account. We're continuing to build on that strategy. We're continuing to add firepower behind who we can put in front of a client to make sure that we can compete against anyone. Specific services, nothing that comes to mind specifically. I mean, Core 360 is pretty all-encompassing. It touches everything from contractual liability to uninsured and uninsurable losses to coverage gaps. I mean, it really touches more than just the whole concept of pricing.
Bill might be able to answer more from the consulting perspective of beneficiaries, because I think they're starting to see clearly with healthcare reform, the need to broaden their scope, and they've done a great job of doing so. I think we're prepared to tackle just about any size account.
Great. Thanks, Mike. Next up we have Tom Gallagher. He's going to spend the next 25 minutes or so talking about our international property casualty brokerage operations. Tom?
Good morning, everybody. Is that working?
It sure is.
How's that? Better? Good morning, everybody. Following up on what Mike just was talking about, talking about white space. Every single time we're out talking to our clients right now, they're always talking about the cyber liability. Last week I was in Australia, and I spent every single day during the week out with some of our bigger clients in Australia and asked them, "Are you buying the cover?" It's real fascinating to me. They're considering it. They've never bought it, but they're considering it. As I sit there and I look at these people, I say, "You're being told by your security team, your cyber, your chief technology officer, you got to secure environment." I always tell them, "How old is he?
Because if he's under 25, he doesn't even actually have a clue what's going on." It resonates with them because what's going on inside of that world right now is unbelievable. The attacks that they're having. Every single time that I sit with that team, I ask them, "How many of your clients have been hit with ransomware?" Time and time. Doesn't matter if I'm in northern England, doesn't matter if I'm in Australia, didn't matter if I was in South America. Our clients are getting hit with ransomware everywhere. Whereas today we don't have a significant penetration in our cyber liability I will tell you that in the next two to three years, we will have a literal transformation of people buying it because they recognize today that they actually have to have that coverage.
That is a fundamental change that's taking place in terms of the purchase of that coverage, which is a huge opportunity for us. Terrific. Right. Let's focus on the non-U.S. business. All right? Let me demonstrate for you a little bit. We had revenues in the global P&C international side last year of about $1.3 billion, 33% of the brokerage revenues and 28% of brokerage risk management revenues of the company to place over $10 billion of premium annually. There are two basic businesses within our international operation. We've got a P&C operation. We've got a London specialty operation. We focus, again, very much the same way that Mike does in the U.S., on delivering value to middle market clients. We've got hosts of small accounts. We've got many, many large accounts, but the core of our business, much like the U.S., is in the middle market.
Going around the world as we look at it, we've got a U.K. retail operation that is plus or minus about $300 million of revenue, and that puts us in the top five in the retail marketplace in the U.K. When we compete, it's very much the same way that we compete in the U.S. Most of the people that we're competing against are much smaller than we are. London specialty, this is our wholesale and specialty unit inside of London. They operate at about $250 million of revenue. If you think about the London marketplace and why people go to the London marketplace, you talk about the specialties that exist there. Over the course of the last 25 years of being in the London marketplace, we've built one of the powerhouse brands about what we're doing. We're better than just about anybody in marine.
We're better than just about anybody in FI, energy, construction. These are the places where from around the world, agents have to come into the London marketplace. We've got a very strong brand there, and the agent force around the world, doesn't matter if we've got locations there or not, is constantly tapping into our team in the London specialty market. Australia and New Zealand, about $300 million of revenue between the two operations. We are virtually the biggest broker in New Zealand. Great business. Just a fantastic business. We've talked about it before. This was a business that was built over a period of time, and it's just a powerhouse in the country. They just celebrated their sales success year last week and had a wonderful time. It's just a terrific culture. Jim Gault actually was with them during that time. Canadian operations, about $150 million.
We have operations all over the rest of the world, whether or not with partners, or we've got little operations such as Singapore and down in Latin America, where we actually have majority ownership or we develop partnerships with it. Where are we at? The end of January of this year, we had about 7,200 employees, last year's organic in Australia and New Zealand did mid to high single digit growth. Canada, low to mid single digit growth. U.K. retail, couple points. London specialty, mid single digit growth in terms of organic. All right? It's very specific about the way that I say that. In terms of the margin, in the low to mid 20s as a global business. New Zealand has excellent margins. London and Canada have good margins.
U.K. retail and Australia have low 20% margins, and we're working on all of these consistently to try to improve. Mike talked about our four pillars, instead of going through the organic, I want to actually start with the, from my perspective, I want to start with the culture piece of it because I think that's the intangible that helps keep this business alive and together. When you look at the course of my travels, whether it was down in South America early in the month of February to where I was in Australia this past week, being part of this culture is meaningful to these people. We had our President's Club award ceremony in Chicago. Now think about it. People to come to Chicago for a two-day event are flying in from Perth, Australia.
That's about a two-day travel so that they could come be with the team because what it represents to them is the opportunity to get to know and become, feel and touch the culture of it. You would expect that you would get half of the time people saying, "I'm busy. I can't go." But to come to Chicago in the middle of the winter, the acceptance rate was about 100%. They love to come because it's the bonds that tie the people together to the business. Our culture cheer calls it Being Better Together. If we get to know each other, if we get to have good relationships with each other, guess what we do? We start to pull the team in and we're working on practice groups.
The meetings that were taking place here over a couple of days that the people came into Chicago was all about the specialisms, was all about our niche practice groups, was all about finding out what we do. Pat, in these conversations, we've talked a lot about how we've been able to bring higher education down into Australia, how we've been able to bring education, our public sector education up into Canada. We see it in all the different practice groups around the world that they really do like to listen to each other and find out what they can do. Our culture is really strong out there.
People wake up every day happy to put on our jersey because at the end of the day, our teammates, it doesn't matter whether it's in Melbourne, doesn't matter whether it's in Sydney, it's in Lima, it's in Bogota, it's in Medellín, they like to be able to take care of their clients, and they want a company that supports them in being able to take care of their clients. That's how we distinguish ourselves day after day after day with our teammates. As I said to you when I was traveling, we're guys in the white hats. We've got to help this war. We've got to get out of the way. We've got a very client-focused mission statement. We are constantly trying to make certain that we bring real value in the culture to everybody around the world. You'd see it.
It doesn't matter where I go. They got to get out of the way. It's meaningful to these people. They like the fact that they're part of our organization. Let's talk about organic growth for a little bit. When we talk about organic growth, it is much the same thing that we're doing in the U.S. It is really about driving the things that are working here. It's the right space and industries. I talked about it being on cyber liability. Cyber liability, huge opportunity. On a global basis, my exec, U.S. as well as the international space, white space is a key initiative for us, and that is, do we have the ability to sell more insurance to our existing client base? If we're successful at that, there's just tremendous opportunity.
All of the businesses around the world are aware of it and are focused on it, and we actually hold ourselves accountable to it on a monthly basis. We know that if we focus on our niche or specialist practice groups, that we do better, that we can actually stand up and fight anybody inside of the business, big accounts, small accounts. Take a look inside of the practice groups that we have for energy. These are huge opportunities and huge accounts around the world, and we're probably the number one energy broker in the London marketplace. Is there an opportunity for our team to help our team in Latin America? Is there an opportunity for our team in London to help our team in Australia? Is there an opportunity for them to help in Mexico and in Texas and maybe Lima?
There's unbelievable work here. We've been really incredibly fortunate. Look inside of our business. It's great. When I travel around the offices and I sit around with the team and I say, "How can I help? How do we trade better together as an organization?" The questions that come up time after time after time is, do you guys have expertise? Do we have expertise in transportation? Sure. What kind of transportation? I had a situation last week where we connected a person in Melbourne who's got a huge opportunity on a metro system in Australia with a guy who is unbelievably good at it in the U.K. They didn't know each other. We just connected the dots on it. Immediately, you've got the power of somebody who actually does huge metro systems around the world. There's huge construction projects going on in and around Sydney.
We're driving transportation as well. The actual construction of a metro system. We picked that up principally because of our ability to say that we work with Transport for London, that we're actually involved in all the construction projects that are happening in the U.K., that we actually work with the Singapore Transportation System. It's fascinating for us to be able to pull these different groups together and really bring the message of cross-selling and solving problems. Product development. If you look inside of product development for us, we look at constantly trying to arm our team. The U.S., we typically go on out on a one-on-one basis around the rest of the world. We're developing product for people.
They want to have something that they can sell. We're working very hard all the time, just unique Gallagher wordings so that we can get the cover taken care of and they can go sell it. The other initiative that we're on is the same initiative that we're doing in the U.S. It's how do we continue to drive better producer hiring, putting more feet on the street year after year after year. We know that if we can drive more people and put them on the street, that we will be successful in actually driving growth in the business. This is a business about numbers. If we play the numbers right, we've got tremendous opportunity to continue to drive organic growth. Our mergers and acquisition strategy in the U.S. is no different than it is around the rest of the world.
We're constantly out trying to find good local brokers that will join our team. Jim used to say when we would sit in these conversations, he would say, "It's easy to identify the broker that fits with us versus the broker that should go off with PE." The broker that's there that is worried about his clients, worried about his teammates, worried about a great landing place for the whole team is our fit. That is exactly the same way it is around the world. It doesn't matter where they are. If we can actually find a way for the team to be able to spend time getting to know them, they know the power of the brand, they know who we are.
If all they want to do is maximize the value of the dollars that they receive and they want to go in a PE. Last year, we had five closed acquisitions internationally, and we'll definitely have more than that this year. The largest acquisition last year was up in Montreal, outside the U.S., followed by Sweden. Good, really good partners have joined us because of those acquisitions. Really excited about them. Great example in the Montreal acquisition. Before he closed, he came to our London offices because they trade significantly into London. Met the team. He didn't know any of the team. He was trading with other brokers in London. Met the team. By the end of the year, virtually every single one of his clients, he picked up, moved it, and dropped it into our business. That's a double win.
We get the revenue in London, we get the team in Montreal, big, strong risk management team. It's a really powerful opportunity for us. That model is a model that we'll continue as we continue to grow our business around the world. Huge opportunity for us. The U.S. might talk about 20,000, 30,000 independent insurance agents. The world is not as big as the U.S. when it comes to the insurance marketplace. There are thousands and thousands of insurance agents around the world that we can look at. They're not all just huge multinationals. They're good niche-specific industry brokers. They're good regional brokers. There are good large brokers that we're always interested in talking to. We're very careful as we start to look at expanding the footprint. It's not just to plant flags everywhere around the world. It is thinking about where can we be?
Where is the growth of their economy? How big is the insurance market? What is our opportunity on the long run for it? We continue to stay very focused on driving a business that can be successful over the long term. We always want, most places outside of the English-speaking world, our partners to have some form of equity in it. It keeps them interested. We constantly are working at trying to build a reasonable way for us to expand our footprint around the world. Talking about productivity. Vishal will touch upon productivity. It's something that is a tremendous opportunity. I don't know whether or not I wasn't in for Pat's remarks, but we took our board to India, and they had the opportunity to actually see the work that Vishal and his team have done.
They came away from it unbelievably impressed with the things that they saw and the opportunities that are out there still, whether it's in the U.S. or it's beyond the U.S. I'm incredibly bullish about where we are, incredibly bullish about what's going on around the world, about our team is completely settled in and focused on driving growth. We feel very strongly, and we've got, as I would say, our best years are ahead of us. With that, Reg.
Questions for Tom?
Good morning. It's Paul Newsome. Could you focus a little bit more on the margin potential improvements in Australia and U.K., and what specifically what you need to have happen there, whether it's people or cost cutting or just driving growth? Just some thoughts as to sort of the timeframe that you need to.
Sure. There are two approaches that we take when we look at it. There's cost cutting and growing into infrastructure. All right? In both of those places, if you take a look in the U.K., back three years ago, we had a number of businesses that came together. We had multiple offices in individual cities. We could, but we didn't jam them all together and put a big expense out and take the hit for it financially right up front. Or you could over a period of time pull those businesses together, which is what's been happening. Just by pulling those businesses together, you get one office footprint. You don't need two receptions. You don't need a bunch of financial and accounting people. You begin to drive margin expansion there.
Beyond that, you start to take what's happening in the U.K. right now, where we've actually got our initiative for using the Gallagher Service Center is absolutely on fire. In 2017, we moved 18 of our businesses into the service center in India. This year, we'll add, Vishal, what, another 15 or so.
-into the service center. That will represent more than 90% of our premium throughput in our retail business. Now it's about leveraging the opportunity there. Can we grow with the existing footprint of people, right? There's different ways of looking at it. Our way is to use the service center that doesn't drive more attention and focus for taking care of the clients and growing the business. Turning to Australia, it's the exact same model. We are in the process of developing our plans as we go forward for how do we pull them into our service center.
Actually took the leader of our Australia business in for a complete and thorough review of what we're doing in Australia, in the U.S. Excuse me, what we're doing with the service center in the U.S., what we're doing in the service center for the U.K., and the opportunities that exist in Australia. We expect that over the course of the next 12 to 24 months, that this initiative will gain significant legs and speed, and it'll have a significant impact on the businesses there. The nice thing about our business is if you think about when we made the acquisition in Australia. We were bleeding last year, negative 17% organic. This year, we actually drove organic growth inside that business. We're asked, that's the most important way for us to be able to drive the business, is drive organic growth.
Well, I actually had a follow-up on that question, then I had another question. As you think about the margin improvement, I guess you just said about 12 to 24 months you expect some of your initiatives to gain steam. Did you expect that your margins in Australia and the U.K. will kind of be in line with your other regions in that time frame?
Doug said that he will take that. He's just put his hand up.
The question is in line with others? Yeah, I think we'll be there.
Yeah.
Like a mid 25?
Yeah.
Okay. My second question, there's obviously been some reviews related to other brokers going on in the U.K. Has that led to opportunities for Gallagher in terms of business and if it hasn't or if it has, I'd be curious about some color about that. If it hasn't, do you think that that could be some opportunities as you think about 2018 and even beyond?
Sure. Thank you. Yeah, of course, there are a couple of different things going on in the U.K. Obviously, there's the aviation review that is being done and the concerns that are there. We don't have a significant aviation broker business, we kind of stand on the side looking in at that. We do have an aviation team, but they're not front and center in terms of the investigation. When it comes to the market study, that market study is underway. We do not have the kind of facilities that some of our competitors have in the London marketplace. At this point in time, I do not see a significant change in what we're seeing in our London business because of the study. They don't expect any reporting out of it until later on in this year, then we'll see.
Does that mean that based upon what they find, that we could have greater opportunities? Absolutely. I believe that to be the case. In the future, we could, as a consequence of what the regulator finds, generate more opportunities for us. I'm comfortable in saying that.
Hey, Tom, this is Meyer Shields. Would you be able to provide any additional color on market and rate outlook internationally with regards to any specific market hardening that you would like to highlight, and what is the underlying growth-
Sure.
-driver, driving them?
Sure. U.K. flattish, Canada flattish, firming market, Australia and New Zealand. Those are our biggest places. Not a significant change and a couple of pressure in the U.K., but there's definitely a firming market in Australia. I heard it everywhere I was in Australia this time. They were talking about trying to find access to markets and opportunities for them. It's firming up. Okay.
Just a quick follow-up to that. What is driving the market hardening? Is that availability of capital?
You look at the downward quake a year ago, and you look at the domestics. Everybody knows the story about QBE. You look at the domestics, and they're struggling a little bit. There's been bad loss experience for those businesses, and prices have been cheap in Australia and New Zealand for a while.
Okay.
Hey, Tom, could you just spend a minute and talk a little bit about Asia? I mean, you're talking about all aspects of the globe, and it seems to be one area that you could have some opportunity to expand.
We are in Singapore today. We have great partners in many of the countries there. For us, it's all about timing. It's about people and timing. We expect to continue to expand our business in Singapore. We expect that whether it's in Malaysia, it's in Indonesia, it's in India, that we will continue to have opportunities to look at brokers and partner with brokers. It's about their timing and our timing. If they match up, we've got an opportunity for acquisition. If they don't match up, we've got an opportunity to charge really well together. I look at our footprint today, and I see great opportunity for us to expand that footprint over time. Doing it right.
Just as a follow-up to that. When you're dealing with some of the countries, are there ownership restrictions on partnerships? Can you talk a little bit about that in specific countries, et cetera?
Sure. If you take a look inside of India, for example, you can go to 49%, and you can only buy one business. I can't go 49% with 25 different brokers in the country. I can only go one time into the country, one license where I own it. Restrictions inside of India are changing a little bit. We see India as an opportunity for us long term. Go to Singapore, it's a little bit more Western, very restrictive regulator in the country. Very thoughtful. They take very good care of being able to protect the business interests in that country. We've got a good footprint in Singapore already, looking to expand our footprint there. Go to Malaysia, the regulator, very tough. They make brokers, if you want to go acquire somebody, take an exam inside of Malaysia. I'm sorry, in Indonesia.
In Malaysia, the businesses there, again, based upon the regulators. It's tough. They take great caution in allowing foreign nationals to come out and buy businesses there. We have obviously had the opportunity to go visit and spend time with people. At this point in time, in most of those jurisdictions, we would partner, whether we take equity or not would be a question. I don't know that we're in a position outside of Singapore to say we would get a majority ownership.
I'm going to follow up to the facilities market study in London. I was hoping maybe you could maybe better flesh out since we're somewhat removed from that. Why doesn't Gallagher have those facilities? Maybe it's a scale issue. Have they noticed higher remuneration to the brokers than talked about for a while now?
I guess, has it impacted your business? I guess if the regulator does deem it to be kosher, is it an opportunity down the road?
Sure. Look inside the London marketplace, you've got massive consolidation of it. You probably take among the top five brokers, I would hazard a guess that it's probably 80% of it. Ray, you actually gave a very specific number. It was about 85% of the premium throughput coming through about eight or nine brokers in the London marketplace. Of those, guess who's the biggest? Right. Marsh, JLT, Aon. Their premium throughput has been there for a very long time. Ours as we've grown our business significantly over the last decade, as we've been pulling together all the data. If you looked at the regulator and they said this was great, as Mike was talking about when he was here, we've got much more data today to be able to provide good analytics on what can go forward with facilities in the future and how to do it.
I think we'd be able to take great advantage of it. At the current moment, I just think it's basically on the timing of the size of our broker business in London, that didn't have us a massive facilities there. We've got great opportunity. They will set the course on what does good look like, and the minute that they set that, we'll follow right in behind it with how do we maximize the value of our broker business and how to add growth from that.
Thanks, Tom.
Good.
Next up, we have Bill Ziebell. He is going to spend the next 10 minutes or so talking about our employee benefits and consulting operation.
Good morning, everyone. This is Bill in Chicago. As Pat indicated, Bill's fairly new in the role. I took over as CEO of Gallagher Benefit Services January of 2017, and started with the company in 2000. I've been with the company for 18 years. Those of you who may not be familiar with GBS, the business on the benefit side really started in the mid-1970s here at Gallagher. By the mid-1980s, Bob Gallagher and John Gallagher decided that it needed to have its own separate P&L, its own separate business, and they separated the business from the rest of the P&C side. At that time, we were around $10 million in revenue. We finished last year with $1 billion. Very proud of that milestone and the growth we've been able to achieve over time. Very simply, we're in the business of people.
We help our clients attract, retain talent to compete, to fulfill their mission and keep their cost at a sustainable level. This is a universal theme in every business that we're in. We operate today in four countries, U.S., Canada, U.K., and Australia. We also have a network of global partners for any risk and what we need, we can take care of that with our clients as well. If you think about those things that go into what I just described in terms of helping attract talent, think about your own relationship with your employer. What are the kinds of reasons you're there? Compensation, your incentive plan, your retirement plan, your benefit package, the culture, professional development, career pathing. Every one of those things are the types of things that we do at Gallagher, helping our clients compete for that talent.
When you think about the demographics and the economy that's going on today, we have baby boomers retiring. We have now millennials, the largest workforce. Really for the first time in my career, we actually really have a real multi-generational workforce, and employers are struggling to make sure they have the right fit and programs in place for their clients. We also have, if you think about it, quite a bit of distractions out there for employers when we have things like pay equity. These are regulatory issues in many of the countries we're in. We have issues with regard to sexual harassment. We do our training and coaching with our clients in those areas as well. That's on our HR side. We help our clients with compensation for executives, for their rank and file. We help them with their benefit plans, 401 retirement plans.
More importantly, how to engage those employees with better communication strategies, helping with their technology decisions. It's a very holistic, encompassing value proposition that we bring to our clients. We have about 125 offices globally, around 4,000 employees. We do about 16 mergers per year, and we operate in markets mid to high twenties. Moving on to organic. What else is growing on the organic side? You heard some of the comments earlier from Tom and Mike about white space. That's also an issue for us. Many of our client relationships, we're really only in one area. If you think about it for a minute, broadly, medical advice is one of the biggest segments we do, but also core benefits, your group life disability, voluntary products, things of that nature, financial services, retirement planning, but also the HR compensation side.
We see that as being connected through a total well-being philosophy. What we're trying to do is really be seen as thought leaders, as differentiators. How do we bring value specifically to our clients? First, we've got our niches. We have eight of those, which comprise about 40% of our revenue. We're looking to expand that in the future as well. We think niches are a real way to win. Really more importantly, our thought leadership. For five years now, we've done a national benchmarking survey in the U.S. We just launched our first one in Canada and in the U.K. later as well. We think this data drives decisions. It's not just personal anecdotes, it's about data. What are your peers, your competitors doing? Do you have a competitive enough package and offering to get the talent you need? By the way, talent is paramount.
If you really think about this for a minute, you can use a sports analogy or anything you want. If you don't have the right type of talent from top to bottom, you will not succeed. Just go back and look at the Super Bowl here in the U.S. in terms of football, right? Ownership, general management, scouts, coaches, players on the field. Do you think those two competitors had average talent or did they have above average, exceptional talent? That's what this is about, is how do we help our clients get the talent they need onto their organization. Our thought leadership includes a national benchmarking survey. We're also going to use that to derive what are the real issues people are facing. We know globally that they're fighting to attract, retain, engage talent, and keep their costs down. Think about that.
Sometimes those aren't exactly aligned, right? We identify those respondents in our survey, which is now the biggest in the industry. What are the best in class doing to attract talent? What are best in class doing to keep costs down? We also have the best of the best who are doing the best at balancing those both out. We use that information. We publish our best in class information to our clientele, our prospects, to tell them kinds of things they could be doing to attract talent, keep their costs down as well. It's given us a lot of publicity. We've had something like 33 million impressions from our thought leadership, what we're doing out there. A lot going on in terms of what we're doing with our clients.
If you think about this for a minute, a lot of our competitors look and sound the same. We're trying to give new ideas, fresh ideas to our clients, help them do what I said, manage and compete for the talent out there. Maybe what differentiates us on the organic side is our compliance. We think we have world class, if not the best compliance team. If you think about this, every country in which we work, there's regulatory issues, compliance issues, and they're always evolving, always changing. We have quite the staff, and we have some amazing members who know how to help our clients. That continues to be an investment area for us as well. When you look at the white space opportunities, I mentioned all this stuff previously for a purpose. Majority of our revenue today is still in the medical benefits area, in global benefits area.
We have a rapidly growing retirement and HR compensation practice. If we can take our clients we have today and introduce them to our other services and give them a good reason, a good why to work with our folks, that is what we're trying to do, and that's a lot of opportunities going forward as well. On the merger front, as I mentioned before, we average about 15 to 20 mergers globally or annually. Last year we had 14 or so. You've heard some of the recurring themes from Tom and Mike about why people join us. We think we are different. We think our culture does matter. Time and time again, I get merger partners that talk to me after they've joined the organization and say, "You know what? You were absolutely right. It is different here. People are helpful.
They're collaborative." I've never had anybody turn me down for help. It's just something that really differentiates us. When we recruit organic hires into our organization from our competitors, hear the same exact thing. We have the resources of all the big players, and we have people that are willing to actually use them and help our producers out there in the field. We're really excited about that culture, and it's very important for us to continue that. You heard this as well. I think a good merger partner is one that can answer these questions very easily, and these are important questions to them. Is this merger going to be good for me and my family? Is it good for my employees, and is it good for my clients?
If they don't really care about those three questions, then they're probably not a good fit for us, because that's our value proposition, bringing more to our clients, bringing career tracking, security to their employees, and of course, it looks good for the merger partner joining us as well. They join us for those reasons, but also the opportunity to cross-sell with our great GGB counterparts that sort of achieves the P&C retail operation. Also those resources I mentioned before, the compliance resources, thought leadership, and some great teammates picking up on the retirement and the HR side as well. Moving on to productivity and quality. We are launching our small group initiative on the GBS side as well. We already now have six centers of excellence continuing to move our small group into that.
If you think about what's going on technology-wise, there's some disruptors out there trying to get in there. By the way, we have an operation that helps advises our clients on HR and benefit technology needs every day. She looks at over 900 Admin, HR tech, Ben tech operations annually. She gets paid, by the way, $1 million by clients to help do that research, and we use it to make sure we have our finger on the pulse of what's going on out there, and make sure we have those leading-edge and cost solutions to our clients as well.
When we look at the pulse of inquiry and what we're trying to do for our clients, looking at the centers of excellence and growing our operations in that area, the disruptors I've mentioned before, how can we compete when the carriers are taking inflation out of the small group space, a lot of pressure on pricing? These small employers really need a lot of help. You imagine the regulations that they're being hit with here in the U.S. and other countries. We needed a platform to be more efficient and deliver that value. It's an important part of our business to continue to invest in that as well as we go forward. We're also looking to do more with our centers of excellence, our Gallagher, our service centers.
We have pilots launching this year, and we expect as well, six to eight of our branches moving into that, into the centers of excellence this year as well. Moving on to culture, I mentioned before about ours. It's really, I think, a critical differentiator for us. If you think, again, just using a sports analogy, just for one minute, the winning team locker rooms are always the one to talk about great teammates, people that really work hard, help each other out, and I think that's a true statement even at Gallagher. I talk about our collaborative spirit, things that we do. We're really spending a lot of energy and time in our internship program. You heard about that before. What do we do with the interns once they come on board? You just throw them into the deep water, hope they swim?
We have a very strong initiative to onboard them, to develop them, to train them, to partner them up with a mentor. A phrase I heard recently was, put your arm around somebody, help them out, help them understand how this all works, give them a career path, sit down with them individually, talk about where they want to go with their careers, and help them get there as well. It's a very big, important initiative for us and helps us differentiate getting the right talent into our organization every day. The other thing I mentioned before, we hit the $1 billion mark, and we had some fun looking at the playoff bowl season back in January. One, the Miami Hurricanes had a turnover chain. We came up with a fun medallion to celebrate our $1 billion.
I go around the network all the time, people want to get their picture taken with it because I want to celebrate their individual contributions to this. I can't tell you how much people want to have that picture taken with those medallions. I know it may sound a little bit silly, you know what? That's the spirit we have. Just through the core of our teammates, how much they value being part of this organization. They're proud to work at Gallagher, they help us attract more talent to our organization. We're going to try to set a world record for the most selfies with their own Do It Yourself medallion. It's just a fun thing that we do. We expect to blow through the record in the coming weeks here. That's enough of that.
Our culture is very strong, it helps us attract the talent that we need, helps us be the destination employer we want to be, helps us understand what our clients and our prospects are going through as well. Putting ourselves in the shoes of our clients and prospects, how do we help them compete for talent? How do we help them keep their costs down as well? With that's my prepared remarks.
Good morning, Bill. I was hoping you could take a moment and talk a little bit more about trends in group health. You guys have previously commented on private health insurance exchanges and activity there. Can you talk about what you're seeing there, if there's any change in trend? Can you also speak more broadly to just employer appetite for high-deductible health plans versus traditional PPO plans, et cetera?
Yeah. We're seeing out there similar renewals this year as opposed to prior years. Depending on the client, depending on what they're going through, single high digit increases year-over-year, that's what we're seeing typically.
Big cost trends in the health plans.
Yes. Understand as well that the employer sponsor of the plan have a lot of levers to pull. They can do cost shifting. They reduce the level of the benefit. It's not a very static scenario there. If they were paying $100 last year and getting a 10% increase, many times the employer will find ways to bring that cost closer to that $100, not $110. We're not seeing that kind of lift on our side of it. Most, we're a transparent organization on our compensation. You've heard that before. Most times, vast majority, we're negotiating and discussing our compensation before we get hired, and we either invoice the client, or we build it back into the product as like in the form of commission.
It's less and less standard commissions based on what the carrier has filed, and that's especially true with a lot of the deals with the employers.
Their private health insurance exchanges.
They're continuing to grow and thrive. I saw a statistic not too long ago that the adoption rate of employers, in terms of from the year these came on board, is somewhere between 401 plans and high-deductible plans when they launched as well. Those are still around. Those are still very prevalent, we're seeing the same adoption rate in the first couple of years with these private exchanges, those two initiatives went through as well. We continue to invest in that area. One thing I would just mention as well, we have an HR benefit technology practice. Within that practice is where we have our Gallagher Marketplace. We walk into our clients agnostically asking them what their needs are. We are much more consultative than perhaps some of our competition. We're not there to sell them a widget.
We want to solve a problem for them. If the Gallagher Marketplace or our private exchange solution is the right fit, then we place that with them. If they want to work with another Ben admin system that's not part of a private exchange, then we do that as well. We get consulting fees regardless of their choice.
Just one on the Gallagher Marketplace, what's the employee or employer.
How many employees or members were on the private exchange at year-end 2017?
I don't have the number of employees on it. I know we're approaching 100,000 employees on our private exchange.
Right. Thank you.
Okay.
Going back, you discussed white space, which was also discussed under some of the prior presentations. Do you have a target for your business for 2018 in terms of revenue?
Yes, we give goals to all of our producers. Every year we go through an annual revenue planning process. Why are you smiling?
Because when we were talking about U.S. retail, we got a $20 million figure. I wasn't sure if there was a number that you could also disclose on your business.
Right. We are continuing to improve it every year. I will tell you there's a lot of opportunities there as well.
Thanks, you as well, Bill.
Yep.
You mentioned technology disruptors, I'm not in the weeds, and you are, I was speaking to my company's head of benefits, and she was mentioning they're working with a fast-growing tech company to potentially help all 30,000 employees globally choose their healthcare. She says it was an interesting offering. Just curious, when you talk about technology disruptors, I know I asked Mike a question earlier too along the lines of additional services being offered in the future. Do you see the need to, I don't know if this makes a bug in the back nervous, but to buy versus build in-house? How big of an issue are these technology disruptors?
Well, let me go back to what was asked earlier about private exchanges. We made a decision back at that time not to buy, not to build our own. Technology is in its own right, its own business, requiring a lot of R&D, a lot of technology investment to keep up with that. We want to be the advisors to our clients and be objective to what their need, not going in with a product to sell. If, for example, last year, Acme Company was the best technology solution for the market, we would be advising to recommend that one to our clients. Next year, if it's Bobco that's the better one, we can quickly shift to the right solutions for our clients. If we build one, it's like the Maginot Line . That's our product. I think that's a problem for advisors.
We want to be seen as going for best in class every time, objectively helping our clients make the right choices on that. We keep an eye on those technology companies. When it's appropriate for us to partner with them, we do so. Like I said, we have a team that looks at over 900 of these every year, what they're doing, what they're evolving to, their pricing, their reputation, their infrastructure, their data security, et cetera. When we make a recommendation to our client, we know with confidence that it's a good choice. If we got into that business, that would change our model, we don't want to be in that business of building that technology.
Anything else for Bill? All right. Thanks, Bill. We're going to go ahead and take a break until 10:00 A.M. Central, which is about 15 minutes. We'll reconvene. Thanks.
All right, we're going to go ahead and get started, keep it on schedule. Next up we have Scott Hudson, who's going to talk about our claims management business. Scott, the next 25 minutes are yours.
Good morning. Okay. Good morning, everybody. Gallagher Bassett. As I always do, I'll dimension the business a little bit to make sure we're all thinking about it the same way. We ended up last year in 2017 at a $770 million business. We're essentially 17% of the Gallagher organization. We paid well in excess of $9 billion of claim payments. The other thing to always keep in mind is we're not a risk-taking entity. We're paying other people's funds. If you think about that in terms of what an insurance company size would look like, we're probably the equivalent of a $15 billion insurance carrier. A sizable operation. We got 4 different types of clients. There's the bread and butter that's been kind of the cornerstone of Gallagher Bassett for years and years. It's the large commercial entities with risk sensitive programs.
They unbundle the claim service to us. That would be the McDonald's, Hyatt Corporation, Waste Management, Whole Foods, organizations like that. Also, a lot of business with public sector entities, small municipalities, a lot of that in the U.K., some here in the U.S. We do state government work here in the U.S., State of Connecticut, State of Minnesota, State of Nebraska, State of Oklahoma. Those are all of our clients. Then, it actually continues to be the cornerstone of our business down in Australia, although we are seeing a fair amount of diversification. We're an agent for the large state government entities down there that provide workers compensation insurance.
The part of our business that I think we remain extremely excited about is the insurance carrier space, where we're walking in the front door of insurance carriers and saying, "We're a good alternative for you to consider in terms of your claim handling." We're seeing significant growth with them. There's the alternative markets, MGAs, MGUs, captives, which is a meaningful share of our business as well. Workers' comp is a significant piece of what we do. It's probably in the neighborhood of 65% of the business. Liability, general liability, commercial auto, and then some professional lines. About 5% of what we do, and I've mentioned this before, is property. That's a question that always comes up. Are we a big property player? Not at the moment.
Our whole deal is trying to enable our clients to get a good solid outcome by adding our expertise, scale, and capabilities to their claims. How do we generate revenue? Typically, it's large multi-year deals. The way in which we price our product, it varies a little bit. There's some that's per claim. When we do it per claim, some of it's for the life of the contract, some of it's for the life of the partnership. We have alternative type arrangements where, if we've got a large client with maybe 30, 40, 50 people, we'll just charge that on a number of staff and then put a multiplier on top of that. Alternatively, if you get into some of our captive business, it's a % of premium. Different ways in which we structure those.
Some we're starting to see, I've mentioned this in the past, we're beginning to see opportunities to make those performance-based contracts where people want to tie our fees, our revenue to the results, and we're quite comfortable and willing to be able to do that. Competitors, it depends a little bit on where we're talking about here in the U.S. There's a number of names that come up time and time again. It's Sedgwick, it's Broadspire, it's ESIS, it's Helmsman, it's CorVel. It's a typical solution set for us. The fact is we're also competing with the carriers, especially since we're talking about outsourcing claim handling. In essence, they're trying to bundle them up. We're trying to unbundle. We're trying to get them to outsource. They're trying to handle it inside. If you go over to the U.K., it's primarily insurance carriers, law firms.
There's a few smallish TPAs that are in our business. Down in Australia and New Zealand, it's primarily insurance carriers that are in this business. There is a TPA or two as well. Our goal is pretty simple. We want to be the premier claim handling organization throughout the world. As I said, right now we're operating in the U.S. That's where most of our revenue is, but we're seeing significant growth in Australia and New Zealand, significant growth in the U.K. I always want to mention that even though those are the only places where we actually have people on the ground, we can handle claims in over 60 countries throughout the world through some of our partnerships. We have what, 5,600 people at the moment.
The average over the last five to six years in the mid to high single-digit organic growth, with in 2017, our adjusted margin was at 17%. We're not as acquisitive as the brokerage business, but you have seen that over the last couple of years, we started picking up some strategic acquisitions that really add to our capabilities and a couple of things that we're excited about that I'll mention here along the way. Growth. Initiatives to drive growth. As I said, once again, we're a mid to high single-digit organic player. What we're doing to drive that growth, first, you go to the fastest-growing segments. We're putting a lot of emphasis around the insurance carriers. I mentioned that's a new part of our business. We've been after that now probably for a handful of years in earnest.
We continue to see our efforts there pick up, in a lot of respects, the story in terms of a TPA being an alternative claim handler for a carrier, it's still awfully new. As we're seeing that the mindset of some of the carriers change, we're actually a legitimate alternative. We can deliver just as good results. We are seeing meaningful growth there. The alternative markets is another place where the tide is rising. The captive business, we're seeing growth there with our clients in terms of introducing new captives, as well as just the membership in those organizations growing, and that's a significant lift to our business. Product expansion. I told you that historically, we're primarily a comp with a little bit of liability. We're extending our reach into a number of new areas. Complex liability offerings around the notion of product liability.
We've gotten into, with an acquisition of National Transportation Adjusters, long-haul trucking, a very specialized niche there. We've got a business in Western Litigation that's in medical malpractice and other professional lines. We see an opportunity to extend beyond just our traditional product set. We're also doing things like there's a lot of what's happening in the U.S. is years ahead. A lot of things that we've done around managed care and medical management are things that really haven't been introduced or offered, like in the Australian marketplace. We see opportunities to take some of the services that we have here and export them elsewhere in the world. Market and geographic expansion. The U.S. risk management market is a mature market. There's not a new Hyatt, there's not a new McDonald's coming up every single day.
The insurance carrier market is a new market here for us. New products are a new market. Where we see a lot of opportunity as well is outside the U.S. We've actually got a pretty significant and meaningful footprint in New Zealand that we probably didn't have as recently as three or four years ago. We continue to see new and different types of opportunities within Australia. Our U.K. business has been growing, we're looking very keenly at opportunities to extend beyond those regions. Even though, as we've mentioned, we can handle claims today through some of our partners, I would expect over the not too distant future to see us planting more flags around the world. The single most important things in terms of our growth is just delivering one heck of a good product.
A good product in our world means that the claims experience of our clients is better than it otherwise would have been if they were working with somebody else. We talk a lot about delivering a superior outcome, we've been doing a lot of things inside our business to enable us to do that. It's a combination of who you hire. It's putting the right tools. It's training those people. A lot of the stuff that you're hearing around data and analytics are critical in terms of being able to position yourself to be able to deliver a great outcome. A couple of other metrics around growth. Our retention continues to be in the mid-90s, quite strong. As I said, new business growth has been mid-single digit for a period of time here.
Let me shift gears to mergers and acquisitions, staying in line with the format that you're hearing from everybody. As I said, it's not been a prominent part of who we are, but we did actually pick up three companies in 2007, or 2017, excuse me, continue to look for other opportunities. Let me just mention as a reminder on those three acquisitions. One was in New Zealand, a company by the name of Symmetry. We had been in the personal injury space, primarily in New Zealand up to that point in time. This gave us property, motor, and marine capability that we didn't have. We also bought a TPA that gave us an uninsured loss recovery capability in the U.K. by the name of Strada that rounded out our motor offering in ways that we hadn't seen before.
I mentioned here in the U.S., National Transportation Adjusters. I just had breakfast this morning with Keith Dunlop, who runs that. It's been a great acquisition for a small little company, $2 million, and they were essentially experts in the long-haul trucking space, but they really didn't have the capacity to handle large volumes of claims. They hook up with us. The next thing you know, he's selling a number of interesting deals on the heels of that. The synergies, especially on the revenue side, have been quite interesting and beneficial to both organizations. Let me shift gears again to productivity and quality. As I've mentioned many times, you hear we're a 17% to 17.5% margin business. That's expanded nicely over the last five years due to a lot of investments that we've made in the business.
Some of it is just larger scale operations. As we continue to grow, we hopefully will see, over the long haul, continued opportunities to gain scale efficiencies. We also think about productivity and quality by using our service centers in India. Recent count is we've got about, you're going to hear from Vishal here in a minute, but we've got dedicated to the Gallagher Bassett side of the business. We've got about 300 people in India serving us. We're also doing a couple of interesting things. I think Vishal probably will talk about service centers that we're building here in the U.S. as well. We're seeing a pretty significant ramp up there.
At the end of the day, there continues to be a pretty meaningful opportunity to take work off the back of our resolution managers, our adjusters, and move it on a centralized basis, both to provide better service and free up their time to handle the claim in a much more meaningful way, and to deliver that outcome that we talk about time and time again. Recently, to the extent you guys are big readers of Advisen. Advisen comes out with a claim satisfaction survey every two years. In the casualty category, you may have noticed that Gallagher Bassett was right up there at the top. This is according to risk managers and the broker community. Independent objective survey. What was interesting about this one as well is they don't distinguish between insurance carriers and TPAs. They just lump us all together.
We're talking about being rated higher than what I think people would call the traditional strong claim handlers, bbs, Travelers, and so forth, and according to the risk managers and brokers out there, at the top of the list is Gallagher Bassett. Whereas I think it's a testament to the great work that we have been providing our clients and some of the investments in what we're doing to build out the strength of the organization, I still think we as a company believe there's lots of opportunity in the future to get even better and better. The other thing around productivity and quality is our leadership position in technology and analytics. We're doing a number of things. There was actually an event, I think it was last week.
Business Insurance was kind of noting some of the great work done as it relates to good projects, good teams, good new services. Our clinical guidance product, which is our decision support around if and when you should use a nurse case manager in the resolution of a claim got some fairly high marks there. We're doing a number of other things in terms of decision support capabilities around reserving, litigation management. I was just listening yesterday to us talking about we're going to be rolling out a new product around law firm performance, panel performance rating. It's going to be quite interesting. Lots of fascinating things going on with respect to technology and analytics. Essentially, that's kind of the next frontier in terms of driving a better outcome.
Our product that you have heard me talk about in the past, Luminos, it's our RMIS tool, was recently in kind of the annual RMIS survey, put in the upper right-hand corner, basically, a statement that we have the most comprehensive tool in terms of its service and capabilities. Right now, it's probably the highest rated tool within the unbundled TPA space. We're pretty excited about that as well. I think I've mentioned in the past in terms of how we're organizing, I mentioned the different client segments we serve. One of the things that's enhanced our quality and productivity is to reorient our operation in that manner. We have a dedicated captive operation. We have a dedicated carrier operation, as well as risk management.
Even though you're handling a work comp claim, the fact of the matter is the needs of those different clients are slightly different. The fundamentals of handling the claim are the same, but in terms of servicing that specific client segment's needs, they are different, and we found significant lift, some of it in terms of productivity, but more importantly, in terms of our ability to provide world-class product to those organizations. The last thing I always want to mention is, it's a big deal in our world. We got a lot of data that needs to be protected, and I would put our IT organization in terms of the strength of security, data security, the things that we're doing to make sure that in no way, shape, or form, do we have any hiccups along that way.
A couple of stories I always like to tell is that we oftentimes in our RFP situations, we're posing our new piece of business, the client organization, some of these large global corporates will come in and kick the tires pretty significantly on our data security and strength of those part of our operations. We always come out with very, very high marks. I think we feel quite good as to where we are with that. Then the piece on culture. The fact is culture is a competitive advantage. It makes a difference. We're a people business, and we've got to be able to attract and retain people that are the best in terms of being the hand of claims. We're also bringing in new types of people.
When I talk about the analytics, when I talk about some of the other product sets that we're introducing, it takes a different type of person maybe than we've had in the past. One of the things I'm quite excited about is that we really have had little, if any, difficulty attracting people to this organization. When I talk about this organization, it's twofold. It's Gallagher Bassett. People are excited to come and join the claims industry, people that might not have traditionally thought about it that way. More importantly, it's the broader Gallagher organization as well. This organization is a magnet for talent, and it really serves us well. Then there are always interesting stories about culture.
One of the things, actually this evening, I'll be headed back downtown where we're holding our annual awards ceremony, where we're recognizing people for the great work that they've done. One of the things we introduced recently was where we're acknowledging we have over 600, 700, 800 of our resolution managers, our adjusters apply to see who prevails as the adjuster of the year inside the Gallagher Bassett organization. We sit in a room right here, those folks come and present to my leadership team. I tell you quickly get reminded as to the business we're in. We're actually in the business of putting people's lives back together. When you hear stories of our folks day in and day out, talking about the work that they're doing to try to help somebody get their life back in order, they're making a big difference.
It's important that we bring that to the forefront and remind ourselves at the end of the day, that's who we are and that's what we do. With that, I'll open it up for you guys if you have any questions. Go ahead, jump in. He's right here.
Oh.
Go ahead.
Scott, thanks for those comments and technology. I realize that there's going to be another presentation on this, maybe you could spend a minute and give us some more color around some of the things that you have implemented that have led to an improvement in your operational efficiency, whether it's an expense ratio issue or something measurable that we can see. You've implemented this program, and it's led to this.
I got you.
Historically, because you can't comment about future, maybe talk about plans that are on your way that will drive further benefits going forward.
In terms of our services.
Yeah.
Let me give you an example here. Vishal could speak to this one as well. Some of these things may sound, depending upon your perspective and what other industries you might be familiar with. This operation we're building in Las Vegas. Very simple thing. We're centralizing all phone services. Today, inside Gallagher Bassett, if you called into one of our local offices, it's possible that you would end up with because you're connected to that resolution manager. You're connected to a single adjuster. That's the person handling your claim. Unfortunately, at any given time, that person has got a lot of things going on. They got 150 claims on their desk. They may be answering, they may talk to somebody else. The likelihood of getting that person when you're calling up isn't real high.
The fact is we want that person to always find a human so that we can resolve their question without the back and forth. We've built a way. Now all those calls are going into Las Vegas. At any point in time, any call into Gallagher Bassett in very, very short order, will always get picked up by a person. What's interesting, too, is the call handling rate, and Vishal can probably give you even better statistics than I am. The number of those calls we can resolve without having to call the person back or get the resolution manager involved, I think it's upwards towards 60% right now.
More. It's about 70.
70 now. There's a fair amount of technology involved in terms of just phone technology.
Right.
The ability to move those things around, transfer those capabilities. At the end of the day, it wasn't that long ago, these operations we had were islands. You could obviously transfer a call. There's a very simple example where we're taking a body of work off the desk of the resolution manager. More importantly, what we're doing, it's just not a body of work, but the fact is we're actually providing better services. These people are getting simple questions like, when can I expect my payment to show up? What is the status of my claim? There's an example I think that's very tangible, but something that's happened probably within the last, I mean, this is since like October. It's relatively quick. The other thing that's interesting, I'll give you one other example. When I talk about this predictive model around clinical guidance.
Basically, there's this question on any single work comp claim as to when do you want a clinical resource, a nurse to get engaged on the premise that nurse will provide expertise and guidance that will deliver a better outcome. They'll keep an eye on the doctor. They'll keep the eye on the other medical professionals involved. At the same time, every time you put that nurse on, our organization or any other TPA is going to charge you for that person's time and energy. What the industry has struggled with time and time again is there's some instances, I think some of our competitors, I won't name them, I think they put a nurse on every single claim on the off chance that it'll make a difference. It's going to cost some money.
Others will be probably a little bit. Let's just go with the ones that are above X amount. The fact is, we have, by evaluating and building these models in terms of looking at historical performance, if and when does it make sense to put a nurse on, we've optimized the utilization of those resources, both in terms of the cost of the service, but more importantly, to get the best outcome on the claim. There is a tool, and we've taken that decision to some extent out of the hands of the individual resolution manager, because now we're leveraging kind of the breadth and depth of the entire organization to build those models. Those are two examples, I think, real in terms of where we're seeing evidence of productivity improvement.
At the same time, the service itself to the client, to the injured worker, is actually changing pretty significantly in terms of the way that's being done. Actually, one last one. I was just talking to Neil Simon, our managed care guy. We're in the process of setting up an operation in the Philippines right now to move utilization review. California is a big driver of this. There are certain times before they'll approve a given medical treatment that they want a second opinion. We're actually going to do that out of the Philippines, which will be far less expensive than having it done out of the U.S. At the same time, the service will probably be a little bit better because the turnaround will be quicker.
All right. You just struck a nerve, right?
Okay.
I'm a former Comcast customer, and I hate calling into the local office and being routed to Indonesia for a claim. If you have a guy in Green Bay, Wisconsin, that has a workers' comp claim, and he's calling a Las Vegas call center, is he going to be routed to? Is he going to be talking to a nurse in somewhere?
No. Once again, this is, I think, back to the point of doing this right and doing it well.
Yeah.
Building that operation. What will happen is he'll call his or her resolution manager. If that person's not available, yes, somebody in Las Vegas will pick it up. I guarantee, because we can prove this time and time again, and Vishal can prove it as well here, that individual is far more satisfied because that claim's getting resolved instantly.
Right.
As opposed to having, "Okay, I've got to leave some guy a message. Maybe they'll call me back within 24 hours." It is a significant uplift in service. They're not going to end up in the Philippines.
All right. I'm going to-
Go ahead.
I have one other question. My impression is if I compare you with your peers-
Yes
that you have a better margin profile than some of your peers. I'm wondering, does that present a structural or competitive disadvantage in the marketplace when it comes to pricing?
No. We haven't seen it significantly. What I will say, though, is a couple of things on that, Greg. One is the fact is there are competitors every day. I got my CFO, Jim Bond, here, and he's got our pricing team, and we are seeing in the risk management space, in particular here in the U.S., there's a lot of price pressure. I don't know that it's necessary. It's not because they're more or less efficient. I think to some extent, we've got some union competitors that are out there buying business.
Right.
I don't look at it as our margin is the thing that in any way is contributing to a disadvantage from that standpoint. The other thing, too, is I still look at it, is there is opportunity. Although we do have, I think, strong margins relative to our competitors. The fact of the matter is, I think we look at our business every day. If Vishal's going to come up here, and I guarantee there's opportunities to continue to move business or move functions and capabilities and activities to our India service center to continue to enhance our overall productivity. What I think we're looking to do, too is make sure we're investing that time and energy, in some cases, back into handling the claims better, which doesn't necessarily translate into a higher margin, but it will translate into a better result for our clients.
It'd be easy to say, I'd like to be able to drop the price, but I don't think that's. At the end of the day, people are going to buy the best service. I think we're okay.
One last question. You mentioned some of your revenues are performance-based. Is that a trend? Is it a material part? If it is, should we be thinking about industry loss ratios as a proxy?
I think we'd probably like to see it more as a trend. If I took you down to Australia, most of our business down there, these states, the way they set it up is, that's been happening for years.
Sure.
They give us a base service fee, they put in place a series of metrics, how we perform against those actually ultimately drives how we get compensated. That's been happening down there for I think as long as we've been providing service to those states. That hasn't changed much. We've always had a little bit of There'll be some sort of a performance tied to the fact, can we get a program up and running? Like a performance fee to figure out whether we've got a program implemented quickly. I think we are seeing the brokers who are really driving a lot of these RFPs. They're introducing a little bit more of, will you put something at risk? Interestingly, most of the time it's We've got a few clients.
We actually got a million-dollar bonus from a client a year ago because of good, solid improvement around experience. That does happen, it's happening a little bit more, it's not a trend. The industry is still good about people wanting to buy per claim, more than probably we would like to see it. I think it will come with time.
All right. Thanks.
Yeah. Thank you.
Next up, we have Vishal Jain, who is going to talk about our global productivity and quality initiative. Vishal?
Thank you, Ray.
Vishal.
Can you hear me okay? Am I on?
Vishal, can we hear you? Go ahead.
I've got it switched on.
We can hear you.
All right, great.
Go ahead.
Hi, I'm Vishal. I'm the Global Chief Service Officer. This is a role I've been doing for about three years now. Essentially, my focus is on improving productivity and improving quality and service across all the divisions and countries that we operate in. Before I took this role on, I spent 10 years essentially starting and then scaling up and managing what we call the Gallagher Service Center, and I'll talk about that in a bit. My focus now is more holistic. The Gallagher Service Center was really about centralizing a lot of things that we did in a dispersed fashion. I still look at that, but I'm as interested now in looking at what we can't centralize and figure out how do we make sure those portions run extremely efficiently and effectively as well. That's essentially the remit.
I think it's pretty obvious, but let me just remind everybody why we focus on P&Q, on productivity and quality. Productivity, of course, what it means is we can offset cost increases, we can afford to invest in growth, and we can increase margins. Pretty obvious. Quality, couple of benefits there. One, of course, if you improve quality, typically, you're also increasing efficiency because it means there's less rework to be done. We think there's several other advantages of quality as well. One is improving customer retention. We have a high retention rate. It's about mid-90s for most of our business. We think we can bump that up a little bit more if we can deliver consistent high-quality service. That's one growth-related benefit of quality. The other is we think we can use quality to also differentiate ourselves and win more business.
As you heard Mike Pesch, and Tom say, a lot of the times we compete, we're going after mid-market clients, and we're competing with small agencies. We think if we can combine outstanding service with our other advantages like market access and industry experience, we'll have a superior value proposition. Quality is important for all of those dimensions. What I'd like to do is I'm going to talk about what we're working on, but let me also give you a little bit of backdrop in some of the things we've done that have set the foundation for what we're working on. I'd like to talk about three things we've done, all of which, as you'll see, are laying the stage for what we're doing now. The first of those is the establishment of what we call the Gallagher Service Center. I refer to it as the GSC.
We started this journey in about 2005. Five people doing one thing for one branch in one business. Today, we have about 3,500 people in our service center. We have multiple cities that we operate in, and there's about 200 different things we do out of the service center that I'd say we touch every part of our business today at Gallagher. That's really what it's done. In doing so, I think we've improved the quality as well as the productivity of everything we've touched. Let me give you some examples of the kinds of things that we do in the Gallagher Service Center. I think when you asked a question where Scott mentioned a couple of things in GB, but let me give you the full view.
For our brokerage business, we check all the policies that come in versus our U.S. retail and wholesale operations, now our U.K. operations as well, and we extend that to other geographies. We're checking it for accuracy to make sure what we promised is what the client got. The benefit of doing that, big benefit is then if you look at our U.S. retail brokerage operations, our E&O costs in the last 10 years since we implemented this have gone down over 50%. Guess what? Our revenues have more than doubled in that same period. The percentage has really taken a huge notch down from where it was before. Of course, it's freed up people as well that were doing it. For GB, for Gallagher Bassett, our PPO organization, what we're doing in India is some things that previously the resolution manager did.
In addition to just managing the medical insurance, there's a whole bunch of services we order for our claimants, and then bills have to be paid. All of those bills now, and there's about 1 million of them, get paid out of our service center in India. What that means is that resolution manager can spend more time talking to the client, making sure they can get back to work, directing the claim. Another example of something we do out of our service center is slightly different, and most of our service center focus is on improving service. We also can work and see if we can support our producers.
One of the things we do is essentially take all new leads, we enrich lead information into our CRM, which is Salesforce, that when a producer calls on a prospect, one, he doesn't have to spend time entering that individual information. Secondly, they're just more prepared, and they're spending more time in front of a prospect than behind a keyboard. As I said, there are 200 services that we provide. Hard to get into each one of them. If you think about it, what we do is, essentially, the service centers have centralized anything that is data intensive or document intensive and freed our people up in the branches to spend time interacting with clients, solving problems, and going out and getting more business. That's essentially the purpose of our service centers.
What it's done, as I said, is it's measurably improved quality, it's measurably improved productivity, and it's also done one other thing, which is it's improved the quality of the data that we have. We now do things in a centralized and therefore standardized fashion, we're making sure when a policy comes in, we're checking everything and putting all the relevant pieces of information in our system. Mike first talked about benchmarking as something when we go to a client in our retail business, we want to be able to say, "For somebody in your industry, your size, this is the kind of exposures, this is the kind of limits, this is the kind of retention we see." Well, how do you get that? One way you get that is make sure that you have all of that data of your existing clients in the system.
We weren't that good at doing that in the past. We're very, very good at doing that now. Data quality has gone up as well. That's one important thing, and I'll talk about kind of where that takes us going forward. The second thing I'd like to talk about is something that we did in our flagship business, the U.S. property and casualty brokerage business here, which we call model operations or CSO. What that entailed was really looking at how our branches were servicing clients and then figuring out a better way to do it. We essentially dissected and analyzed every step of all the things we did, who was doing it, when they were doing it, what kind of systems and tools they were using, and so on.
Then essentially came up with a reengineered, streamlined way of doing that stuff, which we call model office. That was late 2012. We made a blueprint about how we wanted our offices to operate, then kind of lay a roadmap for implementing it. There are four or five key elements of that blueprint, they were important because these are things where there is leverage in doing this in newer parts of our business. Let me talk about some of those elements. First was just standardizing what we provide to our clients and carriers. We're a company that had grown by acquisitions, and we had 10 branches that were in the past independent businesses having their own way of doing things. We just standardized and said, "This is how we as Gallagher want to operate. This is what we want to provide to our clients.
This is what we should provide to our carriers." Secondly, was aligning what gets done by whom, and that was both within the branch as well as what should be done in a branch and what should be centralized. The third was creating within our branches, rather than having branch-specific teams, we basically created a national service organization. We essentially had a service organization now not report up to our branches, but we have a separate sort of service structure as well. Two other things we did, one of which Mike spoke about, we segmented and separated out small business, which was co-mingled in 100 branches, and created these centers of excellence or hubs, just small business, that just do that and nothing else.
The last thing we also implemented, we already had done some convergence to five systems, but we also implemented much more sophisticated workflow systems that allowed us to move work around now that we had those standards. Those were some of the elements of what we did. It's taken us five years, I would say, we're close to the finish line in terms of implementing that. If you look at our brokerage business in the U.S., you see some of where that shows up. First, our cost of servicing has gone down as a percentage of revenue. Some of that has found its way into margin. Our revenue per person has gone up, and we can measure that both revenue per person overall, and we can measure it also, for us, a more accurate metric is revenue per service person, which has gone up as well.
Because that's what we're trying to affect. Guess what? Our employee satisfaction ratings have gone up as well. People say they enjoy working in this new system, doing our new processes much more than they did when we started. That's an important initiative, and I'll talk about again how that impacts us going forward. The third is what we've done on the systems front. Really there, we focused on two things. One, we've done system convergence. If you look at our operations in the U.K., Canada now, we're about to do this in Australia, what we've done is some multiple agency systems, again, a legacy of acquisitions, to a single system. When you do that, you obviously get some scale economies, you get some cost advantages, less complexity, and it also gives us flexibility.
Last year, when we had the hurricanes in Florida and Texas, we were able to very easily move work around to other offices because they were on one system. More importantly, we had the same way of working on those systems anywhere in the country today. That's the benefit that gives us. The second thing we've done on our systems is also while we use typically third-party agency management systems, we've built tools and value-added tools and bolt-on systems that just make the systems even more productive. One example of that is our own proprietary workflow tool we developed for our brokerage business that I talked about that not only allows us to move work around, but it also allows us to measure things like quality, productivity, timeliness in a way that we just couldn't before.
That's sort of three pillars on which we've worked on over the last five years. Let me switch gears and talk about what we have going on right now. I want to touch upon three things that are most critical. There's others for sure. The first is we are expanding our concept of Centers of Excellence or centralization, which was primarily done in India, to beyond India. As Scott mentioned, six months ago, in the middle of last year, we set up our first what we call domestic service center. It's in Las Vegas. The reason we set it up is because as we went around, it was clear that while a lot of things lent themselves to centralization in a place like India, there were many things that didn't.
There were things that it would make sense to centralize in one or two locations, but for various reasons, it was preferable to do it in-country rather than on-country. That's really what Vegas serves. Some examples of the things that we do there, as I think Greg was mentioning, he hated being routed to a phone agent calling somebody and then not really understanding the accent. In the last eight years, three and a half thousand people in India, guess what? We don't do any calling. We do not do customer service out of India. That is phone service out of India. In Vegas, we are doing that. That's an example of, we will eventually have about 100,000 calls just in GDL alone that will come into Vegas, and they are simple questions from clearance and providers about a variety of things.
Our hope is today, 70% of those calls we can resolve without having to burden a more skilled, more expensive, and more valuable resolution manager, and I think that percentage will only go up. For our brokerage business, we're doing things like endorsements, cancellations, and we're also doing actually inbound and outbound calling to small clients out of our Vegas center rather than having that actively distributed. So far, we've got about 100 people, so relatively small, but we're very, very pleased with our results. We'll grow that substantially this year. I think next year, we'll probably add another location in the U.S., because there's clearly more opportunity there than we've tapped so far. That's building on what domestic service centers, and we'll build on what we've started there. Second is optimization of small business.
You heard Pat talk about it, and Mike referred to it in his business as well. What we're looking at there is very straightforward, which is just continuing to improve the way we handle small business, so that not only do we provide great service, but we do it efficiently and profitably as well. We've got two things going on. If you look at the U.S. business, that's part of what our model operations or CSO project. Five years ago, we took out small business and centralized it into a few locations. We improved the way it worked. What we're doing now with that is taking it up another couple of levels. We're further streamlining that business, making it even more efficient on everything it does. That means some more work transfer out of those hubs into central locations like Vegas and India, with automation.
We're using things like self-serve, and then just further process streamlining. That business today operates at a margin that is as good as the rest of our middle-market business. When you think about what the customer base is, which is small premium, small accounts, that's pretty commendable. I think it has a possibility of actually operating at an even higher margin potentially than some of our middle-market business. Further optimization of that. The natural thing to do is to take that small business model, which we have developed in the U.S., I think refined and are perfecting, and do that same thing in many other parts of the company. Those being the U.K. That effort is already underway. Lots of potential there. Australia, Canada, these are all retail P&C operations where we can take the same model.
We have a lot of small business, more so in some of those countries than in the U.S., and we think we can be very successful with it. We're also doing this in our benefits business. You heard Bill Ziebell talk about what we call our small group hubs. Six of those set up in the U.S. We'll probably set up a few more. If you look at it, about almost 10%-15% of Dave's revenue is in small accounts. There's big leverage from getting that right, running it efficiently, mentoring those customers, and then making good margins at it as well. The small business optimization is the second thing we're working on both in the U.S. and in other parts.
The third is expanding and extending our model operations exercise that we did so successfully here in the U.S. P&C to other parts of our business. Right now we've got three of those going on, and each of these, I would say, are large sort of transformational type initiatives, and I think have the potential to yield the kind of benefits we saw here in the U.S. We're doing this in-- Many of these are well underway, so let me just kind of quickly take you through those. The first place we're doing this is the U.K. operation, U.K. retail P&C operation. As Tom mentioned, that's about a $300 million business, operates at low teens margin. We're basically doing a lot. We find a lot of the same concepts that worked here work there as well.
We kind of defined a blueprint for the U.K. We've got about 15 of our 50 offices that have already converted last year. We've got another 15 that will convert this year. That'll account for about 80%-90% of the revenue, and we'll finish the job next year. It takes a little while for the benefits to start flowing in, but we've got great buy-in, great momentum there. The second place we're doing this is Canada, which is about a $150 million business, as Tom mentioned. Still operates in low 20s margin. Again, applying exactly the same tools, finding most of our elements that worked in the U.K. and the U.S. seem to work there as well. That journey has also started. We've got about 25 offices. We've done four of our larger ones. We will do a benefit this year.
We'll probably finish up by the first quarter of next year. We'll have transformed the Canadian operation into what we call our sort of model operations as well. The third place is Australia, where, again, Tom mentioned there's an echelon. In Australia, we don't have a good underlying system, so we're going to put a system in, but then also put in the right way of working. Finally, we're also, as Bill developed and mentioned, taking our model operations exercise, which so far has been in the P&C side, and trying to replicate that on the benefits business here in the U.S. initially, but then we'll do it internationally. We have about $1 billion, as you know, on the benefits side, and there's clearly opportunity. We've done the assessment. We know where the opportunities are. We've got a pilot that just started.
We'll do four or five of those this year. I think that rollout will take about three years, just given the nature of that business, and how different it is in different geographies, both in the U.S. and outside. The potential there is pretty significant as well. Those are really our three flagship initiatives right now. Expanding, setting up domestic service centers to get beyond what we can do in India, optimizing our small business model, both here in the U.S. and there, and then extending our model operations concept to a lot of other large businesses as well. Once we're done with this, we do have other opportunities in that are kind of early in our radar as well. Let me touch upon what those are. There's two, and I'll probably mention. One is this concept of domestic service center.
It doesn't just apply to the U.S. I think this will have applicability in our other major geographies, the U.K., Australia, New Zealand. It will make sense for us to kind of replicate that and have this mix. Not only means additional opportunities that we can tap, but it also provides a backup, frankly. As our India operation gets large, it's important to be able to back that up and have some redundancy. The other thing we're working on in early stages, but I think that will gain momentum, is robotics and process automation. We've done a few of these. Pat, I think, referred to that in his comments in 2016 and 2017. These have been little experiments that people have done, but we're just getting a lot more rigorous about it.
I think our biggest opportunities for process automation lie in our centers of excellence and service centers because that's where we've taken a whole bunch of work that was distributed, typically not standardized, and centralized it. Now that's where we're going to apply our process automation and robotics. We've got an inventory of the things we want to go after. We've got a couple of those that are starting up this year itself, and we'll see a lot more momentum on that. I think there's opportunities in the branches as well, but that's where we'll focus. Those are two things I see adding to our portfolio beyond the things that we're doing. Let me just I guess two more things to One more thing together, and I'll wrap up.
As we do this, in my view, our productivity and quality, the other place this is really helping us is with our acquisition strategy. When we do acquisitions, as you know, it's mainly small firms, brokerage firms that we're acquiring. When we do that, there's two things we're able to do now. One is very quickly, we can bring them on board, convert them to our systems, but also give them the benefit of our shared service centers that we built. What that means is their staff very quickly, and these are all entrepreneurial successful firms, can focus more on selling rather than some of the admin stuff that they might have been burdened with before. In addition, we also now have a pretty well-defined blueprint about what an office should look like and how it should operate.
This is our model operations, as we call it, exercise. Not only are we able to give them systems and support, but also take the work that's in the branches and say, "Here's a blueprint for how you might want to manage and run the branch and serve your clients better." We're finding that's helping in our M&A as well. I hope that you take away from my comments are three things. One, we have worked on this a lot over the last five years, and have got some great results to show for it. For all the things we've accomplished, we've also got initiatives underway that have the potential to yield as much as what we have uncovered in the past, and I've spoken about those. Lastly, for us, both productivity and quality are important.
Productivity again, obvious, but quality, I think for the reasons I mentioned, which I think quality can really help our growth in terms of improved retention, but allowing us to attract major partners because they know we'll serve their clients better when they're with us. Finally, really using it as a competitive differentiator when we go to market as well. Those are the advantages of what we're working on. That's all I have. I'm open for questions.
Time for one or two quick questions.
Thank you for your presentation, Vishal. In the beginning of the day, Pat talked about robotics, and I'm curious if you see robotics leading to a gradual reduction in your employee count in the Gallagher Service Center, or maybe you can talk a little bit-
Sure.
-about robotics is coming into play with the Gallagher Service Center.
Absolutely. The answer is, Greg, if we did nothing other than robotics, absolutely. We would see our headcount in our service centers come down because there's clearly. By the way, we've been doing a low-cost version of that for the last 5 years when the board was there, Pat and Doug were there. We actually gave examples of work that we have automated just over the last few years, just using some very simple tools. This is something we've been doing for a while. With the kind of tools that are available, there's so much more we can do. What I think will happen is the following. We will have grown the service center headcount both in India as well as places like Vegas, as we pull more work that really can be better done centralized than it can.
At the same time, what we're going to find is there's a reduction in the amount of effort that's already been put in because of things like robotics. When I net that, what I think it will mean is slow growth in our service centers than before. If you look at it, in the last 3 years, we have doubled our headcount in our service center. If I just project forward, I would say we will probably double it again if nothing were to change over the next 3-4 years. With robotics, my guess is we'll be looking at 20%-25% growth over 4 years rather than doubling the opportunity that exists. That's what I would give up. Arbitrage opportunity, remember, is less.
We get the first round of arbitrage when we take it from a branch in Canada, the U.S., Australia, and move it. Our cost there goes up. Our robotics basically takes that cost of operation in our service center and drops it down even further. Our challenge here is always with, guys, I am not talking about replacing somebody at, pick a number, $50,000. I am talking about replacing somebody at $20,000. For us, it has got to be very sharp.
All right. Vishal.
Yes, Paul.
The true focus has been trying to crack small business for a really long time. What makes it different today than it was three, four, five years ago when all sorts of programs were making efforts to do very similar things and not succeeding?
Yeah. If you look at it, if I just think about the market in two parts, one is large players like us and Aon, Marsh, and Willis, then you've got regional and then smaller players. Frankly, among the large players, we had a much, much larger book of small business than our premier competitors do. Most of the time, as Stan, many others have mentioned, we're not competing with Aon and Marsh, we're competing with the local brokerage down the street. When the big guys talk about doing small, they're really talking about doing maybe mid-market better as opposed to the real small, which is what you're in. What's changed? Some of it is just us learning. Our view was having that business held where the relationship is, which meant in that local market was that it was important.
What we're finding out is, as the world is, we're finding on the other parts, is that that relationship is not as important as the level of expertise and service you can provide, even as more customers looking for that. A simple thing about just we're doing this centralized, which by the way means that Bob, who got that account and knows that business owner in the community he lives in, is no longer serving the account. The reluctance to give that up in the past, frankly, most people couldn't deliver that level of service. Today, we can deliver that level of service, and we're finding that our retention rates, just as an example on small business, have gone up about five points when we move it from a branch to our centralized hubs. Despite the change in relationship, retention goes up.
Part of it is sort of getting that right and then getting over that resistance. The other is technology. I mean, today we can do things with technology that we just couldn't do. A lot of our interactions with our small business customers is increasingly electronic as opposed to phone-based or obviously in person. Those two things have changed today than obviously five years ago.
Okay. Thank you.
Next up, we're going to have Doug Howell. He's going to be speaking about clean energy and give some financial comments as well. Doug, the next 25, 30 minutes are yours.
All right. After getting a microphone. All right. Can you hear me? All right. Good morning, everyone. I guess we're pushing on afternoon on the East Coast. Thanks for joining the call today. I think that the first time that we get together at the beginning of the year, it's always a little bit of a repeat of where we were in 2017, maybe forward-looking. I think a lot of the message tracks that you're hearing today hopefully was talking about where we feel like we're going and the things that the guys are working on and the teams are working on in order to deliver another great year in 2018 like we had in 2017. Today, I want to spend some time just going over the CFO Commentary. I want to give you a little bit of insight into revenue recognition.
We'll talk about tax reform, clean energy, maybe at the end of the call, I'll go back and recap hopefully what you heard from everybody that was giving some presentations today. Let's do that. Let's go through the CFO Commentary, just first and foremost that we posted this morning. Not a lot of changes, to be honest, between it. I think that the dollar strengthened a little bit. You're seeing a slightly less tailwind than we had when we talked in January, that can change on a daily basis. We know that. Workforce and lease termination. We're starting some continued success in downsizing some of our offices and consolidating into common locations. You're seeing a couple of pennies there that we see coming up in the first quarter. Anything else in there that's significant?
I don't really see it. Maybe what we do is we go to page five of the CFO Commentary. Page two, everything's kind of in line with what we told you. If we go to page five-
A little bit less favorable on the back of currency.
Yeah, I said that. The FX was not as much a tailwind as we had just a little bit there.
Thank you.
Page five. Rolling amounts of acquisitions might be a little less than what we had prognosticated the last time we spoke. Still a really good deal pipeline, though. I'll tell you that. The amount of meetings that I've been invited to for nice family-owned agency, I just feel it being better than where we were last year. I feel good about that in the environment. Maybe going to clean energy.
Any change in private equity's appetite for this because of the change in the tax law?
A question from the audience was, do we see a change in appetite from the PE firms as a result of tax law? Put it this way, we're not seeing a change in appetite. I don't know if on one hand, there's issues that they have with tax reform that we don't have. They're also seeing the value that brokers have. It's competitive out there with the PE firms. We don't see them in the small family-owned agencies, something that's three, four, five million. We're pretty competitive, and there are some banks that are selling off some properties. They're pretty competitive on that. We typically like to pick each branch ourselves. Our learnings are that if you buy somebody else that has cobbled together eight, 10, 12, 15 branches, we're probably going to be pretty excited about three or four of them.
We're going to be okay with five or six of them. There's probably four or five that we're not excited about. The multiples that the PE firms are paying right now, just not too excited about it. The other thing, too, is when the cash doesn't go to the actual selling family, founding broker that's going to stay and sell insurance, the check just gets written over to the financial seller, it doesn't create a lot of excitement for them. Truthfully, if they're there, they're not that excited. We get into these meetings, we just see excuse after excuse after excuse of why they can't grow or execute their business plan when they're owned by a financial sponsor, primarily banks. When we talk to a family-owned broker, they're excited about joining us.
They want their children to come into the business, or they're at a point in their career. Pat say he's more excited about working today at 65 than he is at 45. That's true. As I approach my 60s, if the 60s really are the new 30s or 40s, I'm excited about that because I had a lot of fun in my 30s. We do better by picking every single one of our partners that want to be with us. They want our capabilities, our skills. That's the place we're seeing it right now. I've talked to some bank sellers recently. The PE firms, I don't know what to pitch them other than money at this point. I'm okay with the fact there's 30,000 agency brokers out there. We'll get our 100 a year.
I'm not too worried about that. We'll take fair prices on it. I'm not seeing any more or less competition with tax reform in particular. I think Elyse had a question. Just go to questions, but that's okay.
Maybe we can address this in remarks, usually these meetings, you'll tell us how much cash you have on hand for deals.
Yes.
Which would be great to get the number. It sounds like Q1 may be starting a little lower in terms of acquisitions for the year, still strong about the pipeline.
That actually might have been more for the lack of closures in the fourth quarter than a rolling in.
It always seems like you're positive about the pipeline, and then maybe not. You always seem to have this extra cash on hand even as deals are completed.
Yes.
When do we get to the point, and maybe as long as you're still positive, you don't get to the point where you'll think about buying back your stock?
All right. Great question. Cash on hand, we've got $400 million. I think we'll have $400 million at the end of the quarter. Our first quarter is historically our smallest cash quarter. That's when we pay out all the producer compensation bonuses and the management bonuses. Typically, the first quarter is our lowest cash quarter. We'll have $300 million-$400 million, we have borrowing capacity of $300 million or $400 million too. I think that we've got an M&A pipeline that I think we can do $800 million to $1 billion worth of deals this year with free cash. We don't use it for M&A. We'll use it for share repurchases. We also have cash internationally that I don't want to bring home yet. Tax laws will help that. We'll be able to repatriate that now without having as much concern.
I don't know if I necessarily. If we have reinvestment opportunities internationally, we'll keep the cash there and buy in the U.K., Canada, Australia, New Zealand.
How much of the $800 million to $1 billion is international that you have available? How much of your cash is international?
I think international is probably $250 of the $400 right now. There's plenty of opportunity. There's also ways to loan between international companies. You don't have to bring it back. We can loan from New Zealand to Canada. We can loan from Australia to New Zealand, back and forth. We move the cash around the world through a lot of different structures that helps us use it in particular countries. I wouldn't say we're going to do $250 in the U.K. if we have $250 there. It can be moved elsewhere. I see us having terrific cash. We have borrowing capacity right now that's up a little bit, but still pretty favorable rates in the spectrum. We don't have a large interest to phase out loan because of the balance between foreign and domestic earnings. That's plenty there.
Also, we're not paying any tax, basically in the U.S., because we've got a refund of AMT credits coming our way. That's $100 million over the next couple of years. One of the things that we did is we put a pro forma in there. We haven't updated it since January, but the impact of tax reform, you can see that basically, we're in a flat, basically zero or next to nothing tax payment rate for at least last year and certainly in the foreseeable future. I think we're well-positioned for M&A. On tax reform in particular, we're still fleshing some of that out, but I think our estimates that we gave you in January were pretty close to what we see happening. Not seeing a lot of activity elsewhere from that. Not feeling pressure for different reinvestment levels.
We've always been pretty good about reinvesting because we weren't paying that much tax in the past anyway because of our clean energy efforts. Clean energy is actually doing well. We had a terrific 2017 and it's early in the year right now, but this cold snap that we've had helps in March. Hopefully we'll have good earnings on that. The IRS has issued guidance recently that will allow us to find co-investors for the plants, should we want to do that. We still have plants that we could put in place, or plants that are underutilized right now that could be shifted into new locations. As you recall, the program ends in part for some of the plants in 2019. It ends for all of the plants in 2021.
There have been some talk about trying to get the law extended, but we'll see if we can get a group of pro-coal congressmen that would be interested in sponsoring a bill to extend the law. A question that we got is: what happens to your 2019 plants? If you go to page four, somebody asked, if we think it's going to make around $120 million a year or something like that, $115 million, $120 million. If you go to page four of the CFO Commentary, that number adds up pretty close to $120 million of after-tax earnings. In theory, after 2019, those 2009 era plants would be shut down for tax credit purposes, and we would lose $21 million worth of earnings. Then in 2022, the remainder of it would go. Again, these are non-core earnings.
They produce cash for us. I've cautioned for years to look at our core brokerage and risk management operations and use this as a treasury management type view versus an EPS view. I will say, however, that there's some really nice 2009 locations that if we get out to 2019, we can substitute one of our 2011 era components and put them into those locations and possibly run them out another couple of years. I'm not saying that all $21 million of earnings go away. There are some things we can work on. I really would just get the law extended if that would work for us. I don't know if we're going to be successful or not, and we'll go to a mechanical solution, or we'll swap out the mixing bowls in one for another.
The way you'd use page four, and the reason why I made it is I had a question from somebody about this. How do I use page four in understanding what 2020, 2021, and 2022 looks like? On the surface, that's how you'd use it.
You just said some of the laws could be extended. Is there?
No, not could be. I think we'd like to. There's some movement afoot that might say that there's support for extending the law so that these plants don't stop receiving tax credits in 2021. From our standpoint, just put in perspective, we're generating so many credits right now that we believe that we'll have use of those credits well into the late 2020s, right?
If those are extended, they could go even longer.
Yeah, sure.
This talk, or is there?
I think there is, but I love to talk.
Is there a time frame in mind, like take it from X year or Y year?
These laws typically get extended in one, two, or three-year increments. I think it'd be piggish to assume that you could go in and ask for a 10-year extension. The innovation's been proven. There's commercial reason to run these plants for environmental beneficiation. The purpose of the tax credit has served its purpose. The real question is, does the industry need to sync up the expiry of the 2009 plants with the 2011 so they all expire at one time? There are a lot of jobs that these create, is this something that there would be support for the law being extended? We are actually trying to improve the technology every day inside of here, too.
There's further innovation going on in these plants that if Congress could see its way clear to extend them for a few more years, it gives us nice test locations in order to continue to improve the technology. There's a whisper. Write your congressman.
My second question, sorry. You did also make mention of maybe some of the plants that aren't in production could actually come into production. I'm looking on page four as well. Is there a way that we could judge how additive that could be to the current stream?
I don't think you can. I think we're still exploring with locations right now. To be honest, we've been waiting for IRS guidance that came out last week. That's favorable. I wanted to make sure that our appetites for credits under tax reform, we don't need to be spending a ton of cash today for something we're going to get in 2035, right? We'll take it as a one step at a time way there. I think there's a clearer road ahead now that we think that we've proved the environmental beneficiation. We've preserved the credits during tax reform because if the AMT had not gone away, that would have jeopardized these credits. We've preserved that under the current construct of Congress. We think there's favorability out of coal states that would have an interest in extending these for a short period of time.
That's our next step. This is always going to be a six-month view type exercise. In our case, as you look at it's a great way for us to control our tax rate for the next decade or more at this point.
In your comments on this, you said something to the effect that you're going to be able to now start selling or exploring the sale of ownership interests in this. There's a change in law.
Yeah.
Go back and talk about what you said.
Yeah, sure.
Then talk about the market for the sales and how it shows up on a GAAP basis.
All right, fine. Here's the thing. There's two things. If you go back in the old Section 29 era, and early on in the Section 45 era, we would find co-investors to own a piece of our plant because they would have an interest in controlling their tax rate to a certain extent. There's a structure that is allowed, and there's a structure that's disallowed by the IRS that allows for co-investors. It's illegal to sell tax credits, and we've never done that. It's legal to find co-investors that want to be a partner in your plant. By the way, these rules, in certain cases, apply to the solar business, the hydro business, et cetera. By and large, there is a tax structure now that the IRS has given guidance on.
That doesn't mean that it's a rubber stamp approval, but we believe we could go out and find co-investors. For instance, let's say that we don't want more tax credits, right? That we have an idle plant. We could co-develop that plant with a co-investor that would be an equal partner, pro rata in all the economics of the transaction, and we could get paid for effectively selling a portion of that plant. That's something that this industry has done for years. It's out there. Now that the IRS has issued guidance, we think that's a positive thing. Whenever you co-invest or co-develop with somebody, you leave a lot of the money on the table, though.
The fact is, as I look at it and say, do we really want to bring in a partner and share 50% of the economics, or should we just keep it all for ourselves? Because we're the developing partner. It's our hard work, our sweat, and equity that's going into this. It's their money that's going in to pay for the plant. Maybe we want to keep them for ourselves. Again, guidance last week, structure we'll look at. There's appetite for tax-advantaged investments, just like there's appetite for munis, et cetera. One step at a time, but I did want to say that as we look out to 2018 and 2019, there are opportunities. We hope there's opportunities on the legislative front. We hope there's opportunities on the co-investor front. I think that it's a pretty good time for this, and we survived tax reform, right?
As a result, I feel like the clean energy business is in a really particularly good spot at this point. Predictability, what's it going to look like? If you can predict Mother Nature, you're better than I am. That's kind of a little vignette on clean energy. Other questions on that, and then we talked about cash a little bit, but we can go back into tax reform, or we can go back into wherever. Where do we want to go next?
I've got one on clean energy.
Okay.
You talk about co-investors. What is the return on investment for a company looking to get in? What's the return on investment for AJ Gallagher when you think about your clean energy?
Well, our return on investment is staggering.
Multiples, right?
Oh, 200%, 300%, 400%, 500%. I mean, it's just because it costs so little to develop it, and there's so much economics that come out of it. For a co-investor, it's not as lucrative to them because it's our machine. We developed it, we pioneered it, we developed it and everything, so we're going to get paid for that. Right now, I think the lost economics for us seems to be a lot higher than our cost of capital. That's what I've got to evaluate, is should we just keep them ourselves and use it even though I think the answer is that if you don't use the if you spend a $1 today, you got to get a $1 back the way it works. You spend a $1 today, you basically get $5 back. When does that cross?
It takes about 12 years. If we spent some money today to get credits in 2030, it probably meets our cost of capital criteria. Now anything before that, it's got to improve the return to us. All right. Clean energy, cash, good position. Borrowing capacity, good position. M&A pipeline, good position coming into the year. Probably the other thing is just tightening up on tax reform. There are going to be entries by companies over the next year that tweak their estimates that were made in a three-day period at the end of the year and a month. Just realize that. We'll carve that out. I don't see anything coming for us at this point.
I think that the table we put in at the back of the thing should come true, we will spend a lot of time working on that in April and doing that. The next thing is revenue recognition. Not only were the accountants busy enough with tax reform, working with the IRS on guidance on clean energy. They've been busy for the last 18 months trying to develop revenue recognition. Some brokers have put out their estimates on a quarterly basis before us. Some are giving some initial guidance. We put our cumulative effect since the last time we spoke. We put our cumulative effect. We think that it'll be a positive $130 million, $150 million. That moves it over the history from 2015 and prior. It means that our accounting probably was a little conservative, right?
Over 90 years, $150 million is a big number. We, I think, are the only broker that are going to do the full retrospective method. When we issue our March 31st accounts this year, we will be entirely on the new GAAP basis, and we'll compare to new GAAP in 2017 and 2016. The natural question is, what are you going to see 2016 and 2017 on the new GAAP basis? We're targeting sometime in the first 10 days of April, right? Is that I will publish the information, we'll put it out there, and then I probably will do a special call just on the history of the restatements for the new GAAP. That will give you two to three weeks, and we probably won't do our earnings release this year until about May 1st.
That gives us an extra week in the time, the calendar kind of pushes a little bit later also, gives us a little extra time to get everything digested and put out, it'll be helpful for you. Hopefully, I think, where do I see 2016 and 2017 coming in? I see material changes based on the quarterly earnings patterns. Do I see material changes for an annual amount? Probably not. I don't see it being if it took us 90 years to accumulate $115 million worth of, or $150 million of change. A couple of years, I don't see it moving our book back dramatically or our earnings dramatically, going back. I think that Aon put out a similar type of view, I think there's maybe just a flatter down a little bit or up a little bit.
I would say that we might be in a similar position on that. Here's the thing. People say, "Well, gee, you got all this change going on. Is it good or bad?" I said, "I don't know if it's either. It's just different." It's kind of like, what's the difference between GAAP and statutory accounting for insurance? They're both right. They're just different, right? Just a different way of looking at it. One would argue one's more conservative, another one's more conservative. The new revenue recognition standards are just different. Hopefully, by us doing the full retrospective method, we can move on with the rest of our life and not have to worry about what old GAAP and new GAAP was. That was our choice.
I think that most of my accountants hate me for it at this point, and so I'm not probably a popular man inside of the company because that is a lot of work to go back and redo that rather than just starting afresh on it. Look for that coming out in the first 10 days of April.
That's going to be your follow, basically put online a supplement, like an old supplement with the new numbers?
Yeah. Actually, the question was what are you going to see coming? If you go to our investor supplement that we publish, what's really going to happen is we will add, we will drive in a progression. Right now, we show you reported, we show you some adjustments for comparability purposes, and we get to our adjusted numbers. What we'll do is we'll go back to old GAAP reported, adjustments to get to new GAAP, reclassification, the adjustments get to new GAAP. You'll come down the page, and I'll have new GAAP, and then we'll just have the typical adjust. There's not a lot of difference in our adjustments between reported new GAAP and adjusted new GAAP. There'll be just one layer for those two years that you'll have, and then there'll be footnotes that explain each one.
We'll get on a call, hopefully educate you that by this time, there'll be other information, so you're learning along the way. You'll say, "Okay, this is like this." The big changes are for Gallagher, we recognize direct bill upon the effective date instead of waiting for the direct bill or installment basis, instead of on the installment that you're coming over 12 months. Contingent commissions get pushed back into the year that they apply to, not the year that you receive them. Actually, we do receive contingent commissions sometimes that are two years or three years old. There could be stuff that we recognize in 2016 or 2017 that actually we recognize should have, under the new GAAP, recognized back in 2014. You could pull contingent commissions and do that.
Our benefits business, since there's such a large amount of business that is effective 1/1, most of our healthcare plans, right, are 1/1 type, January 1st healthcare. We'll pull revenues out of the later half of the year, and you'll recognize them at the beginning of the year, or excuse me, in the first quarter. While Gallagher has been seasonally smallest in the first quarter, now when you get the new GAAP, we could be seasonally largest in the first quarter, just because of the benefits business coming back in. I think those are kind of the four or five big things that you would see change. Then, of course, there's some deferral costs. Deferral cost isn't a big deal for us because most of our producers are on variable comp. They get paid when the income's recognized. We match it up, and there's not a long earning.
We don't give a producer a check today for value that we get for three or four years. It's basically a one-year payment. There's not huge commissions on the front end. We don't have a lot of that. By and large, that's the thing that you're going to see. Since I'm on the point of seasonality, one thing I do want to always remind people of at this time, first quarter seasonally has been our slowest M&A quarter, right? History over time. Second of all, other than one or two quarters out of the last eight or nine years, our first quarter organic has been lower than the full year amount. Let's see, I think last year it might have been higher, then second went down. There's one or two years in there.
By and large, we always expect our first quarter organic, and there is a reason for that. Our people get paid based on annual production that gets done by the end of the year. You get into January 1st, next thing you know, they take vacations, they've got the holidays, they kind of pick it up again. There is a reason why production can be different in the first quarter versus the other quarters. Like I said, other than two out of the last nine quarters, I think it's been the slowest quarter of the year. Rev rec, seasonality. Where do you want me to go next?
Maybe on margin. Let's tie that in. On your last call, you guys had a really strong organic. We can adjust and say that Q4 was 6% ex items. You made a comment that like, "Well, I thought I heard that being said, if we're pointing to margin improvement at a 4% organic, typically it had been a 3%." How do you see the margin profile? Can you talk through the first quarter if growth follows a seasonal pattern a little bit lower than the full year? Then also talk to the full year, how you see the margin expansion potential in your brokerage business.
Right. Great question. Here's I will say, I'm going to give you comments on old GAAP, new GAAP is going to be a whole different answer, right? Traditionally, our first quarter margins were the very lowest. They may end up being the very highest for the year. Just that could happen, the difference between old GAAP and new GAAP. Relative to prior year, on both the new GAAP or the old GAAP basis, quarter-over-quarter, new GAAP versus old GAAP, margin expansion shouldn't be all that different except for this change in contingent commissions that could have a dramatic impact between years on that. That said, how do I feel about the nature of the business? Let's just talk about organic growth and expenses versus organic growth into revenues, just to give that thought.
3% has kind of been the break point where I've said under 3%, pretty hard to expand margins. Do I see it hard to expand margins under 4%? Yeah, there's some in there over 4%. I'm not moving the benchmark from 3% to 4%. There is a different dynamic in the workforce right now. There is wage inflation out there. There are a lot of sourcing initiatives that we've brought on that we're basically renewing rents now at same rates or a little bit higher, whereas for a number of years, we were renewing rents, leases at a lower rate than we did in the previous that were falling off. To a certain extent, there are some other margin pressures out there as the economy heats up.
I think listening to Vishal talk about the opportunities for us to have a labor and quality arbitrage into our service centers, regardless of where they're located, that will control some of the labor inflation that is naturally happening out there. We do have an outlet for a solution for wage inflation and operating cost inflation. How do I feel about it? I think Gallagher Bassett is going to be in the 17%-17.5% range. I think our brokerage business in the first quarter, just the nature that if they post 3.5% organic growth, they should have a touch of margin expansion. 4%, a little bit more, 3%, probably none. That's the way we are in this first quarter. We've gone in at the second half of the year. It usually takes a little while for it to catch up.
Looking out, I think that Greg had an insightful comment, and that was, is there a competitive disadvantage for Gallagher Bassett if their margins are best in class? There is a need for us to invest into business, and we like our margins where they are. I think there's opportunities for those to grow in an organic and growth environment. There are opportunities for us to reinvest, put more boots on the ground, more so. I think the better question is, where are we going to spend the money? I think if it's on innovative ideas, and I think if it's on getting more salespeople to sell and having fewer people servicing, that's really where the opportunity lies. I'm not being evasive on the question. I'm just saying that we're in an environment that's not dissimilar to last year.
Maybe a little tougher to expand margins than last year just because of the inflation that's out there and the wages. I see it kind of similar, to be honest.
Okay, a couple other questions. Contingents. Sorry.
That's okay.
Contingents, you said they can skew for the quarter. Can you just give us whether it's old GAAP or new GAAP, contingents on a full year basis, how you see that embedded? I know that's embedded in the organic growth view. Are you expecting kind of the same level of growth in contingents?
So here's the-
easier to understand.
Great question. What's going to happen with contingents? First and foremost, here's the funny thing about new GAAP. I get the luxury 100% of recasting 2016 and 2017. I can tell you exactly the contingent commission I got in 2017. I get to go back and book it in 2016, right? I will not be wrong at all on that number. My problem coming into 2018, when we close the books at the end of March, I now have to anticipate what are going to be our contingent commissions on the receiving cash out in mid part of 2019.
The sheer estimation factor, just that number alone produces probably some conservatism in my mind that says, "Well, I'm going to do my best guess of what we're going to get in 2019, and I'm going to book a fourth of it in the first quarter of 2018." By our nature, that's probably going to be slightly conservative, right? My big concern is when you look at contingents that we book on a new GAAP basis in the first quarter last year, under new GAAP, in first quarter 2017, it'll be exactly one fourth of what we earned for the year, right? Now I'm going to guess a number here on contingent commissions that I might not get for 18 months, and if it's conservative, I'll look like contingents have gone down. If I'm aggressive, it'll look like contingents have gone up, right?
I think it's really important for the Street to understand there's estimation risk that will come into our numbers, that drawing too much of a conclusion by a guess in March of 2018 by something I'm not going to get until April, May, or June of 2019, it really puts us in a bad position of having to guess. I feel like I'm back with a carrier again. The fear that I have is with a stroke of a pen, earnings can develop, right? That is something that has typically avoided the brokerage space for you to look at for generations that now has been introduced with estimating revenues. We've got GAAP now. We've got unearned premiums, but unearned premiums aren't based on what you have bound divide by 12 like a carrier. It's a guess on how that's going to run off.
It could get 80% in the first month and then run off different. There's going to be lots of estimation risk in the business, in the financials, that I think truthfully is nonsense and didn't need to happen because of the revenue recognition side. I didn't see that our industry had been doing things to substantially manipulate earnings, whereas perhaps other industries had, or had aggressive or ultra-conservative recognition methods. I'm an accountant. I'm forced to live by the rules. To answer your question, I don't know what you're going to see in the first quarter when it comes to contingent commissions and to draw too much conclusion on. The base commissions and fees I feel good about. I think we'll be able to do that and give you some guidance on that. Supplementals, I feel pretty good about that. Contingents, it's going to be a guess.
You all cover the carriers, you understand what happens with guesses.
Thank you so much for that. Just a follow-up to wage inflation, could you possibly speak to how brokers are compensated? If you consider that more as a fixed versus variable cost, and if it's a fixed cost or if it's linked to top-line growth, how much revenue they're able to generate. As a step back as well, for the overall cost of the business, what do you consider, what percentage breakdown would be fixed versus variable? Thank you.
Right. Let's go this. Let's stay with that. For Gallagher, we run about a 58% comp ratio. Take our revenues times 58%, and that's kind of what it's looked like over the last six, seven years, something like that. How much of that is variable and how much is fixed? I think the variable component of that is probably only about 20% when you really look at it, because their producers get paid based on a percentage of their book in a lot of our jurisdictions, but not in all. Sometimes it's just a salary and a bonus. To me, a salary and a bonus is about as fixed as you can get because what are we getting at? If a person makes $70,000, and you give them a $2,000 bonus, that's pretty well $72,000 a year. You're not going to not give the person a bonus that much.
It's not as variable as I'd like to have it, and I think there are things we can do to better that. I think at this point, before you go into too much of a variable comp, I think in the middle office layer, for instance, a service layer, you need to have standardized procedures, and you need to have efficiency of production. To pay somebody too much on variable comp in a chaotic or out of statistical control environment leads to really employee morale problems. To pay on piecework and then have production come in when you're getting a bonus for something you didn't do. To pay on piecework on something that's out of control, that is demoralizing.
I think that as all the things that Vishal is doing in order to standardize the process and the lift that we're getting, there'll be a time for variable comp in the middle office layer. In some of our branches that have really stable price, they do that a little bit with their service level. I think that's a challenge for us over the next four or five years is how do we get to standardization? How do we get to really managed metrics? Then we can go into more of a variable comp model, which will actually help us if we ever get into a situation of a softening market again or a soft market, that could help. Do you want to put it in if there's a hardening of the market? I don't know necessarily.
Variable cost isn't a huge component in our comp. Greg?
I was interested with Vishal's presentation because you really outlined what is a growing part of your company, your business. I'm curious about how his budget has changed over the last couple of years. I know there's a cost allocation of his budget to different groups. First, if you could speak on a macro basis, how has the budget changed, and from an expense standpoint, and then how you go through the allocation process?
All right. First and foremost, let's make sure we define what Vishal's. He's our Chief Service Officer, but he's also responsible for our centers of excellence. There are about 3,500 people in that group. They spread across three or four different countries, but primarily in India. We are offshoring work to those places, but we don't outsource. Those are our employees. They work purely for us. They don't do work for any other organization. They're an extension of our team. I was there last week or two weeks ago, and I've been there a dozen times in the last few years. It looks and feels just like a Gallagher office you would see if you walked upstairs or into one of our branches. In fact, it might be nicer than some of our branches. It's a workforce that's a knowledge-based workforce, not a process-based workforce.
We basically bring people in, we break down the intelligence into pieces that looks a little bit more like an assembly line mechanical bot. Somebody basically coming out of commerce school there, three-year college degree, will come in, and they may only verify name and address the first week. Six weeks later, they might name and address, deductible. The third or fourth week, or actually, they'll move off name and address, they'll go to deductibles, and then they'll go to other things. It's more complicated than that, but you get my point is that we create a knowledge base. You've got people that have been there for 10 years now. They may have reviewed a full 25,000 insurance policies. They've read every single word of them. They've compared it to what we sold.
The gearing on that, Vishal mentioned it's $20,000 per person. That's about what our cost is per person for everything, desk chair, lights, phones, desks, and everything. Cost per productive worker is about $20,000 there. Now, we used to think that it would take 2 overseas to do 1 domestic. We actually see that matching about 1 to 1 now. I think if you do the math, our comp ratio would probably be 2 points higher without them. To be honest on that, I think that we do a lot of work there that wasn't getting done. In fact, we know that.
The great thing about Gallagher, we can actually measure our quality over there so well right now, and we know exactly what the competition's quality is because we buy 60 of them a year, and we go in before we do, and we measure their quality. The number of notices of cancellations, the number of bills issued per collection, the number of certificates issued in the lag time and take the time from request. We measure all that on what the competition quality looks like. I'm not speaking to the big four others. I don't know what they're doing, but it doesn't matter 90% of the time or 85% of the time. We compete with a smaller person. I know what their quality is, and we carry that quality. We turn stuff around so fast right now, that it's almost instant turnaround. Why does that matter?
We rarely get fired because we screw up our placement, that we don't get a good market, or we don't have a good relationship with a carrier, we don't handle a claim right. To be honest, we get fired a lot of times if we screw up their service. There's nothing worse than a producer that goes out and sells a piece of business, and then later we don't issue bills correctly, and the owner gets crankier, then the CFO gets cranky and says, "Well, I didn't have confidence in you because you didn't issue me the right bill." We're fixing that, and I believe Vishal talked about this a bit. We can sell quality, no other broker can. If anybody else tells you that they know what their quality of turnaround on certificates of insurance is, they don't know.
It doesn't really matter until it matters, right? Insurance is terrific until you have a loss and you find out it doesn't cover, right? Service is terrific until you have bad service. I'm telling you, it is a differentiator for us, and it's another arrow in the quiver for our sales folks to go out and say that there is a difference in what you get from Gallagher. You get more from us. There's financial gearing there, but there's a higher quality. If we took all that work, as Vishal said, if you want to hold me to an 85% quality standard or 75% quality standard, I can get rid of 1,500 people in India. I said, "But we're not holding ourselves to that standard." Standard on everything we do here because the quality will matter at some point.
Vishal is way too modest. The effort that they have going on in what we would call robotics is some of the software that's being sold as robotics. The sophistication of Microsoft Office is more sophisticated than what they're pumping on the street as robotics, right? Excel calculates, Word types, right? Access computes, PowerPoint presents, right? If you look behind Excel and Word and Access of what they can do to read, analyze, manipulate, represent or categorize or codify, it's amazing what it can do. They interface with Adobe, where you can read that. That's all robotics. We developed a technology that verifies VINs over there.
It's a robot that goes in and computes a VIN because there's a formula in how a VIN number on an auto is issued that if the fourth position doesn't equal five times the second position times the letter J or whatever, it's an incorrect VIN number, right? We have a robot that does that. It's called Excel. Vishal has some really amazing robotics, which we've been doing for 10 years. We do 4,000 Kaizens a year over there. That's an improvement process. They stopwatch each other. They improve. They watch. They let somebody else learn it. The improving the knowledge, the learning base, we're just getting better and better over there. We have about 20% attrition. The idea of us having to shift people into different positions because a robot doesn't bother us with that. In fact, those people clamor.
Folks there clamor for new opportunities to get better. We have more CPCUs taking exams over there than we do in the U.S. It's really amazing. If you get a chance, go over. Sorry, I digress. I don't know if I answered your question, it's pretty exciting.
Part of it.
Is that?
Good job.
I'm a C student. I probably got half of it right.
Two completely unrelated questions. One is on revenue recognition. Just so that I understand, if you have a guess as to what contingents are in the first quarter, and in the second quarter, it proves wrong.
Do you push that change through the second quarter, or do you restate the first quarter?
Push it through the second quarter. There will be a triggering event. Think about it as a loss. Think about how a carrier accrues their premiums, or they actually have They're setting their loss payments. A big loss comes, a hurricane hits. All the earnings that they may have recognized off their reserves before, off those premiums, in this case, they have to be charged because the hurricane hit, and you reverse all the profits that happened for the first three quarters effectively. It goes through different line items, we don't go back and restate the first quarter and say, "Oh, I have anticipation there's a hurricane coming," right?
You'll have a retroactive adjustment.
Yep
that will run through Revenue line.
Yep
Hopefully we can figure out what you did.
Yeah. We'll tell you. Listen, one of the things that I hope is if you have patience with us, we're telling you the ups and downs, just like the amount of deferred revenue. The deferred expense is a DAC. You guys are comfortable with DAC. When you look at the deferred expense line and you see that every quarter the deferred expense line's going up $3 million, and then one quarter goes up $12 million, you'll say, "You just improved earnings by $9 million different than what your run rate. Why?" Might be a perfectly good reason. I believe that we'll have situations we'll have to unlock our deferred costs. We might have to unlock our previously recognized revenues and say that our guesses back then weren't as good as we thought.
I don't want to get into the business of having an accident year organic and a carrier year organic. Guys, I left the carriers 15 years ago for a reason.
Congratulations to your life insurance company.
Yeah.
A completely unrelated question actually has to do with.
Life insurance is pretty good for your family, Paul.
Has to do with the economic impact. We've heard a couple other brokers talk about poor economy in the U.K. in particular, whether or not that was coming through in your businesses.
All right. Brad said a poor economy in the U.K. I'm not seeing it. On the other hand, our operation there is improving so well day to day that there could be underlying economic stress underneath it that's not through. As we put together the three big brokers that we are, modest size brokers relative to us, but big brokers in there. We now have $300 million-$350 million of retail business out in the U.K. countryside. I'm not seeing that happening. I think there's a fear that it might happen, but we're really not seeing it. I was just with some of the U.K. folks a couple weeks ago, and I asked that exact question. London specialty business, Tom said it's competitive on some of the big energy construction accounts.
I'd say of all the words that were used here, that might be the place where it's still a little soft. Even Mike Pesch says we have a soft market. It's a moderate market in some lines. It's a moderate flat, moderate up, moderate down. That might be the one place, but I'm not seeing it in the countryside of England or of the U.K. at this point. Just like I'm not seeing robust. Yes, there's economic improvement in Australia, yeah, but I'm not seeing China buying a ton of stuff from Australia at this point, it's not like we're in a robust economic environment down there. That's purely just taking a really great group of folks that worked for an industrial conglomerate and having them work for a broker, and organic goes from negative 7% to positive three, four, five. It's a pretty good turnaround there.
I was hoping to go back to some of Pat's introductory comments.
Okay.
Talking about the pricing environment.
Yep.
I think you kind of tied it together by saying, kind of a flat market down or up about 1%. When you guys see as you bring together all the pricing color, and I know we gave some color by line, does the momentum continue to start the year? As we heard from all the carriers, things were getting better. December was better than October and November, and that continued in January. Does that continue in February? Are you seeing?
Yeah
Even if it's small, prices are getting better?
It's getting better. We re-ran our first two months renewals and tried to get as like to like levelizing for exposure, and it is better than that same work that we did in October, November, and December. There is a noticeable change. Is it 5%? No. Is it an extra point or half a point? Yes, but the trend continues that there's that. The other thing, too, is Joel Cavaness is running his rewards comp, and when we set this rewards day for today, this was a year ago, two years ago, and we didn't realize that we'd be sitting here with after catastrophes. I'm telling you, in the wholesale business right now, we're starting to see that market have some nice rate uptick on it, which usually is a first step before it gets to the pure retail business, right?
The wholesale business is seeing some uptick in pricing that's greater than the retail space.
How much is the pricing uptick in wholesale?
Let's see if I can go to my notes here. I think that we're seeing auto is up 5% or more. Pricing on cat-exposed business from the hurricanes is probably up 10%-30%. All right. Non-cat's flat on property, which is better because they were cutting, if you remember. Personal lines flat to a modest increase, but you follow that on the auto side a little bit. You're seeing price increases coming into the auto space. General casualty is flat to a modest single-digit increase. That's probably 3% or 4% as I read through on that. Executive life and healthcare, thus far they're flat, but it looks like they're kind of poised for an increase before the end of the year, that you're starting to hear that from the carriers or from the in-house writers on that. I think that's probably the pricing element.
Joel wanted to make sure that I mentioned that they won the Business Insurance award for technology innovation for our e-commerce platform. Congratulations to the RPS Small Business e-commerce platform for winning that award. How are we doing on time? Just so I don't wear a watch or I don't wear a Fitbit either. How are we at time?
I think probably have 10 minutes.
10 minutes. All right. Where do we want to go next? Do you want to walk around the world? I think Tom talked about margins in some places. Truthfully, if you go back two years ago when I did the walk around the world, I said that maybe we had five, six to eight points of margin opportunity in Australia. Remember that Australia business is a $200 million business. I see us having three to four points of opportunity now, we've quadrupled and we've done well on that. U.K. retail, $300 million-$350 million, we might have three or four points of margin improvement in that business. Our underwriter in the U.K., we really have done an amazing turnaround on it. It's only a $100 million business, but it's really got some nice upside. It's got 10 points of margin opportunity in it over the next couple of years.
We've invested heavily in MI or BI information there. That's something hard. If you look around the rest of it, Mike Pesch's business is running terrific, high 20s%. Bill Ziebell is running high 20s%. Canada, high 20s%. New Zealand, high 20s%. Specialty business in the U.K., high 20s%. The point where you see the high 20s% is where we are. Those are really great margins in this business. At the same time, we're putting 500 kids in our internship. We've got data people that are in the business. We're investing in items. We don't have a lot of places that are going out at this point. There's business that they continue to reinvest in the business or the businesses have the money to reinvest in the business. Any comments?
As we get off, make sure you please give comments to Ray on what we can do better on these meetings. We think that sometimes four times a year feels like a lot, but we get new people that are coming into the room, so sometimes you have to shift through the re-education process. We think that our story does change a little bit each time, but not a lot. I think that's a good thing. I think that we feel bullish about 2018. Me personally, having the first two months of the year doesn't give me a lot of chance to work on the new year yet, but March 1st is my official, I guess that's the accountant's new year is March 1st. Here we go. Thanks, everybody, for coming and listening on the call today.
Thank you.