Good morning, everyone. I'm Ray Iardella, Head of Investor Relations at Arthur J. Gallagher & Co. I want to welcome everyone to our fourth quarter investor meeting, including those of you that are attending here in New York City, and those of you who are listening in on the webcast. We have a really great lineup of speakers today, and the format will be very similar to the past, with each speaker providing about 20 to 25 minutes of prepared remarks, and then we'll open up for Q&A for those of you who are here in the room. Note that we have handheld mics that we'll be passing out during Q&A. For the benefit of those on the webcast, please wait until you have a mic before you ask a question.
Additionally, we handed out our updated CFO commentary document, and we posted the same document to our website at www.ajg.com/december12materials. 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 in today's meeting, including answers given in the 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 than 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. How's that, better? Yeah. Thank you. Ray said I think we've got a good lineup today, and I'll be joined, as you know, with and many of you, it's great to see old friendly faces. There's a number of you that have been following our story for a number of years. I think we've got a good lineup today. Doug will sort of finish the day with any kind of comments or what have you that you'd like on the CFO commentary. There's one person, Vishal Jain, who's one of our last speakers, who won't be here today. I'm disappointed by that because Vishal, last year was the first time at this meeting that he came and explained his role as our Chief Customer Service Officer.
Vishal's had a huge impact on our company, a very positive one, as the person who led our path into our Indian service centers. We now have over 3,000 people in India in four locations, servicing all kinds of our businesses everywhere around the world. I think in large part, that effort has been responsible for a huge decrease in our E&O claims, as well as a huge increase in our margin. I'm hoping that each of my colleagues can talk a little bit about what we're seeing in the area of productivity and quality as we go through the day. I'm probably not going to speak for 20 minutes. I'm probably going to speak for 10 or 15 minutes because when I look around, I don't see that many faces in the room that are new to the story.
One thing about Gallagher is we're consummately boring. We're actually not boring. We're actually a lot of fun. The story doesn't change much. What you'll see today is we're going to continue to talk about the four things that each of our divisions are trying to do to grow the business. It's pretty simplistic. We're working hard on organic growth. Every single day, all of us, everyone that you'll meet today, understands that the job is to get up and make sure we don't lose clients. I get personally involved in that every single week. If there's some question, if there's some claim issue, if there's some opportunity to help a client, the team knows to call on me, and they know that they're talking to a fellow broker. Number one is to keep every client we have. Number two is to get new clients.
You do that by being very aggressive in the marketplace. We're an aggressive sales and marketing team, and we're proud of that. That aggression is not something that's negative. It's positive. We go out and knock on doors and explain to people why they should do business with us. I've used this analogy with you before. It's a tough job. It's tough to go convince someone that they should leave their insurance broker. I didn't make this up. I wish I had, but you've heard me say this before. The reason it's tough, it's a little bit like going to a party of happily married couples and trying to pick up women. They picked. You got to go and explain to them that they picked wrong.
We happen to know from Salesforce.com that we compete about 90-plus% of the time when we're in the marketplace competing on an opportunity, we're competing with somebody smaller than we are. That means that our vertical capabilities, there's 32 areas in the property casualty world and about 15 in the benefits world where we feel we are stronger than anybody. I can rattle off a bunch of them. It's professional lines, construction, religious and not-for-profit, public sector, education, real estate, et cetera. In those areas where we have a managing director, that person is responsible globally for helping us expand that business. It works globally.
Our head of higher education about five or six years ago made a trip to Australia, we have done an unbelievable job of writing new colleges and universities, new to us, across all of Australia with the help of the practice group here in the U.S. That happens with construction around the world, energy around the world, et cetera. In those areas, we think that we're as strong as anybody, which again leads to the push for organic growth. What's interesting to me when it comes to this organic story is that I keep waiting for what I call a waterfall. It has not happened. These relationships are very strong. That's why we don't win. When we go out and compete, we win about 35% of the time.
Interestingly enough, when I started full time in 1974 and as a young producer in the late '70s, our hit ratio was about 30%-35%. Not all that different. Considering the tools and capabilities that we've developed over the last 40 years, it's kind of shocking. One of our guys was with a merger partner and their largest account, and this is just in the last few months, and went out with the merger partner to their largest client and explained what they were going to get now that this merger partner was part of Gallagher. The client looked at the merger partner and said, "Thank God you sold. Man, oh, man. This stuff that Gallagher's bringing to you, the capabilities are unbelievable.
I had no idea I was missing all this." The waterfall I'm talking about is when does it happen where people begin to realize that that relationship, that yes, they picked, that they're married, but the fact is, for their business, our analytics, our capabilities, our relationships with insurance companies on a global basis are so much more powerful than that $2 million-$5 million shop that you've been doing business with since you started your business. I believe that day is going to come. I believe there will be a time. The second thing we're working on every single day is mergers and acquisitions. We have a tremendous pipeline, and these are mostly $2 million-$10 million shops. We're still able to buy them at pretty darn reasonable prices. That doesn't mean that these people don't put themselves up for substantial earn-outs, which they do.
We love paying earn-outs because that proves that the seller was right and we were right to make sure that they came aboard, and they succeeded in our environment. That is something that you can look at the 10-K or the Qs, and you'll see what we're paying out, and those are successful acquisitions. Most people that I talk to about acquisition activity, their experience is not good. In particular, people in your business. I've got friends in your business that say, "I just hate acquisition as a strategy. They always tend to blow up." We've been doing this successfully now for over 30 years. We've done over 500 acquisitions in that period of time, and I can tell you that less than 5% ever go wrong. That doesn't mean that every single one of them is an absolute financial home run.
What we say is that when we're doing these acquisitions, we're not just getting a revenue stream, which we need, and we're not just getting an earnings stream, which we want, but we're getting brainpower. We're getting new brains on the team that come and help those verticals get even stronger. What's interesting about our business in terms of creativity is that of the 500 plus deals that we've done, no two are exactly alike. It shocks me. There are so many cool ways that people in our business figure out how to serve their clients' risk management needs, that the creativity never stops. We bring that creativity on board, and it helps us be even better.
We've taken many ideas from smaller merger partners and put them across the globe, saying, "Hey, this is really a smart way to handle this type of risk." I think we offer the merger and acquisition partners something that none of our PE competitors really offer, and that is a long-range career path for their people in a business that they know is not for sale to the next highest bidder in 5 years. If you want the second bite on the apple, if what you're looking for is the highest price up front, because we have to be competitive long term, those earn-outs have to be competitive. If that's what you're looking for, you will fit very well in the private equity world. We basically wash that out quickly. Why are you here today? Why are you here to see Gallagher?
What is it about our firm that interests you? If we find a cultural fit, that business will grow, and one of the reasons I believe we have strong organic growth, most quarters stronger than our other publicly announcing competitors, is because we release an opportunity in them to expand their business. These are two to five to $10 million shops that cannot write the biggest account in town. They might be friends with those people. The minute they join Gallagher, they're off to see their friends. I think we run a lot of that business. Thirdly, we're working on productivity, quality, improving ourselves every day and expanding our margin and making more profitability for our shareholders. I think we've done a remarkable job of that in the last six, seven years.
Our foray into India and our effort at productivity and quality came about because our E&O claims were killing us, E&O being our professional liability. We did a root cause analysis trying to figure out why is it that we're having greater number of E&O claims and losses growing faster than our revenue, our headcount, or our earnings. Ultimately, the root cause turned out that we didn't do a very good job at checking policies. Now, that's a boring job. In fact, it's probably the least favorite job of anybody in a branch. You got to take last year's policy and you got to look at it, and you got to look at it in detail.
You got to pull it out and really say to yourself, "Okay, what's in this policy?" You got to look at your proposal and what changed between that and this. You got to look at the new policy and say, "Did they get the changes?" I look at that and I say, "That's a tough job." The question that we asked was of a friend of ours that was a consultant in the U.S., going back to India to be with his family, "Do you think you could put a small group together that could just basically check policies? Is the schedule right? Are the autos right? Are the locations right? Is the name insured right? Don't opine on the insurance, just tell us, did the policy come out the way we ordered it?" What did we see?
We started seeing E&O losses coming down. The question was, "Well, can you issue certificates of insurance?" The answer to that is yes. "Can you do auto ID cards?" The answer is yes. On and on. To the point where now, as I said, we've got over 3,000 people in India. We're starting service centers in Las Vegas and Orlando. We have over 10% of our people in the service centers today, and I think that will go to 15%-20% of our people, and then we'll artificial intelligence it, robotize it, and even make it fewer people. That productivity and quality is ongoing quest in every division, every day across the board.
When you look at our fourth effort, the four pillars of what we're trying to do to grow the business, no change from when you've heard me before. Organic growth, mergers and acquisitions, productivity and quality, maintaining our culture. I cannot emphasize to you how important the culture is. The reason we have less than 5% of our acquisitions go sideways is because of the culture. It is a glue that is incredibly important. As I said, most of the people in this room, I've seen you many, many times. You're all familiar with The Gallagher Way. I had a chance to meet the head of the Gallup Poll, what he was explaining at a CEO breakfast, an off-the-record roundtable, was that Gallup had worked very hard to do a global human race survey.
He said it's incredibly difficult, to ask the same question in London as you ask in New York, as you ask in Tokyo, as you ask in Moscow, you have to get it absolutely perfect to ask the same question. There's very big cultural shifts there. The reason I bring that up to you, number one, he thinks they did that, which was pretty interesting. Number two, I had no idea as we were expanding globally how this The Gallagher Way document, clearly a Midwestern written document. If, in fact, you were an English instructor and you took out a red pen, you'd mark it up like crazy because the syntax isn't good, the punctuation isn't good, he repeats himself. It's perfect.
What's interesting to me is that that document has flowed around the globe and is in every office, everywhere I go, everywhere in the world. People exhibit that document saying, "You know what? This is how we want to work. This is meaningful to us." That this is a statement that you've made about ethics, integrity, teamwork. What's important is the client. That resonates with everybody in every culture we trade in. That's amazing to me. It's amazing to me. That culture is one, I think, that emanates out of a whole group of us that are getting long in the tooth now, that always had to fight above our weight class. Every time we went into the marketplace, if you're going to compete on a college or university, you're doing it against the big boys. A lot of them aren't with us anymore. RBH, A&A, Frank B.
Hall, et cetera. They're gone. You're fighting over your weight class, and you better do it as a team, I think that has emanated. The other thing I think that's added to that is probably the number 1, I talk about this in our July R-Day every time. I believe we have the number 1 internship in the industry. We'll have close to 400 kids this coming summer that we'll introduce to what we believe is the greatest business on the planet. Those people come aboard. We tend to bring them in after their sophomore year. We recruit them after they graduate from college, and those that take to the business well stay a long time. Mike Pesch will introduce himself next, and Mike's been with us over 20 years coming out of our internship, as has Jim Gault, myself, my brother Tom, and others.
Those 4 things. I feel good about the year. I think we had a good solid 3 quarters. I feel good about our organic growth. I'm looking at the 4th quarter hoping that that organic kind of stays at that level, maybe even a skosh higher. I'm looking at 2018, if there's any pressure on rates anywhere, the pressure is up. I do not want to signal to the older faces in the audience here, because I see Bob get his pen out, he's moving it. Man, hard market. You know.
Bill's not going to
There, hard market. Pat Gallagher says 20% up. Jump on this baby now. For those of you online, that is not going to happen. I don't think we will ever see the typical 2001 hard market again. I think information is too great, I think capital flows too easily, I think the lines of coverage will firm and soften as they need to in their various areas. We are going to see, Joel will talk a little bit about, we will see some pressure on catastrophe product lines, property lines rather. There is continued pressure on transportation. Workers' compensation is softening a bit. We're seeing a little bit of pressure on the upside in New Zealand and Australia. Things are flattening in the U.K. I look around the world, and really, to me, the best of all worlds is if we're in a flat environment.
I'm competing straight up against my competitors on program design, ability to place, creativity, and we're not worrying about whether the swing in price is going to take them up 25% or they're not going to be able to get a coverage, or the price is going to drop 25% right out from under me, making all the work that I did worthless anyway. I think when you're in this environment where things are up two, down two, up three, down two, it's kind of Goldilocks for brokers, really. Add just a skosh, not that I'm predicting this, but add just a skosh of inflation, and then you're really off to the races. If we can eat the organic up beyond that three and a half, four, then I think we're really in a strong place.
I feel really good about where the business is. I feel very good about the team. I am very confident in the younger members of the team coming up behind us. I think that we've done a great job of bringing folks aboard, training them up, and we are moving them around the world. Once again, taking our culture and making sure that it's a global culture that holds the whole thing together. With that, I'd move to questions. Elyse? See if I talked about everything Ray told me to.
Elyse Greenspan, Wells Fargo. My question is just, I guess, a little bit more detail on the rating environment. Obviously not a hard market, but what do you see in property lines coming off the high level of hurricanes, and how much do you think rate could add to organic next year? How much of Gallagher's business is exposed to property?
Yeah. Let me take it backwards. You can ask the question again later when we're talking about the wholesale business. Property would not be our largest line. It's important, don't get me wrong, and we are the largest writer of excess of surplus property, at least by our calculation, in Florida. We're also substantially large in Texas. We're also a sizable player in California, where the fires are a problem. I think there is clearly pressure on catastrophe property. I think you could see in those areas that are exposed, where people have had losses, 20%-25% jumps. Anecdotally, and this is always, you got to be careful. Anecdotally, we've seen some that the original quote coming out was 100% increase. It did not hold. It was not a huge account. It was in the Naples area.
I think if you just take property and say, well, maybe something along the lines of 5%-7% of what Gallagher does is property. If half of that is cat exposed in some way, you kind of get to a number that doesn't really impact organic growth in any huge way. It's a heck of a lot better than what's been going on, because for the last seven years, large property schedules have been off 15%-20% a year. Before the hurricanes hit, people were telling me, I didn't do the examination myself, but people were telling me that rates were lower than Andrew, before Andrew in 1992. Any stabilization there and some northern movement is certainly going to be helpful. Look, I've said all along, when the rates were going down, my whole thing was the clients deserved it. Wind didn't blow.
Why should they have to pay the same rates that they had to pay after the wind really devastated Florida and the Gulf Coast? They shouldn't. For 10 years, there were no big storms. Now it's fair to replenish those pots with an increase in rate. I think that the interesting thing for us is to make sure that our service team gets out early and explains that to clients. Because I'll tell you from four hard market experiences, nothing makes a client angrier than a big surprise on the upside. Kai?
Thank you. Kai Pan with Morgan Stanley. Just follow up on the pricing. In the past, you have said that switching from pricing pressure in the past to some pricing sort of upward lift could add 100 basis point to your organic growth. Is that still sort of hold?
Yeah. I think 100 basis points is about right.
100 basis points on top, would you achieve like a 3.5% in 2017?
I try to stay away from overly predicting, Kai. Yeah. Here's the deal. If rates are falling 2%, 3%, 4%, and we're growing 3.5%, we're running up a down escalator, which is not as bad as it was in 2005. 2005, stuff starts coming down 10%, 12%. Really tough to grow organically at all when that's happening. Your renewals, I mean, let's face it, we're an annuity business. If I'm getting 2.5%-3%, and I'm adding new accounts, yeah, it should add a point.
My second question on the tax reform. I just wonder from two perspective, one is what's the impact on your sort of financials. Secondly, more interestingly to see your view on would the tax reform prompt these potential sellers or like a family business to sell the business. Do you think that sort of a increase in term of acquisitions?
I think both. First of all, as you all know, we've worked really hard for the last 10 years to get our tax rate to about 20%. If the government's going to do that for us, that's pretty darn nice. Secondly, I do think that these taxes tend to come and go, right? George Bush knocks down the tax on dividends, knocks down capital gains, and it definitely spurred the sales of businesses. The baby boomers aren't getting any younger. According to Bobby Reagan, there's 39,000 of us in America. In America. That's firms. I'm not talking brokers. That's firms. I don't know if Bobby's numbers are right, but this is what he does. I mean, he studies our industry. To be number 100 last year in Business Insurance's top 100, you did $26 million of revenue. Think about that. There's 38,900 firms out there.
An awful lot of them are run by baby boomers, what a great opportunity to sell. What a great opportunity for them to kick the tires of a place that wants to bring their folks aboard and give them a great career path. Because we're building. Jay?
Thanks, Pat. Jay Cohen, BofA Merrill Lynch. Pat, I was hoping you could comment on the situation in London with the regulators looking more closely at the business, specifically some of the facilities. What are you hearing, and do you see any risk to AJG?
The good news is that we are not part of that investigation. The regulators in the U.K. are very strong regulators. They have very strong opinions as to the way that the business should be run. I think it's appropriate for them to take a look at making sure that whatever facilities are put together are positive for clients. The good news is the FCA in particular, really takes their position as to what is the right thing for clients. I think that the squawking by underwriting companies that brokers are taking too much out is bull. Period. End of statement. I'm usually pretty sure.
Jay Gelb from Barclays. Pat, with regard to the EBITDA margin for next year in brokerage, it sounds like you're a bit more constructive on organic growth, new businesses coming in strong. In periods of dislocation-- not dislocation, but in periods with maybe a bit more back and forth following big catastrophes, could that perhaps lead to less margin expansion on an EBITDA basis than it might otherwise occur?
Jay, let me restate your question because I think it's a very good question. When you have times where rates are moving a bit, there's more work for brokers. Things go out to market more. Clients push back more. They want another look at a deductible. They're saying, "Well, maybe I don't need to buy this many limits. I'm not just comfortable necessarily accepting these price increases. I might like a change in terms." When you're doing that, you're spending more time working the account. Yes, there is pressure on margin when you've got that extra work going on. I don't know them off the top of my head, but we have the statistics on how much of our stuff is being marketed and remarketed. We know that, and I forget what the number is, but it is creeping up.
To your point, there is extra work that happens, and that can put pressure on needing more bodies. There's another thing, we're approaching in the country, full employment. We work very hard, and if you take a look at our compensation ratio, it's been pretty darn steady for years and years and years. We're proud of that because we've increased our margin over the last six years very nicely, and we really haven't taken it out of our people's pockets. We've kept about the same comp ratio. We are seeing that to replace people who leave, retire, whatever, is costing us more money.
That all being said, since EBITDA margins and brokerage have gone up for the past six years, would 2018 be any exception?
Let me see if my prediction to Kai is right. If I can get an extra point of organic, I think you see your way clear to some improvement margin. If it's going to be that 3% to 3.5%, Doug has said forever, if we're not over 3% organic, don't be looking for margin expansion. It's really going down to do we get a chance to bounce to 4.5% to 5%? Which I'm not predicting, just saying if we get that, I think you'll see margin.
I guess just a quick follow-up. I did notice that there was a footnote about $0.02 of savings coming through next year in the brokerage business. Annual, maybe that's later for Doug's section.
Would you give that one to Doug?
Could that help, I guess, would that be something that would offset some of the margin?
It might, yeah. Brian.
Pat. Brian DeRubio. You mentioned in the past ACA was bad for the country, but great for Gallagher. Is the confusion around ACA's continuance still great for Gallagher?
Yeah, we do well. I'm very proud of our benefits team, and Bill will be speaking about this later. In these meetings, just three or four years ago, there was tremendous pressure coming from the questions from the floor. Why aren't you building an exchange? Everybody's doing an exchange, but you're not doing an exchange. We said, "No, we're going to have the exchange product. We're just not going to spend all the time and effort and money to create the solution for our clients. We're consultants. We're going to take a big broad look at what the possible solutions are, and we're going to help a client figure out what's best for their company and their people." Which turned out to be the exact right thing to do.
It turned out to be exactly right because the exchanges that everybody thought our competitors were going to roll up the world on, they did well, but they didn't roll up the world. They didn't become the only product. Clients want choice. Whenever there's confusion, as there is in the marketplace, that's when our expertise benefits our clients. It's great for us. I still think it's a crappy law, but hey, thank you very much. Brian.
Ryan Tunis, Credit Suisse. I just had a couple, Pat. I guess the first one, thinking about the M&A pipeline over the past couple of years. The average size of deals at Gallagher has tended to be pretty small, especially I think versus what we saw, I think it was in 2014 when you did some larger ones. Looking out to 2018, is there a possibility you could see some higher revenue volume deals? On top of that, how do you see the mix evolving? Are we more likely to see more employee benefit deals next year versus P&C, or any help on that?
Well, I'll make a guess at my answer here because you never know. It looks like Gallagher's doing all these zillions of acquisitions. Even sometimes you have people say, "Well, do you really focus on organic growth?" Organic growth is our number one focus. We have literally hundreds of people in the marketplace talking to potential merger partners. If we do a deal and buy someone in, we turn right to them and say, "Now talk to your friends. You're part of the Big I, you're part of this organization. Your friends are going to start looking." That's why we can percolate up so many opportunities. The fact is that literally 99% of the businesses out there are small businesses. Our pipeline is comprised primarily of tuck-in opportunities that are incredibly accretive.
If a $7 million shop comes in and happens to move in to a $20 million shop, they bring their production force, they bring their account service people, and that is it. Off to the races we go. That's where you're going to see the preponderance. I don't know if P&C or benefits, which one will outdo the other. They tend to sort of go in spurts. Benefits last couple of years has been a little bit stronger because of the ACA. I can tell you that the benefits acquisitions come in if I see them before they've seen our compliance team or after, I can tell. When they come in before, they're cocky as can be. I got the ACA, it's not a problem. I can consult with my clients. I know everything. I can show them how to weather the storm.
They meet our 30-person compliance team, most of which is comprised of attorneys, and they leave scared because the truth is they don't get it. They don't get how complicated it is, and the Department of Labor and others are going to be in auditing them. That's why the pipeline grows, because they really do need our expertise. I think both sides of the house, I think, frankly, globally. The acquisitions we made in 2014 in Canada, the U.K., Australia, and New Zealand have worked out, knock on wood, better than we had actually hoped. Now those are very fragmented countries when it comes to brokerage as well, and our pipeline to do tuck-ins there are strong as well. That doesn't mean if we had an opportunity on a larger firm that we wouldn't take a shot at it. No doubt about it.
The banking community knows that. If there's something that's coming along that's of size, Doug will get the call. Then we'll take a look. You know, the funny thing is, I'm not chasing some of those prices. If you're going to lever a broker nine, 10 times and then go out and spin that to get to a point where you can spin it to another PE firm, I'm not in that game. I'm not going to compete with those prices. You know the names. If they want to come and offer 15 times, they own the property.
That's helpful. Then, sorry, I just have one more. You talked about on the property side, much smaller part of your business, I think you said 5%-7%. The conversation, I guess the reason it sounds like carriers are warranted to take rate increases is just because of the magnitude of losses we've had this year. That makes sense. On the casualty side, which is a much bigger part of your business, first of all, is it at this point in the cycle, are you able to go to accounts and ask for small rate increases on the casualty side? Second of all, if you are, I guess what is the rationale given the fact that to your point, we haven't really seen that much major inflation?
Well, first of all, I've been saying now for a number of years, I think the cycle's over. This talking about the cycle as though it were 1970s, 1980s, 2001. The cycle's dead. There are mini cycles. Work comp is soft. Work comp should be soft. Clients deserve a break. They paid enough for carriers to make a good buck, and there's competition for that business for a good reason. Supply and demand. Transportation's not soft. Transportation's a problem, mostly around distracted driving. Rates are going up. When a firm the size of AIG says, "Look, we're out," that disrupts the whole market, but that's in transportation. D&O, it's soft. You can get stuff done in D&O. Property in cat-exposed areas that had big floods and had big wind and has big fires and has big earthquakes is going up.
Inside the cycle, and this has been going on now literally for the last almost decade. I think what you're going to see is that people are going to talk about which lines, and the carriers have tremendous IT information. They've got great management intelligence. They know where they need money, and the smarter players are willing to say, "I'm not going to play at that price." If there's outlying players that drag those prices down, so be it, but they will get burned, and it'll trickle back up. One more?
One more quick one.
Okay.
Hi, Sarah DeWitt, J.P. Morgan. I think in the past you've said you're at your target margins in both brokerage and risk management. If you can get the organic growth up a bit, over the long term, how much more opportunity is there for margin expansion? Or is there some point where you hit a natural ceiling?
Well, here's the thing. I think it really comes back to Doug's point. I'm feeling like we're kind of living in this world where the organic growth is somewhere between 3% and 5%. I'm hoping that rates and what have you get us maybe this 100 basis points. By the way, at 3.5%, I'm happy. That's good growth. At 3.5%, we're at target margin. I'm not pushing our people for more margin. If for some reason we were able to get lucky and push organic to 5% or 6%, then we've got room because we'll pay our people, we'll hire the folks we need to handle the account, and there'll be room left over for some more margin. I am not predicting a 5% to 6% organic. I'm just saying that's the way you got to look at the leverage.
Thanks, Ray. Thanks, everybody. I appreciate it.
Thanks for being with us today.
Next up, we have Michael Pesch, who is the leader of our U.S. Retail P&C operations. Mike, the next 30 minutes are yours.
Good morning. As Ray said, I'm Mike Pesch. I'm responsible for our U.S. Retail Property Casualty business. Took over this responsibility in December of 2016. This is my first IR Day, I'm counting on some real layup questions here from you guys. I've actually been at the company for over 25 years. Started in 1991 as a college intern, then joined full-time in 1993 as a producer. Took on some leadership roles as a branch manager, spent some time in our M&A group, recently was regional president, now responsible for the U.S. Like many of us, I kind of fell backwards into this business, but quickly fell in love with not only the industry, but also this company. I'm going to talk about that.
I'm going to talk about the company, why I still love this industry, why I still love this company. I'm going to reiterate what Pat was talking about as respects to our four key priorities: organic growth, M&A, productivity, and our culture. Of course, I'll be open for any questions. The business that I'm responsible for today is a $1.2 billion, approximately, business. It's about 33% of our brokerage operation and about 28% of our overall business when you include our risk management business. We're in many locations. We have 10 regions. We have over 175 distinct locations around the United States. We trade right in about the, in terms of growth, about low single digits, between 3%-5%. We trade in our EBITDA right about mid to high 20s. It's a very mature business, but it's one of our lead businesses.
When we started in 1927, it was the lead business that we had. I'll take a step back and talk a little bit about the industry, about what we do for our clients. Our predominant, where we spend most of our time is what we call the middle market. These are companies that spend approximately $100,000 in premium on up to $1 million. That's not to say we don't insure small businesses, and we certainly insure our fair share of Fortune 500 and Fortune 1000. Predominantly, we spend our time working with what we call the middle market. The reason that's important is because most of the buyers in our business are one individual, usually the CFO, but sometimes the CEO gets involved in that purchase.
It's important because as we talk about, and you heard Pat say, 90% of the time we compete against someone who is smaller than us. It comes down to what kind of value, what can we deliver that makes that CFO or that CEO's job easier to buy the insurance, to procure the insurance. When you think about insurance, and I know many of you have been in this room many times before, I'll just to clarify exactly how we trade and what we do. When you think about buying insurance, and most of you in the room probably have an auto, you buy auto insurance. The underwrite is pretty simple, right? There are a few things that they need to know. They need to know where you live. They need to know what kind of car it is.
They need to know how many miles you're going to drive, where you're going to drive. Pretty simple stuff. In my case, if you've got teenagers driving for you, it's going to cost you about 5,000% higher. The reality is it's pretty simple underwrite. That's why when you buy auto insurance, you can buy it online. You can buy it in a pretty simple format. Now imagine you're a CFO and you've got to buy insurance for a middle market company. Not only do you have auto, you've got a lot of other coverages from workers' compensation to property to general liability, umbrella, you name it. List goes on and on about different coverages and the uniqueness of those coverages. Then the uniqueness of your business and the needs that your business has.
Understanding the risks and exposures that your company has as it relates to those coverages gets pretty complicated. That's where we step in. That's why I love this industry. When you think about it, our industry in general, it's pretty difficult to buy insurance as a CFO. It's complicated. It's not something that you could buy online in a simple format. Truthfully, being positioned in the marketplace, we trade with over 300 different insurance companies, being able to understand that marketplace, and I'll talk about that in a little bit, to make sure that not only are you getting the best deal, but the best program structure. Pretty challenging. That's why I love this industry. This industry is complex enough where we can add a tremendous amount of value, and we can differentiate ourselves.
Like I said, 90% of the time we compete against someone smaller than us. Oftentimes they don't have the depth and breadth of focus. They don't have the niche expertise. They don't have the access to markets that we possess. It really becomes down to one-on-one combat. Can you compete? Can you bring in more value than your competitor? When we talk about our industry, or specifically what I'm responsible for, our global brokerage in the U.S. Like I said, we're in many different locations. As you heard Pat say, we're very acquisitive, we're constantly looking for folks to join us through acquisition. We have a lot of producers. We have over 1,200 producers scattered throughout the United States. I'll focus in on the four things that Pat talked about: organic growth, mergers and acquisitions, productivity, ultimately our culture.
When it comes down to organic growth, how do we differentiate ourselves from our competitors? A couple of years ago, we rolled out what we call CORE360. CORE360 is our value proposition, how we differentiate, how we communicate both internally and externally to our customers on what we do that's different than our competitors. It involves six cost drivers. These cost drivers have everything to do with program structure to contractual liability, to losses that are underneath their deductibles or retentions, and how we help them mitigate those losses, to uninsured or uninsurable exposures. You can't open up the newspaper today without talking about or reading about things like cyber. Over 47% of companies will experience an attack of some sort through cyber or through the Internet. How do we protect them for that?
CORE360 is sort of our value proposition, how we communicate that, what resources we can deliver at the point of sale. How else do we deliver organic growth besides differentiating ourselves? A couple initiatives. We have an initiative we call Whitespace. When we look at a client, we take the data that we have, and as a big organization, we have access to a lot of information about our clients, what they're buying, who they're buying it from, what others are buying in their industry, what kind of retentions they're taking. We can use this information to help our salespeople help their customers make better decisions. When we talk about Whitespace, those are the coverages that our clients aren't buying from us or aren't buying because they choose not to buy them.
They choose to self-insure, or maybe they're unaware that they could buy the coverage that they need for that exposure. Commission adequacy, another way that we grow organically. When you look at all of our information, again, we trade with well over 250, 300 different insurance companies. They all pay us a little bit differently. As a producer, as a salesperson within Gallagher, I want to make sure that not only am I getting the best deal for my customer, but I'm getting the best deal for my organization, right? Being able to understand if company A is paying us 8%, company B can pay us 10%, how do we leverage that strength? How do we leverage that information to make sure that not only are we compensated, but we have the best deal for our customer?
Those are just a few of the ways that we grow organically. Product development is another one. We talk about using our expertise. Pat mentioned our niches, 32 different niches that we have, where we have different experts that are responsible for growing in those either products or industries. We've harnessed those experts, put them in a room, said, "Hey, listen, why don't we just figure out a way to build a better product?" Take, for example, umbrella. We built a product around umbrella where we have 12 distinct endorsements that are added to every umbrella policy for our customers that are different in the marketplace. When we go to market and we differentiate ourselves in the marketplace, we have a better product to sell. We've done that with several other products. It helps us differentiate, and certainly, it gives our client a better product.
Cross-sell, you'll hear from Bill Zabel a little bit later. It's a big topic for us. We have a lot of initiatives that we're constantly embarking on to make sure that we're bringing to our client all the depth and breadth of Gallagher, and that includes our employee benefits teams. We're constantly working together in concert to make sure that we can deliver all those services to our customers. Through all this, our retention is in the mid-90s, so we retain nearly 95% of all of our customers. Won't dive too much more into rate, I think Pat covered it quite a bit. We're seeing a lot of noise and hearing a lot of noise around what Pat talked about, cat-exposed property. Jury is still out on what that will mean.
We think in the first quarter, we'll really start to see maybe some of the impact of that. Casualty lines, Pat mentioned workers' compensation, still pretty soft. Auto, because of distracted driving, and also, if you have a vehicle today, you get hit, your bumper, whatever it is, the cost of replacing that, just the pure physical damage on the vehicles today, so much greater than they were just four and five years ago. There's still going to be some pressure in auto. A lot of the underwriters that we talk to, and we meet regularly with our key leadership at our carriers to understand what they're seeing in the marketplace. Certainly, a lot of them are saying that auto is a problem for them. I'll also mention, talk about the hard market, and it is important.
We have, like I said, 1,200 producers to make sure that we're prepared. We're going through a whole process right now of coaching and training and mentoring our producers to be ready, not for the big swings in the market, but to make sure that we can communicate with our customers the way that they expect, the way that they can understand what's happening if they do have a cat-exposed facility, or they have a tough auto exposure. We're walking our producers through that, guiding them through that so they can be prepared for the market, so we can maintain our level of retention at mid-90s. M&A, Pat talked about it. This has been a good year for M&A. We've closed 15 deals thus far, and our pipeline is just about as strong as it's ever been.
As Pat mentioned, we have just about everyone in the organization who's in a leadership role involved in some fashion, trying to build relationships with independent agents, whether there's 16,000 or 39,000. You can imagine there's a lot of conversations going on every single day with merger partners. Our whole process is to get to know them, and I did that for a time period in my career, to get to know them, to get them to understand Gallagher, not just from a pricing perspective, to get to know us as individuals, but also to get to know what value we bring to the table. Why are they going to be better? Why will their salespeople be better if they join Gallagher? We spend a lot of time and effort cultivating and building those relationships.
In addition to that, we put 5 individuals whose sole purpose for our organization are to cultivate and build relationships and basically travel across the country, figuring out who's ready, who's at that point in time where perpetuation has become an issue. So we've got committed resources dedicated exclusively to M&A. So that's why I'm so confident, I'm so optimistic about our pipeline as it relates to mergers and acquisitions. Dollar-wise, it'll be somewhere around $80 million of revenue, annualized revenue, that will close in 2017. And like I mentioned, I think the pipeline is very strong for 2018. People sell to us for a lot of the reasons I was just talking about from an organic growth perspective. They don't have access to the products we were talking about. Truthfully, a lot of these smaller agents, when it comes to expertise in different industries, they just don't have it.
They may have one account or two accounts that they can relate to in a particular industry. They don't have the depth and breadth to call on. They don't have the niche leadership to be able to bring into an account. Pat mentioned a lot of folks choose to sell to Gallagher because they've had that relationship with that large organization for a long period of time. Just can't get it over the finish line because they don't have the resources, or truthfully, the CFO or whoever's responsible for buying the insurance, doesn't feel comfortable putting their assets in the hands of their friend because of the depth and the background that that firm has. So a lot of reasons why they sell to Gallagher, but truthfully, I think most of them relate to their access to markets, their ability to have more expertise at the point of sale.
Most independent agents we talk to are genuinely interested in perpetuating their firms through acquisition. They don't want to see their firms go away. They want their employees to be happy and successful, and we give them that. Productivity is a big thing within our division in the U.S. As Pat mentioned, we were one of the first to utilize our teams, in India, in terms of things like policy checking. Pat was talking about it earlier, making sure that what we proposed is in line with what was presented from the insurance company. It's very important, but it's a tedious task. And it was important to get people on the team who could do that every single day and be very good at it. Not only that, they help us in terms of things like issuing certificates.
We have over 99% accuracy on all the certificates that we issue every single year. That's tremendous. When you talk about mergers and acquisitions, if you ask a merger prospect what their accuracy rate is in their certificates, they can't tell you. That's a difference maker. That's a value add. They can sell that to a customer, that 99% of the time when we issue a certificate, it's 100% accurate. Constantly looking at ways to utilize India. We utilize things like a national accounting center. Took a look at how many different accounting-- and when you do a lot of acquisitions, you pick up a CFO here, an accounting person here. Centralizing that to create more efficiencies was an important part of what we did from a productivity standpoint. And we're constantly adding different tools and resources for our support staff, making their jobs easier.
Our goal with our support staff was to make sure that we never lost a support person to a competitor because they didn't have the tools, they didn't have the resources, they didn't have the kind of technical background that we would give them from a training perspective and from a hardware and software perspective. Finally, I'll finish up with culture. Culture's a bit hard to define. We've built a culture since 1927 that I think is pretty special. I'll give an example a little bit later of why I think it's pretty special, but how we constantly bring in talent. Through our internship program, I'm a product of that, how we recruit on campus. We'll have over 350 college interns in 2017, and that number will be even greater in 2018.
We're really proud of that, bringing young people into our industry. We're one of the only brokers that does that on a regular basis. We believe it's our lifeline to perpetuation. Started a program called Hire Right over the last two years. We recognize that there's a lot of talent out there that may have just reached a plateau in their respective industries. A lot of good sales talent, but not necessarily insurance-related sales talent. We built an entire curriculum, entire training platform around what we call Hire Right. We hired dedicated recruiters to go out and find these people, source these individuals. You talk about organic growth, you talk about perpetuating your culture, doing it by bringing people into this industry that are fired up about sales, and we teach them insurance.
It's been a great outcome for us over the last two years. That group has generated over $4 million of new revenue in a short period of time. One of the last things that we're doing to bring and perpetuate our culture is a program we call Achieve. Similar to our internship program, where we bring people from college to come be salespeople for us, we also are now working with junior colleges and other local universities to bring in talent in our support staff. We have the same perpetuation challenges that a lot of firms do. We have an aging population. So how do we perpetuate that? How do we get prepared for the next 20 years? By the way, when these folks come into our organization, they learn our systems from the very basics.
They don't have any predisposed opinions or background because we had to hire them from one of our competitors. We come in, we coach them, we teach them, so far it's been a huge success. Bringing in the right talent is how we perpetuate our culture. For me, one of the ways that I look at our culture, we have a program we call Chatter. It's not unique to us, but it's part of our CRM. Salesforce is our client management system. Chatter is sort of like Twitter for internal communication. Had it for about 10 years. What's most interesting to me is that when someone posts something on Chatter, usually an inquiry of, "Boy, how do I get access to this market? What do I do with concrete contractors in New York City?" Within minutes, that person will have between five and 10 responses.
With almost certainty, most of those individuals who respond have no vested interest in helping that person. They're just helping a colleague. They're being a part of the team. When you recruit and cultivate relationships with merger partners for that type of individual, that's the kind of result you get. For me, that's how I define our culture. It's a sharing environment, but one that empowers people to do things on their own, but with the backup of an organization that has the power and the breadth and the expertise to be able to do that. That's what I think is our secret sauce. I look back, just kind of in closing, we have not only the capabilities from a niche perspective, and an industry perspective, but we've got a team that's focused on teamwork and sharing.
Truly, it's a culture that's built for success, not only next year, but well into the future. With that, any questions? Yeah.
Hi, Mike. James Naklicki with Citi.
Hi.
My question is on disintermediation. You talked about commercial insurance is complex. You can't buy it online was the statement. We see it in personal auto. It's moving into homeowners. Why do you think it's not coming to commercial?
Yeah.
Thanks.
No, it's a great question. Let me reframe it a little bit. One thing I didn't mention in terms of our productivity, we started recognizing in small commercial, so small business that pays us under $5,000 in commission, that we needed to do something. Oftentimes, those clients have very significant needs, but you don't get compensated very much for what you do for them. We centralize the servicing of our small commercial. We did it really to make it more efficient. What we did was now that we have it centralized, we can leverage the markets, and we can start to build infrastructure around it to make the buying experience a bit more digital. To answer your question, do I think that there's going to be digitalization or maybe disintermediation in the brokerage community?
I don't know if disintermediation is the word I would use, but I will say that digitalization, so the ability for that small business to connect with their broker in a simplified format, whereby maybe the underwriting is simplified so that they can get back to doing what they're doing. Because remember, small business owners have 17 or 20 other hats that they're wearing. The ability for us to digitalize that was important. Getting it all centralized in one location under one leader has been very helpful. Now, you start getting up the food chain, and when the risks become more complex, you couldn't walk into a large manufacturer and say, "That one's the exact same as this one." They're so different, one to the next. Our ability to help articulate that message to the marketplace is always going to be important.
You can really look at one dry cleaner and say it's pretty similar to the next dry cleaner, or one flower shop pretty similar to the next flower shop. How do we digitalize that and make it easy and simple for people to buy insurance? The movement is to have more of an online presence from that standpoint.
Thanks, Mike. Jay Cohen, BofA Merrill. Question on the potential for changes in the tax system. Did that cause some potential sellers in 2017 to hesitate and wait, just given the uncertainty around what the tax implications might be for a sale? If yes, does that mean maybe more deals in 2018 when you get more clarity?
It's a great question. There's a lot of reasons why people press the pause button. It certainly can be one of them. The whole changes in taxes could certainly be one that would cause them to accelerate that decision. Truthfully, it's one of many things that instigate the sale of an agency. I wouldn't count on that being the only reason, but it certainly could be a soft influence.
The rules on sexual harassment in the workforce are changing on a daily basis. Is there a big demand for coverages as you looked at January renewals? Is there a big market-
Yeah
of insurers willing to write that business? Is there anything you guys are doing internally just to make sure that Gallagher is performing in line with the new world?
It's a great question. That EPLI coverage falls under that Whitespace, as we would call it, right? Those are coverages, sort of electives. You don't have to buy it. No one's regulating that you buy it. You choose to transfer that risk, or you choose not to. Our producers, our salespeople, are constantly talking with their clients about why they should transfer that risk. I think the elevated exposure that it's experiencing in the press today will probably likely cause many of those clients to second guess whether they transfer the risk or keep the risk internally. Yes, I think to answer your question, it helps our cause when we're trying to promote that as a coverage that they should purchase. Remember, it's an elective. They don't have to. They can retain that risk.
They don't have to transfer it to an insurance company. I will say, between that and cyber, because to this day, there's still a disproportionate share of companies out there that purchase cyber insurance for whatever reason. They feel that they have a safe environment, they're not at risk, but it's happening every single day. As part of that whole Whitespace initiative, we're constantly feeding content to our customer, making sure that they're aware of what's happening in the environment, making sure that they're aware of what others are doing who are of a similar nature, and encouraging them to transfer the risk. All of that noise is very helpful in progressing the purchase of the coverage. I don't know if that answers your question.
What about internally? It will maybe be a question for Doug later.
You're talking about our own employees?
Own employees.
We have a tremendous HR team. It's a team that is fantastic. We go through eLearn training every single year. I don't have any answer for you specifically on how we're changing what we're doing there, but it's a constant process that we've always had of educating people, reminding people of the pitfalls and risks that are associated with that kind of behavior. Yeah.
Pat's on next. If we do get tax reform, it's Mark Hughes, SunTrust, do you think the risk is that that might get competed away with smaller brokers, your competition, except lower commissions? If they were paying lower taxes, could that put pressure on commission rates and margins?
To answer your question directly, I would say no, I don't think that that would have an impact at the point of sale. Remember, what we're trying to sell is a value to the customer. We've been transparent with our compensation since 2005. Our clients know exactly what we make, both in direct commissions and fees and our supplementals and contingents. They know exactly what we make, and there's been very little, if any, downward pressure on that. In fact, it's really gone the other way. I mentioned our Commission Adequacy Initiative, where we're sharing with our producers where they need to leverage the carriers to be able to obtain more compensation. That compensation is fully disclosed to our customers. When we talk with our customers about our value, we relate it to what we make.
If a smaller broker were to come in and say, "Well, because of taxation, we're going to do it for 10% instead of 15%," what value are you getting for the 10%? What things are they going to do to help drive losses out of your company? What things are they going to do to help consult you on contractual liabilities? It becomes more of a consultative sale, for sure. Since 2005, we've been on that journey. We've been convincing our customers and our prospects that there's a lot more value to what we do than just procuring insurance.
I think we're out of time for you, Mike.
Oh, all right.
Well done.
Thank you.
I'm sure Tom can answer any questions you guys might have had for Mike Pesch. Next up is Tom Gallagher. He's the leader of our global retail P&C business and also our international wholesale business. He's going to spend the next 25, 30 minutes discussing the international P&C business. Tom?
Thanks, Ray. I promise you, I think I heard Patrick say that he was happy with 3.5% organic. I can assure you that's never been something he's ever said before. All right? We constantly talk about the fact that we are looking for and striving always for 10% organic. When you look at the organization globally, no, we're not there, but nobody is ever happy internally. He's never said that to anybody, ever, that he's happy with 3.5%. Part of what I did, and I talked about it when we were last together, part of what I did to internalize that, to get the team around the globe, the U.S. as well, to focus on the opportunity for us to grow, is to roll out the concept and the idea of 95/15.
Because if we can retain 95% of our business and sell new on last year's revenues, 15%, we can drive much better organic growth. Get aided a little bit by what's happening inside the marketplace, whether it's a point up, a point down, we can drive significantly different. In the last 12 months since rolling it out, we've actually built the metrics among every single one of our businesses around the world. We can actually pour in and identify, do we have 95% retention? Do we have 15% new business sales? All right, just a quick aside on that. Ray has asked me to talk a little bit about the international business, talk about it each time. It's about a $1.2 billion business, slightly larger than our U.S. domestic.
We've got $300 million of retail business in the U.K., $250 million worth of London wholesale business, $150 million worth of Canadian retail business, and about $300 million worth of revenue down in Australia and New Zealand. We talked earlier today a little bit about the four acquisitions or the four significant things done. Giles, the first of those large acquisitions, is now more than four years ago. Oval, Noraxis, and then the Wesfarmers acquisition coming up into four years. Our integration process is over. What I was really, really pleased with, we did our own internal studies of employee engagement. What I was really pleased with is that there is not a significant difference in the employee engagement between our domestic team, which has 90 years of history, and our international team.
We've not only gotten these people to participate, become part of the organization, accept the name Gallagher, put on the jersey and work hard every day, but at the same time, that same team is now as engaged as our team is in the U.S. That's a great result for us, and it portends incredibly well for us in the future. When you look at what I'll talk about today, we talk about where we're going, what we're doing. You think about the four drivers in our business, in organic revenue. Our niches actually resonate around the world. Pat talks a little bit about the higher ed down in Australia.
Do you know that after John McLaughlin, who runs our higher ed practice in the U.S., went down there the first time about six, seven years ago, that today we're the number 1 writer of higher education business in Australia. We do more of it than anybody else does. Last week, we connected a couple of our teammates that were actually between Sweden and San Francisco in construction. These people were spending an hour and a half on the phone trying to develop strategies of how do we take our construction practice into the continental Europe. We had a huge win down in Australia for a religious business, first one that we've done, where we actually brought our team from the U.S. down to Australia to help write, not a charity, but an actual order, a religious community. Big opportunity, large sale for us.
We took our construction team from the States and helped a large construction project down in Australia. If we can continue to pull our team together, which we drive all the time, it provides us with tremendous opportunity to leverage the value practice groups, the niches that we've developed in the U.S. around the world. Our teammates everywhere around the world are very excited about the opportunity to actually tap into what we're doing in the U.S. It's fun to watch. It's fun to see them grab at what we're trying to do. Our practice groups are alive and well everywhere around the world. We also are incredibly focused on trying to drive inside of these businesses the things that we're doing in the United States. Mike talked a little bit about the Whitespace initiative. The Whitespace initiative for us, again, it's all about metrics.
We can measure how many policies do we sell to each of our clients around the world per client. Can we improve that during the course of the next year? Striving to sell at least one more policy for our team. Just keep out in front of our clients and work to develop further relationship. Mike talked about cyber as a great example of it. Today, I would say 7% to 10% of our clients buy cyber. That's it. Every single one of our clients, Mike said 40%, every single one of our clients, I believe, is being attacked virtually every day online. Every time I'm in a sales meeting, the first thing that I ask our clients or our prospects, "Are you buying cyber liability cover? Are you buying it?" Often they say, no. Your fire insurance, you may have a fire someday.
You may have that moment in time where the house is burning, the building is burning, but I can assure you tomorrow somebody's trying to break into your network. It's happening every day. I believe that in our industry, over the course of the next decade, the vast majority of businesses will buy and acquire cyber liability cover. It's an opportunity. It's a Whitespace opportunity for us. Bob talks about the problems that are coming to the surface today. You talk about Gallagher, about the industry as a whole. Many people don't buy employment practices liability. They should. If you run a big business, you should be buying employment practices liability. Think about the opportunity to pull that together between the P&C side and the benefits world, both in the U.S. and around the world. Tremendous opportunity for us.
If you look inside of our business globally when it comes to organic, it's about accountability, it's about sales, it's about people, feet on the street. We talk about the number of salespeople that we have in the U.S., the number, I've talked about it last time we were together, I liked the term accountables, that we actually are going out constantly looking at and trying to determine how many people can actually go on out and generate X amount of new business revenue year after year after year. We call them accountables. Can we grow that number of people inside of our company year after year? That mission not only goes in the U.S., but it goes around our business globally. So we know how many we have in Australia, in New Zealand, in the U.K., in Canada.
Talk a little bit about mergers and acquisitions. It's fantastic to be in the position that we're in today because we don't need to do just the great big acquisitions. Because of the presence that we have in Australia today, where we've got 30 offices all over the country, we can actually work on and pick off small brokers and tuck them into our businesses. The U.K., we've got 70 offices in the U.K. We have an opportunity inside the U.K. at any time to be able to pull local and regional brokers into our business. If we do the tuck-in as Pat talked about, if we do the tuck-in, for us, that's a fantastic business. We can shed the real estate, typically. We can bring them on our platform so that we don't have to have two platforms.
We can help these people understand our practice groups and our niches. Works incredibly well for us. We do actually have a very different proposition than most people do. The private equity world is very focused on making a few people a lot of money. Ours is about the team and about taking the team with us. Jimmy used to talk about when he would come on up here, the fact that it's very easy for us to identify those people inside of the industry that would be target opportunities for us. He would talk about the fact that if the guy is all about what am I going to get, what's my role? Go to the PE firm. If it's a conversation about, what about my team? What about my clients? It's a natural fit with us, and it works incredibly well.
We do it time and time and time again around the world. I see an incredibly robust pipeline of opportunities. In the U.K., we've been quiet for a couple of years. Let's tuck this business in. Let's get our house in order. At the same time, we've never walked away from a pipeline of opportunities that we have, that I think you'll see sometime in the near future, we will begin again to look at merger opportunities in the U.K. Canada, the same. Australia, New Zealand, looking at tuck-in opportunities all over the globe for us. Moving on to operational excellence. You look at what we're doing in the U.S., and that becomes the model for us when we go off to Australia, when we go off to the U.K. and into Canada.
All the things that we've done, our businesses, though there's technical differences in terms of the way that business flows and is processed, is fundamentally the same everywhere that we are in the world. Because it's fundamentally the same, we have the ability to actually take what works well in the U.S., this Gallagher Service Center, and be able to drive it throughout the rest of the globe. Takes a while to get the wheel turning, then there's something that goes on inside of the business that ultimately drives a change in behavior. I'll give you an example of what happened in the U.K. There was a little bit of resistance in a retail business because of all the change going on. Then we had one thing that enabled a complete mindset change occur, and today they stacked themselves up trying to get onto our platform.
We call it the magic mailbox. All right? Every single time a piece of communication from an insurance company or client comes into our offices electronically, you got to file it. We don't file it by virtue of running a copy of it and run it into a file anymore. You're all familiar with it as well. Our service center today does the filing. Our service center, we post those into a document, and they grab that information, and it's the magic mailbox. It just disappears, and it goes into the file. It's right almost 100% of the time, and it saves our team hours every day.
If you think about what has to happen when you electronically file, you have to actually find out the name of the client, then the policy, then the year, then all the material of how it goes in, and it takes minutes every single time to try to file it. If you could just move that off, just one little step changes the mindset completely, and began a process of our team actually really beginning to get excited about what other things can happen. In the U.K., as I said, they're stacking up. When do we get the ability to be able to drive our platform onto what we're doing in Gallagher? The story remains the same in Canada and in Australia. We are actively trying to drive improved margin in both of those locations.
When you look at productivity opportunities for us in all of our countries around the world, you look at the combination of systems, digitalization, and our service center. Those three combined provide us an opportunity to actually leverage what we do so well in the U.S. We take all the learnings that we have from the U.S. and push it down through these businesses. And finally, culture. It's really interesting to me that we haven't talked about it this morning yet, but something that really resonates for our teammates around the world is that Pat announced in October that we have our 90th year, and in celebration of our 90th year, he's challenged the team around the world to commit 90,000 hours of charity to their communities around the world.
Our teammates all over the world know that as an organization, we are completely committed to our communities, that we are absolutely driven as an organization to try and find ways to help those who are less fortunate in our communities. Every time I go into an office today, the first thing they want to talk about with me is the thing that the team did on behalf of a charity. Whether it's climbing a mountain for a teammate's daughter in Wales, and they lost a daughter to a cancer illness at a very young age. And the team climbed a mountain in Wales. To a woman in Australia who had cut all of her hair off for another cancer cause. The team gets incredibly committed and excited, and they believe heavily in who we are as an organization when they see that that's being driven from top down.
There's a fundamental difference between us and a private equity firm. It's a commitment now, it's a commitment to communities, and it's a commitment to the future. I could go on and on and talk a lot about different things, but I'd rather just open it up and take any question that you might have. Please.
Thanks. Elyse Greenspan, Wells Fargo. In the past, you've spoken about looking to increase the margins in the U.K. and Australia from the low 20s to where you're running in your other businesses around the world. Can you just update us on the margins there and just how you think about the outlook in 2018 and beyond?
There's incremental improvement coming through all of our businesses around the world. As I talk about with the Gallagher Service Center and the opportunity to continue to expand it, I think we start to see that happening in the U.K., and that wheel is beginning to turn much quicker. When you take a look at Australia, we've got a significant project related to process improvement. That project is well underway. We expect to begin to yield some benefit out of it. I think more importantly, Doug and Pat are going to drive all of our businesses that do not achieve the baseline margins toward their minimum baseline margins all the time. All right? There is constant pressure on what we're doing, and Doug will talk, I'm sure, a bit more about it in specific.
Elyse, we are, without any question, continuing to work on all of our places that don't reach baseline. Okay.
Thanks. Hi, Ron Bobman, Capital Returns. Could you discuss the initiative to grow the London wholesale business?
Our London wholesale business, last week there was a little bit of an article in "Insurance Insider" about Gallagher driving business to it. Look, we work on behalf of our clients for their best interest all the time. We have worked incredibly hard over the course of the last decade to build the best specialty broker in London. I think what's happening is the team is recognizing what we have and the opportunities that we have there. So far this year, that business has got fairly strong organic growth inside of it because the team is very focused on bringing and driving better opportunities for our teammates around the world. We will continue to work on that year in and year out. I think the London marketplace right now has got the benefit of the concerns that come from the fires, the earthquakes, the hurricanes.
I think that that marketplace right now, in terms of excess property, is beginning to firm a little bit in terms of cat-exposed property. If property comes into London, it typically is cat-exposed. Your domestics in the U.S. particularly, they never worry about it if it's not cat-exposed. If it's coming in there, they're beginning to see some benefit of it. Again, I defer to Pat and his comments in terms of what it means to us ultimately, but I do see our business in the U.K. strengthening.
How much leakage is there as far as London wholesale brokerage that Gallagher as a group drives to other London wholesale brokerages that presumably is the opportunistic pie that you could recapture some of?
Without giving specific numbers, let's just say that there's tremendous opportunity for us in 2018 and beyond to make certain that business that can, again, in the best interest of our clients. We will always have business that we don't do. We've never mandated that it comes into our business. We believe when we built a great practice group, that our team is the team that should handle it. Let's face another thing, for one moment, without even this initiative. As we say all the time about our markets, I hope I have a problem with a market that I have a billion-dollar trading relationship with rather than a million-dollar trading relationship with. The same story goes in the London market.
If we're going to trade inside of that marketplace, we want to be certain that we provide our clients the best opportunity for solving their problems. If we do that, we've got a good team, we want them to be trading with our team.
While you're on the London market, Brexit, euro seems to be heading to the goal line. I think you've been saying it's not such a big deal as everyone was making it to your business model. What's the implications to the London market and your operations when Brexit is done?
If you think about the London market, as I just mentioned a moment ago, it comes into London because it has to come into London. I think a longer-term impact of the London market is really not about Brexit. It's really about the development of the global markets around the world. You listen to Lloyd's, they don't say they're Lloyd's of London anymore. They say they're Lloyd's with businesses in Singapore, Shanghai. They're moving down into the UAE. That's a threat, I think, to the London marketplace. Again, when I look at our business, it's coming into us. We don't have a presence in continental Europe of any significant size. It's coming into us because of the skill set that we have in the brokering business, and I don't see that changing because of a change in the relationship with the EU.
The domestics in France and Germany, in particular, are so strong that the only reason it comes in is because they've chosen not to do it.
You're not beefing up your Irish operations at all just to be able to accommodate your team.
No, we have Irish operations, but it's in the north. We really do believe that there will be opportunities for businesses in the south. I don't see the London marketplace changing. There's tremendous intelligence, there's tremendous creativity in that marketplace. It'll still be the dominant marketplace in our world for a very long time. I firmly believe that.
Tom, in the past you've said your international acquisition focus on English-speaking countries. Are you looking outside that and looking into the other regions as well?
We've begun. If you think about it, our drive has always been to the English-speaking. If you look at South America, we continue to grow that business in South America a little bit. Again, it's doing it slowly, finding the right partners. When we talk about finding the right partners, it's really about finding the right families. That ticks along, looking at doing a couple of acquisitions in the future down there to continue to grow it. Great organic growth down there for us in our businesses. Great organic growth, but they're very small in sum total. I don't really measure it against what we call organic. I think you look at the Scandinavian countries, Kai, we've got a presence there that's expanding. We feel very comfortable with that. All right.
Hi, Sarah DeWitt, J.P. Morgan. It's been a number of years since you've done some of the larger international deals like Giles and Wesfarmers. Could you just talk about your appetite to do more deals of that size?
Pat mentioned it before. He said, "Look, we will take a look at a big deal. All of these deals will come out into the market at some point in time. It's got to be the right one for us, and it's got to be done in the right way for us." What did we do with the big deals that we did in 2013, 2014? We created platforms for us in these countries. One of the concerns that you have, let's take London Market as an example. There are wholesale brokers in the London marketplace that are going to come out and go through a process of selling. If you make an acquisition of big to big, you run strength against strength.
If you run strength against strength, there's a risk of losing team after team, because there's always a winner and a loser. Anytime we look at a large acquisition or the opportunity for a large acquisition, it will be based upon whether or not we believe there's great synergies between the groups, and is there a way for us to make this add up and be significant in value for us over a long period of time? I love the idea of us going out, and as Mike talked about, the many smaller acquisitions that we've done in the U.S., and for us to do the exact same thing, whether it's Canada, U.K., Latin America, or Australia, New Zealand.
Time for one more? Great. Thank you. We're going to take a 10-minute break. We'll reconvene at 9:42 Eastern.
Nice to see you.
Canada and Australia. What we do, think about your jobs, your employer, the value proposition they give you to have you come work there. Salaries, bonuses, medical, life disability insurance programs, maybe some voluntary insurance, 401 plans, long-term deferred compensation. This is what we do. This is the business we're in. We help our clients attract, retain talent for their organizations. Over the last few years, five, seven years, we've been really evolving our thought leadership. Really helps us with our organic growth to have insight to what's going on with our clients. We find many of these to be universal regardless of what country we're working in. If you think about what's going on demographically in the workspace, earlier today, you heard we're approaching virtually zero unemployment.
There's a real war for talent out there, and every organization, whether you're non-profit, commercial, domestic, international, is fighting for this talent. What's your value proposition to go out and attract and retain this talent? Our thought leadership includes national surveys. We do them in the U.S. and Canada. We're going to be doing it in the U.K. next year. We ask not only what are you doing for your benefit plan levels and compensation levels, but what are your strategies the next couple of years? What are you doing to compete for that talent? What are your issues? What are your primary concerns as an employer? We have, by the way, the largest survey in the U.S. today. We know that the top priorities of our clients and prospects that are responding to their survey is that they're trying to attract, retain talent.
That's their number 1. Trying to grow revenue, that's their number 2 primary focus. Their third is controlling their operating costs, including benefit costs. What's really awesome about that survey is Gallagher can help with all three of those things. Our job is not only go out and win business, land the new client organically by competing for their business, usually identifying their existing pain, that is their medical increases in the U.S. How do we help them get better pricing, better cost controls over that? Then expanding our relationship with them by finding other Whitespace opportunities. What other things can we do for them to help them attract, retain clients? It's not as easy as just spending more money as an employer. There's a risk factor there of sustainability.
If you don't control your costs, you can go out of business because your cost structure becomes unsustainable. If you're not spending enough or doing it in a good enough way or communicating it well enough where your employees understand what you're doing as the employer, then you lose your talent, and you have a hard time competing as well. Talent is paramount regardless of what organization you work for. We use these insights to help us go out and compete for new business. I mentioned how we help land and expand our relationship with clients, focusing on their pains to begin with. We're also very big into our niches. We have eight of those or so in the benefits space that are very big for us. Healthcare, religious, non-profit, public entity are very big, for example.
We're also expanding our producer capacity, hiring more producers, taking them away from competitors, hiring interns, converting to externs, but also finding people outside of the industry. We have a very powerful value proposition for producers that can compete in our business, and we're attracting those folks and training them up as well. Organic is a big important focus for us, as you've heard already today. Mergers continue to be a big important part of what we do in terms of getting talent into our organization. On the benefits side, we've done 13 of those already this year. Continue to be a great value proposition for our merger partners. They want to join us because of our resources, our culture, the opportunity to cross-sell with property/casualty.
The other things we can do for their clients in the areas of compensation, 401(k) consulting that they don't have today, helps secure their clients and helps them grow larger. Also, if you think about productivity quality, you've heard about that consistently today as well. We're doing quite a few different things with our Gallagher Service Center. We use them to help us find more information about our existing clients, for example. Do they have multinational needs that our existing consultant may not know or might not be aware of? Do we know all the key decision-makers of all the products that they're doing out there? How do we find out who those folks are? We're enriching our information about our client using the service center. We're also launching our small group initiative as well. We're in phase 2. A quick statistic for you.
In the last quarter, we had over 10,000 procedures, tasks that we conducted that are in phase 2. 10,400 of those were conducted. We had only 23 errors. That's an accuracy rate of 99.8%. It isn't just about getting less expensive work done. It is about improving the accuracy and quality of what we're delivering to our clients. We see great opportunity within the small group space as we expand those going into 2018. We do so much with them. We're just now launching our CSO, Client Service Organization in 2018 as well. Our analysis has shown that we think we can free up another 28% of our producers' time to go out and sell and consult more. We hope that'll also help us grow going forward as well. Lastly, culture. You heard a lot of stories about culture.
I want to share one with you. We think it's an important part of who we are. Things like you heard about collaboration all ring true. I think of myself as a steward of our culture, and I try to get all of our leaders to do the same thing. You have that one jerk in the mix, and it kind of messes up an office for a while. You have to be really sure that when we do a merger or a hire, that those folks can fit into our culture and who we are. It's really important that we maintain that. Last week, we had a celebration that's usually at year-end in December. We call it Breakfast Club, Happy Hour Club, and Cocktail Hour Club. It really is all about something that Tom Gallagher and I started, gosh, what, 12 years ago, Tom?
We had a lot of interns coming in. We saw a little bit too much leakage on that young talent. Just some of the feedback we were getting was, "We're not sure what our career looks like. We're not sure we have access to the top of the house." We started getting together with them every month and just talking about different things. What's going on with Gallagher? What's happening with the financials? Book of the month. We do different topics, mix it up a little bit, answering rumors that we heard on Wall Street, things of that nature. It really resonated with these young folks. It's been passed on to Mike Pesch and now to Patrick Gallagher and others in the Midwest, doing it around the country. It just gives these younger folks access.
I'm looking around the room last week as we're doing the celebration. We literally had 12 years of young people that have come onto the organization. Room is full. Everyone's happy. They love getting access to senior leadership. You have a beer and a slice of pizza and just have a nice time together. It's just that kind of culture that we have at Gallagher that's really important for us. Business is what it is, right? If you can have some fun, you're usually working eight, 10, 12 hours a day with people. You hopefully have some fun with them and enjoy working with them. I think that really tells a story about who Gallagher is and why we really cherish and protect our culture. It's very important that we maintain that going forward as well.
As I said before, we think we're really well-positioned in the middle market space, regardless of what country, to go out and help our clients compete for talent so they can succeed. Helps them keep their costs down when it comes to insurance, helps them get the right communication value, helps them with technology decisions, and so forth. This is a universal value proposition that we're bringing around the globe. Those are my opening comments. Now I'll take some questions if you have any. Over here.
Sort of curious on your payment, your commissions that you receive. With the Affordable Care Act, there was explicit pressure on brokerage compensation. As time has gone by with potential repeal, do you think your ability to monetize or generate the revenue off the same client, when we think about the next couple of years, is it going to get better, steady, worse?
You've heard already before, since 2005, we've been transparent in our compensation disclosure to all of our clients on every dollar we make. Way back then, we were really good at talking about and articulating what we're doing for our client. It isn't just about procuring the insurance. When you think about what's going on, for example, with medical, there are claims every day, every week, things going on every single day, all the time, year-round. Our value proposition doesn't begin and end at the renewal or the placement of the insurance. The consulting side of it includes compliance, new regulations come out with ACA, or there's always something coming out from Washington, D.C., the last five years. How do we help interpret what those decisions are being made and so forth? Compliance is huge. Wellbeing is really a big initiative for us as well.
How do we help engage those employees, be more productive, and so forth? Why I'm telling you all that is we feel very confident in that we've already been there, done that with regard to our pricing and what we've been doing. There is some pressure on the small end of employers that are community-rated insurance companies because of MLRs, are trying to get some of that inflation out. They've been doing things more like a PM, per member per month, types of fees to the brokers in that area. Our small group area is really a very small segment of our overall revenue. We are squarely in the middle market. We have very large employers, 80,000 employees, that kind of a thing. Very transparent.
We know what we're giving them for a fee that's been determined ahead of time, and the commissions down at the low end have nothing to do with that. We don't see any change going forward, regardless. The thing is, we don't really call in the benefits world hard and soft market like they do on the P&C side. If you were to use that vernacular for a while, we've been hard for so long that the clients aren't taking it, right? They're finding ways to shift costs to the employees, cut back on the benefit levels. This has been going on for over a decade. I mentioned earlier, why do you suppose, for example, in our survey, that one of the top three focuses of our clients is growing revenue? Because the costs that are happening on the medical side are unsustainable.
They're finding everything they can do. How much more can we shift to the employee population before it becomes unbearable for them as well? At the end of the day, I think what you're seeing is the clients, they have choices, too. While there's only a handful of medical carriers nationally, the Bouchard, Blues, United, Cigna, Aetna, and you have a bunch of local HMOs. There's always a market out there, if you will, but the discounts and networks can only take you so far. They're looking for us to be more creative in what we can do. When you come in there and say, "Oh my God, I got a 10% renewal for you," if you're middle market and you're self-funded, you have a lot more options to you than you do if you're 40 lives, community-rated, here's your rate.
The smaller end, that's true. Middle market and larger, there's a lot more that the employer can do to respond to these increases in premium.
Drew Wilson, Fenimore Asset Management. I'd like to ask a couple of questions on cross-sell initiative. Could you maybe tell me what kind of challenges there are to cross-sell? How do you compel cross-sell? Are you happy with the metrics?
We're never happy with the metrics. You always want more, right? I would tell you that in 2017, we've seen a sharp increase on the cross-selling, cross-selling. It's how you define all this. I've been on the job since the beginning of January, this is my, what, 49th week. I think I have that right. We're really putting a focus on, and it's kind of a catchy phrase internally, but land and expand. Land the client, how do we expand that relationship? I go around to my offices, and I talk to them about the national survey, those three primary focuses from our clients. Controlling overall costs, growing revenue, attracting and retaining talent.
I ask everybody, "How many of you are here at Gallagher because of our benefit package?" They laugh, because it's about the people, the culture, the opportunity, career path, and so forth. Nobody ever says the number one reason they're at Gallagher is because of our benefit plan. Okay? Let's quit kidding ourselves. That's what our clients are using us for. They need us big time because of compliance, because of the regulations, with the communication to go out and get it done in the right way. The things we can do for them in a bigger way, if we expand the understanding of what we can do for them with regard to those three initiatives. Think about this for a second. Overall operating cost. What happens if you have a major claim on the Property/Casualty side, and it wasn't adequately protected?
Cyber claims. You heard Tom talking about that before. That could put a business out. Right. Gone. If you're not adequately protected on the property casualty side, you are out of business. Okay. At the end of the day, we're trying to get our folks to understand that and the connectivity of this. For several years now, Michael Pesch and I have been getting in front of young people. We call it GCAP. It's a lot of young people that have just joined the organization. We're trying to get them to understand the empathy for the client. What are they going through? How do they make decisions? What are their risks? It isn't in a silo that says it's just one thing. Let's go shop this.
We're trying to get our folks to understand the opportunities to help our client do better, to thrive, keep those costs down, grow revenue, attract, retain talent. If you understand that's what they're really looking for, it opens up your mind to things we can do for them. Some of the things that get in the way, per your question, is that many times the decision maker on my products are not the decision makers on Mike's products. As you've mentioned, CFO, risk manager for the property casualty. For mine, HR, benefits manager, sometimes the CFO, that's where we get those folks together, good things can happen. Did that answer your question? Okay. Yeah.
Ryan Tunis, Credit Suisse. Just curious, what do you think The Hartford and the Aetna combination means for the employee benefits market?
I don't know if that means much. Quite frankly, there's only a handful of medical carriers. There's a pretty good market on the disability and life side. The Hartford's been in that space for quite a while. They're one of our bigger trading partners on both property casualty and benefits. This strengthens what they do. They're one of the better ones out there. Aetna getting rid of it, you'd have to ask them why, but I think it's really clear that CVS Health is like, "I don't want to be an insurance company. I just want to have these clients come to our stores." They're matching those life and disability business with another professional life and disability insurance carrier. It doesn't change capacity. It's business as usual. We trade with both. I think what we've heard from everybody from those two carriers is that business will go on as usual. Yep.
Pat talked a little bit already about the growth in the private health exchange has been as much as expected. Can you talk maybe more about the growth rates in that particular market, as well as, are you still using third-party platform Liazon to help your clients on that?
Right. Pat's comments, talking about a couple of our competitors that went all in. Remember, they spent a lot of money developing their platform, and they wanted to get their money back. Some of the knocks against them in the marketplace were, it feels like they're selling a product now. What our clients really want is independent advice, consulting on what the right fit is. We didn't want to build the technology, because once you start sinking that money in, you're in it, and that is your baby, and you got your ROI on it. We are very good at being independent advisors, trusted advisors, without a product to have to sell. In doing that, we went out and looked at the marketplace, did a market scan. Who would be the best partner for us starting out?
We chose Liazon, which is now part of Willis Towers Watson. We also work with others. We have Businessolver and several others as well. We've never tied ourselves to any one platform. Beginning of the year, we made an acquisition in the HR and benefit technology space. All this business does is consult employers on what their needs might be for ben admin, HR tech, and so forth. Rhonda Marcucci and her team, they scour what's going on out there, and they put together market basket, market studies of what's going on, pros and cons, pricing, things of that nature. We never walk in with one size fits all. We go in, we ask questions. What are your needs? What do you have now? What are you trying to solve for? Et cetera. Is it a complete replacement? Is it an add-on? Things of that nature.
We have an evolving HRBT practice within our business because our clients are asking for it. Instead of asking an insurance producer to be an expert on the technology side, we're saying, "No, be the quarterback, but bring in that expert into that when your client brings up those issues." Okay? We are right where we want to be, trusted advisor. The business continues to grow for us. It's never been a focus of ours to go sell more of it, but it is growing. We are selling more in that area. Did I answer your question, Kai?
Do you have any rolling?
North of 75,000 on the exchange itself. We have a lot more that we're advising on in terms of the technology that's out there.
Anything else for Bill? All right. Thanks, Bill.
Great. Thank you.
Next up, we have Joel Cavaness. He's going to be talking about the U.S. wholesale business. Joel, the next 30, 35 minutes are yours.
35.
Great.
Morning. Thanks for being here, and thanks for your interest in Arthur J. Gallagher. I'm Joel Cavaness, and I'm the President of Risk Placement Services. I'm going to spend the next few minutes with you talking about RPS and where we've been, where we are, and kind of a little bit more about where we're going and how we're set up. A lot about some of the similar things that you've heard from other folks today. We talk about our company, our organic, our merger opportunities, our productivity, and our culture. Kind of hit around those key areas of the company. I've been with Arthur J. Gallagher and company in different divisions for the last 31 years.
I'm not the longest term, but I'm certainly not the shortest term, and I really do enjoy it here, and I do enjoy where the company's been and where the company's going. Give you an idea of RPS for those of you that don't know, RPS is our name for U.S. wholesale. We primarily trade 99% of our revenues coming from the United States. We trade in really four different key areas. The MGA space, we are the largest generalist MGA in the country. We trade in the brokerage space. We trade in the standard line space, and we trade in the program space. I'll give you a little bit of an example of the four different businesses. The MGA space is where we act as an outsource underwriter, so we do all activities for about 31 different insurance companies in different states.
We do their underwriting, we do their rating, we bind, we collect money, and we issue their policies. There are two things that we don't do for the insurance companies. We don't place their reinsurance, and we don't handle their claims. We do take in their first notices of loss to direct them to the proper insurance company, but we don't adjust their claims for them. For that, we get paid a commission for all of those services, and we share those commissions with our retail clients that we do business with. On the MGA space, it's generally smaller business. It could be everything from a $500 or $600 personal lines policy, up to, on the higher end, a $50,000, $100,000 transportation account. It's a little bit of everything in between. We are generalists. We handle lots of different things.
In our space, we could be handling a bar, tavern, or a restaurant, and the next day we could be handling a vacant piece of property business. It's the gamut. We do a lot of small policies. To give you an idea, we're underway on a project. We're looking at all of our accounts under $1,000 in premium. We have 110,000 accounts under $1,000. That gives you the opportunity to look at that business in a very different way, to be able to capture it and say, "Okay, what are we going to do differently with those 110,000 policies?" Gives us the ability to go to an insurance company as an example and say, "Look, what if you give me policies till canceled?
I never have to reissue those policies ever again." Gives us a lot of opportunity for productivity increases, gives the retailer the ability not to have to look at a new policy every year. Exposures don't change on that small business all that much. That's a very efficient way to handle it. To kind of give you an idea, the other way that we get compensated on that business, because we are making underwriting decisions for our insurance companies, we get paid a profit sharing based on the profitability of the business in which we put on the books for them. We can earn up to an extra 10% on the premium that we write in that business if we make them profits, and that is a large part of our revenue and profit stream in RPS. That's our largest business.
Our second biggest business is our brokerage business. That's the business where it's individually negotiated at somebody else's desk underwriting level. In other words, we'll have clients or retailers send us a large property account. We'll take that property account, we'll package it in our own way. We could do modeling on that. In other words, catastrophic modeling for wind, for tornadic, for almost any kind of cat peril that we can model. Then we go and sit down with our underwriters across the world and negotiate on the behalf of our retailer the best price that we can put together for that account. These are typically larger accounts, over 50,000 up to multimillions of dollars. We have schedules that are billions of dollars in values, large schools, large property, large real estate accounts. This could also be in the casualty area.
It could be anything from a manufacturer of tough products. We can do hospitals. We can do tough doctors. We can do just about anything that needs a particular specialty or attention. Generally, the people in our brokerage space are specialists. A person would do property his or her entire day or year. They don't switch between doing a property account one day and an auto account the next day. They are typically very specialized in what they do. Could be environmental, could be healthcare, could be E&O, could be executive lines, but they're all very specialized in what they do. Moving into our program space, that's a space where we have particular niche products with particular niche insurance companies, where we are specialists in a particular area.
That's, again, all that our people would do, is they would only do country clubs, as an example, all day, every day. We have insurance companies that just like that niche. That's a great space. It's a highly profitable space for us. I was speaking earlier, there's about 3,000 program managers in the U.S., so it gives you a very broad opportunity for mergers and acquisitions in that particular area. Our standard line space.
Our standard line space is basically providing products to very small retail clients that aren't large enough to keep a contract with standard lines carriers. Somebody like the Chubb, somebody like AIG, somebody like Encompass or Travelers or Hartford, most of the times, those carriers want you to have a particular size of book of business or business to support their contract. $1 million, $2 million. These guys can't do that. They're not big enough. We have the products and the contracts, and we provide those contracts on an aggregated basis out to all of these small retailers, and they give us their onesies and twosies and threesies. Each of them have, as an example, a large high net worth account. But they can't support a Chubb contract with one.
If we have 6,000 agents giving us one account each on a high net worth, that adds up to a lot of business. We provide that out as a service. We're really big in that business up here in the Northeast, and we're starting to expand that through the Southeast, through Louisiana, Texas, and then up to California. You all read every day or watch the news, there's going to be a big need for that in California. Hopefully, there's going to be enough to insure out there. Those are really the four different businesses that we operate in. Speaking of our clients, you heard Tom speak and Mike speak earlier, Mike and Tom are very large clients of mine. I look at them as clients.
We are a part of the same organization, but they are clients and I need to treat them like clients. That way, we're providing the best for them. We do a lot of business. We do about 25% of our overall revenues in RPS, comes from Mike and Tom, and 75% of our business comes from all other independent agents across the country. We do business actively with about 13,000. We call that our top agents are about 13,000 in number. We transact with about 23,000. We're trying to grow the 10,000, try to grow the 13,000 and, of course, grow your largest client. Those are our clients, and that gives us opportunity every day to go out and do more with each one of those. That really gives a really true growth engine.
To give you an idea, we have about 55 people that do nothing more every day than to meet with those clients. That's all they do. They don't underwrite, they don't broker. That kind of leads us into our distribution and something that a few of you have heard us talk about, and we continue to grow this particular type of business. We have 28,000 retailers, and we're working on our version of Insurtech or Fintech. We call it Insurtech. We have an e-commerce platform that we now have about 13 different products up and running and accepting business and transacting, and we're adding more and more every month. As an example, we're in the process of rolling out a new private D&O product.
We're in the process of rolling out a BOP product with Chubb. We're in the process of rolling out a flood product with Hiscox. All these various products, we have a very successful cyber liability product. We transacted 20,000 cyber liability policies this past year. We didn't touch any of them. You can go in, a client can go in, ask five questions, get an indication, add about another five questions, and get a bindable quote and get a policy. It's a fabulous product, and it's growing like crazy, and we enjoy that. The more products that we put into that platform, the more that a retailer will go back and look for more product and transact more business. They can do this 24/7. There's not really a need for anybody to intervene.
If they have questions, we have people assigned, of course, for them to go in and ping a question or even make a phone call if they need to. We're very excited about that, continuing to grow, invest, and add more product. Our goal is to get in fairly short order of time. These are not easy things to do. For those of you that spent time in the Insurtech's not easy. The insurance business in the U.S., as much as we want to make it simple, it's not. It's very complicated, and there are a lot of laws and jurisdictions and regulations around insurance. The good thing about us is we have all the pieces. We don't have to go out and get any of it. We have to get an insurance company to partner with us. Other than that, we have every other piece.
We can issue policies, we have the technology, we have the people, we have the relationships, and we got broad distribution of 28,000 retailers. It's very exciting. Give you an idea, we talked a little bit of how we get paid. We share revenue with our retailers, or they share with us, depending on how you want to look at it. They bring us business. I was with a large retailer last night for dinner, and he's excited about his growth potential with us. It's interesting, he's a N.Y. retailer, and we do about 25% of his business because he specializes in N.Y. contractors and bars, taverns, and restaurants. Gives us an opportunity to match up really well with those guys. And we share generally on a broad scheme, excluding the profit sharing, because we do not share that.
We get about a third of the commissions, and we share about two thirds of the commission with our retailers. That's generally how we get paid in our business. Our margins continue to be very healthy in the mid to upper 20s. That is our focus every day, making sure that we stay very viable and very productive for the company, then try to take whatever's left over and invest it, which kind of leads me into where we're going with our organic growth. I was asked during the break, why are you guys able to grow faster than a lot of your competitors? A lot of it is due to our size and our breadth, and the things that we're able to take and look at a different way. This kind of combines on an organic discussion with a productivity discussion.
If we're able to, we issue about 300,000 policies a year, we've centralized that process. That was probably something that people had to drag me to the trough to understand that as you get larger and as you centralize more things, you do it faster, and you do it better. The quality just has soared for us across all of that business. If you look at it, we take all of a unit, we put all of our processing of issuing policies in one place, we get better at it, we get faster at it. We can get our products out much faster. We generally issue our policies within 24 hours, our error rate is virtually nil on those as they go out the door. We're excited about that.
That gives us the ability to reinvest that money back in to hire more people to do more things, because I don't know any of you, but I haven't seen a lot of people that come to me and say, 'You know what? I got a lifelong dream to issue policies.' It gives us the ability to train better. It gives us the ability to issue the policies better, then we can take whatever's left over that we save for that and reinvest it in more producers. Give you an idea, we were on an organic growth kick this past year, we worked really hard at hiring. We added 29 new producers this year, net new in RPS.
That may not sound like a lot, it's a lot when you can add 29 more people selling more insurance for you next year, as you grow, we track them every single month. We're very excited about the people that are now coming to us because we can do all the things that they can't do at smaller firms. We have huge breadth of insurance company relationships. We have technology. We have a great base of different businesses. We can do almost anything for anyone, anything from a very small personal lines policy up to a $multimillion, not many of our competitors can do this. We do have some great competitors out there. We compete with AmWINS, we compete with CRC, we compete with Brown & Brown's wholesale organizations. We compete with all of them, we do very well against them.
We actually win more than we lose, that's great too. I know there's a lot of questions on the rate environment. As we look at rate, we're starting to see, as Tom indicated earlier, starting to see some of the catastrophic events in property start to rise. I think 1/1 renewals will be a clear indicator of what we're going to see for 2018. Everybody knows you saw about 17, 18 quarters of reductions in cat property. That's a big slide. As we've seen what's going on with the wildfires and the different hurricane events, and then of course, worldwide cats, something has to give, and I think it's going to be an interesting, hopefully 2018 as we talk about at the rates. The M&A, talk briefly about that. Obviously, there's more and more people in our space every day.
The guys that are doing deals, representing deals, know that. We believe that people join us for lots of different reasons, either succession. Most people that join us, join us because of the culture that we bring to the table. I had dinner last night with a new person that joined us from one of our competitors, and like, you all are very different. Just the aggressiveness, the way that we transact and do business with each other is different. It's a very different organization. They're joining us because all of the things that we bring to the table. Nobody wants to do accounting anymore. It's a dangerous spot in a small business. We bring that resource to them. We bring policy issuance to them. We bring insurance company relationships to them. All the different things that they've fought for, we just get naturally.
We're a very attractive merger partner, and we're excited about that. We're excited about where we're going there. Lastly, on our productivity, we talked about our centers of excellence, just like the other people that were up here. That's getting better and better every day. Again, we're very excited about what we're doing in Las Vegas With our cancellations, that was the first thing that we centralized into our Las Vegas Center of Excellence. We're excited about that. We're excited about today our model office. We're trying to get to a point where we have everything that is non-insurance related, in other words, that is just services that support the insurance activity of writing business and putting it into centers of excellence so that we can take that savings and invest it into underwriting and sales.
All the things that have to happen in the backroom should happen, but it should happen in an environment that's centralized and where they can do it, and where we can actually invest and make sure that we're the best at it. We're excited about that. We're excited about where we're going in that direction. Lastly, talking about our data and our collection of data. Every year we make great strides in looking at our information in a way in which we can build products around. If you take just RPS has about $3.3 billion in premium. What we're doing now is we're taking that $3.3 billion and bucketing it in ways in which we can extract information and build products around it.
If we do $600 million, $700 million worth of cat property, we can take that information now because we've modeled it all, and we can go to market and put together programs and products for our retailers and go back to them and bundle that premium up in a way in which it's better for the ultimate client. We're excited about doing that. We're excited about taking the $300 million that we do in particular areas and build programs and products around that business. We think that's where the next spot's going to be. Somebody asked me about why is wholesale in general growing faster. A lot of it is because we can do those kind of things today that you couldn't do before because you didn't have the information. Today, we have that information, and we can do more with it. Finally, talk about our culture.
You guys, you hear that from us. We're mindful of our culture every single day. To give you an example of culture that exists within our company, it's actually pretty cool, and I don't know if anybody else has talked about it. We recently did an engagement survey across our entire employee base, and we used a third party. We used IBM. I'll speak just to RPS because I know that the best. Within our response rate, we had 95% of all of our employee base respond to that survey. I don't know where everybody works in here, but we've been told that that's unheard of. Those kind of response rates within that range of 95% just blows the benchmarks away. We blow those benchmarks into another level. That's the kind of culture we have.
We have people that are willing to sit down and take the time to fill out a survey that tells them how they feel about our company and how they feel about the Gallagher culture and how they feel about The Gallagher Way. You'd be blown away with those response rates on how people feel about us. We had four open-ended questions. The rest were just yes, no, different things, or somewhat. That were open-ended, and we asked people to actually answer. I think in RPS, I had 92 pages of responses. That's 92 pages of responses from four questions that people were willing to actually sit down, take the time, cared enough about the company and what we say about it. This is not just BS.
We actually tell them, okay, these are the things that we learned from the survey, and here's the things that we're going to take and work on and improve on. We believe in that. It's very exciting to hear when you go out to an office, I'm going from here to Uniondale, New York, to hear that those people really care. They appreciate the fact that you're willing to listen to them, and you're willing to make changes for them. That is just one piece of our culture that makes it so very unique here. With that, I'm happy to answer questions. Go ahead, since we don't have a mic yet.
Thanks. Jay Cohen, BofA Merrill. Three questions, actually. I can repeat them if you need. First, the storm activity, will that have an impact on your contingent-like compensation? One. Secondly, of the four segments that you talked about, what's the fastest growing business?
Okay.
Third, the e-commerce platform that you are building, could that be applied to Gallagher Retail as well, where they could go out and actually connect with the actual clients?
Okay. I think I can remember those. The storm activity and contingents, we are watching that right now. Obviously, when you have a storm that has that many claims in it, there will be a question as to how they develop out, right? You'll get a notice of a claim, but you really don't know how big it is until it runs through the process. It's still a little bit early to tell if there's going to be. I would tell you it's not going to have a huge impact. It has to have some impact on our contingents and profit sharings, but it's not going to be one that's detrimental to us. The second question was-
Fastest growing
fastest growing. Our brokerage business is our fastest growing business right now. I think some of it is because you can have, as you write more business, it's bigger, and bigger accounts obviously generate more revenue than small accounts, so it can have a bigger impact on that business. We've been very successful in adding to our executive lines business, our environmental business. Obviously, we always add to our property business. Those have been very fast-growing segments so you can have a bigger impact. I would tell you that's our fastest growing. Lastly, our e-commerce. We do trade with the Gallagher retail division on that. So about 30% of the 20,000 cyber policies that we did came through the Arthur J. Gallagher retail chain. Absolutely, they're always looking for easier ways.
We team up very well with them on their small business initiatives, making sure that we're bringing them solutions to the broad, because if you look at Gallagher on the GGB side, they have 50 states, and small business runs a very big gamut. If you think about all the different small businesses out there with all the different exposures, you need to have somebody with a huge appetite. We're trying to marry up the products and carriers that we have with the needs of their clients, which are very vast. You can't take a small business platform and say that The Hartford's going to do it all or Travelers is going to do it all. They don't have that kind of broad appetite. We have carriers that have that kind of broad appetite.
Hi, Ron Bobman, Capital Returns. I have a couple of questions, I think both of which fall inside the brokerage segment of RPS. In the wake of all the CAT activity in sort of most recent days and weeks, are you seeing a pickup in apps for that unit?
By the way, we've seen a huge uptick in applications across all of our businesses. Anytime that the people, the retailers sniff a market change, they feel like they owe it, which in some cases they do, to their clients to go out and shop the account. We've seen a big increase in our app. We actually watch that on a weekly basis to see where our application's in a hot spot to make sure that we have it covered because it's expensive. We only get paid if we're successful, right? Second place in our business doesn't pay well. It doesn't pay at all. We watch where our applications come from.
What we've done to kind of make sure that we're on top of that, we take our highest hit ratio retailers, as you would expect, any time that you look at your client list, you make sure that you give them the best service because they're the best return. We are seeing a fairly significant increase in our applications.
Thanks a lot. This is really a casualty question, and since you mentioned the growth in executive lines and environmental, I'm wondering if, it's not CAT driven obviously, but there's talk of potential movement in casualty lines pricing.
Correct.
I'm wondering whether it's executive lines or environmental or other casualty lines that are in your RPS world, if you're seeing any pricing movement, lesser decline, flattening, improvement of note or nothing evident yet. Thanks.
If you look at the casualty lines, obviously casualty's pretty broad because you have workers' comp, which is considered casualty. We are seeing a big increase in some of the workers' compensation lines. Comp's been a big driver for us this year. You get to auto. Everybody kind of knows they've seen an increase in the auto. Auto's been a big mover for us in 2017. We centralized our auto activities as we talked about productivity, because we want to get better and better at it. In our space, there's only 5 large carriers that do transportation business, and we have all 5. We've been exploring, and one of the other cool productivity things that we've been doing is working with robotics. For us to be able to fill out 5 website rating engines in the same time that it takes us to do one.
We're excited about that because again, it helps with our productivity. It really solves two problems. One, it's hugely productive for us. Two, it gives our retailer five quotes in the same time that we can give them one. They're happy and we're happy. Candidly, our carriers are happy because they get more shots at more business. We're excited about that. We are seeing a fairly sizable increase in transportation rates. The general casualty business, I would say, is improving but flattish. It's not going down like it was. Some of the specialty lines, executive lines, I would say right now it's fairly flat. There are areas that there is fluctuation, but generally I think we're in a little bit more of a stable environment than where we were before on the casualty lines.
Two questions for you. Brian DeRubio, by the way.
Hi, Brian.
New business formation is a big driver of growth. What are you seeing in terms of new business formation as a driver of growth as the economy improves? The second question is just give us a sense of the discipline and price that you're seeing between the standard and the excess line providers. Do you see any of the standard guys getting more aggressive to get the incremental premium to where it'd be your client traditionally?
Okay. I think business starts are pretty stable and increasing. If you look at our business, in the MGA world, that's really where we live. We live in those startup businesses because they don't have history, so they can't get insurance from the standard market. They come to us, they live with us for three years, and then generally if they're successful in their business, they generally will then move to a standard market environment because they have more history. They're not going to go out of business or whatever. They have less moral risk. We are seeing an uptick in that. We're seeing a little bit more of an uptick, which is kind of interesting in the transportation space. That's kind of a big in and out, or has been.
You'll see a lot of them start trucking companies, and then after a while it seems like that really falls off. We are seeing a lot of startup in trucking business. We are seeing a fair amount of hospitality business. I think I heard this stat last night, just in the city, in Manhattan, there's 14,000 restaurants in Manhattan. You see a lot of them starting up, and a lot more activity in that area. Yes, we are seeing startups. Your second one was, the standard market. The standard markets, they kind of ebb and flow in and out of our business. You'll see them creep in and kind of expand their appetite and kind of work our edges.
As things get a little tougher, losses start coming in or start having cat losses, similar to Florida, they would move into Florida in kind of the edgy areas, losses would come in, they would back out of that business. We do see that. Right now we're seeing them not entrenching into our business, but actually getting out of some of our areas.
Kai Pan, Morgan Stanley. I had two questions as well.
Yes, sir. Go ahead.
First one to follow on Jay Gelb's question on the contingent commission. What percentage of, or how much the contingent contributes to a high 20s margin? If you think about underwriting profitability, given the storm activities as well as slow reserve releases, do you think that will be headwind to your margin going forward?
Yeah, we manage our margin pretty closely. I don't expect a margin deterioration due to contingents. We're good underwriters, by the way. Every time when you do have cat, there are cat loads that are put into your business so that you maximize your cat loss in any particular event, even in our profit-sharing agreements. That gives us some level of protection. There's only a couple carriers where we had major concerns. One was Lloyd's and one was Nationwide or Scottsdale, the old Scottsdale Insurance Company. The other ones we feel really good about, and we manage those. We have a guy who's in charge of market relations, and he watches those every week.
Then we also have a person in charge of underwriting, a vice president of underwriting, to make sure that we're putting the right business in the right contracts and we're protecting those. In other words, you don't put your worst account in your highest profitable carrier, right? That wouldn't make any sense. You find a brokerage market to place that business in. We're very good at protecting our insurance companies to make sure that we maximize our profit sharing. We're watching it, of course, but we're not overly concerned about it.
Okay. Thank you for that. The second question on the program business, we have heard some carriers are pulling back from programs and some big carriers are sort of like, do you see some disruption in the marketplace?
Yeah. What you're seeing, we've heard that as well, candidly, there probably were some places where people riding a lot of cat property at very cheap prices or riding a lot of property in California at cheap prices. That's not really our program space. Our program space is more heterogeneous type of accounts like country clubs or like sports or like workers' compensation and some of those lines of business. We're not a big MGA that says, "Okay, we've got $8 billion worth of cat property aggregate, and we're going to go use it." That's a dangerous spot to play. We call those one-trick ponies. One-trick ponies, as everybody, or you may know in here, once the pony breaks his leg, you got to shoot the pony and the show's over.
That's a dangerous environment to live in. We make sure that we don't live in those environments. Yeah, we are hearing of people that there is a general pullback in the MGA space in some of those lines, but not in our space. It still continues. The program space is a good space to be. More people every day calling us saying, "What do you have? We'd like to build more programs." We had an insurance company come to us recently and give us a program for tool and die manufacturing, covered 50 states because they know that we're really good at what we do. There's still lots of program opportunities out there. If you go and look, the fourth largest provider of cyber is Blue Cross Blue Shield, which is us. It's backed by Lloyd's.
What it does, Blue Cross Blue Shield gave us the ability to do it on an admitted basis. I can't remember which one he has it placed with. We actually do it in conjunction with the guys in London, through Gallagher London. Yeah, we're pretty stable. We are seeing increases in losses there. There's a lot going on in that space right now, with the Affordable Care Act and a lot of the hospital companies buying big doctor groups and getting more doctors. You've seen a lot of creativity in the way that they've been able to take a doctor's tail and just absorb it so the doctor doesn't have to pay huge amounts, 300% of his premium on all of that. They've been doing that for the last couple of years.
We were seeing a pretty big dramatic drop-off in pricing there and starting to see a little bit of a comeback in that. Of course, remember, there's a lot less to insure out there today than there used to be. The long-term care is a pretty stable market for us. Yes.
Ryan Tunis, Credit Suisse.
Hi, Ryan.
Hey, how's it going? Just thinking about, we've seen some alternative capital come into the primary property space, I guess either through fronting, rated fronting companies or-
Correct
I guess rated alternative capital companies themselves. I think I've heard more about your competitors being involved in that, but I'm curious what your take is on how that might evolve, especially because we've been hearing about the opportunity for pretty decent rate increases in the primary property market. Along those lines, I'm also curious how the unit economics to a wholesale broker might be different if you're dealing with an alternative capital provider relative to someone who's traditional.
Yeah. The lines are pretty blurred there. Sometimes you can't tell that it's ILS or alternative capital because it is fronted by someone else, whether it's a State National, which was a recent Markel acquisition or someone else, some of the Clear Blue and some of the new fronting companies out there. There's a lot of it swirling out there. I would tell you there's a little bit more talk than there is action. It's not quite as disruptive as people talk about. You still have to underwrite the property, right? This is a huge industry. You guys know the industry as well as I do. This is a huge business out there, and somebody coming in and writing 20, 30, 40, 50, 100, $200 million, it just doesn't move that needle because the industry's so large. It's so big.
Like in Florida, you might have so many people pulling out that the opportunity for somebody to get in and write some business, because there will be, it's just not that dramatic. I think that the alternative market's probably here to stay. I don't think it's going anywhere. I think they got a little bit of a thumping. If next year they get another thumping, they might start thinking about a better way to make money. It is here to stay, and I think that just like us, looking at our data, looking at our opportunity to aggregate big, large chunks of business and do something different with it, will be something that people want to look at. They like that. Your second question was?
Just
Yeah, exactly.
All right, thanks, Joe.
Thank you all.
Next up we have Scott Hudson. He's the leader of Gallagher Bassett, and he's going to spend the next 30 minutes talking about the claims management business. Scott, the floor is yours.
Thanks, Ray. Good morning, everybody. I'll dimension Gallagher Bassett, talk about what the efforts we have underway to drive organic growth. Talk a little bit about M&A, not quite as significant as in the brokers business, but things are picking up there a little bit. Talk about what we've got underway with respect to driving increased productivity and quality. Refer to our culture as others have, and then I'll close with just a reminder on how we distinguish ourselves in the marketplace. Gallagher Bassett represents about 17% of the overall Gallagher enterprise. In 2016, we were a $720 million business. We run, over the last five years, mid to high single digit organic growth, about a 17% margin, a little bit above. We've got about 5,500 people located around the world handling claims. If you look at the type of organizations we do business with, four primary customer segments.
We've got the large traditional part of our business, which is commercial entities, the Marriott of the world, the large Fortune 500, Global 1000 type organizations where they unbundle their claim handling and we do that for them. Public sector clients, whether that be school districts, states. More recently we've picked up a large number of states here in the U.S. Outside the U.S., when you go down to Australia, a significant portion of what we do is with the state governments. We also more recently have been driving a fair amount of growth directly with carriers where we walk into the front door and say, "Let us take over the handling of a portion of your claims." That's probably one of our faster growing segments. Lastly, the alternative market for us is captives. We've got a fairly significant group captive business.
I think when you add it all up, it's probably approaching a $100 million business as well. We've seen significant growth both in that and with the carriers themselves. We're still about probably close to two thirds of our business is comp, but we do a lot of liability lines. We're seeing growth and expansion that I'll talk about in a few minutes in some other specialty liability lines. We do actually very little property at this moment. Now we're seeing a little bit of an uptick with an acquisition that we made down in New Zealand. If you look at kind of our book business overall, the type of claims we do, probably less than 5% of it is property. We generate revenue in a couple of ways. Probably the longstanding way is on a per claim basis with a lot of our clients.
That can come in one to two forms. They'll pay us over the life of that claim, so we own that claim. They pay us a fee for it. In other cases, they'll pay us for the handling of that claim during the period of time that they're a client of ours. Another way that we do it is some of our larger clients, there'll be enough claim volume where they'll actually take a team, we have a markup on that team itself. You look at the payroll of that team and then mark it up. The third way is as a percent of premium. This tends to be focused primarily with our group captives, where we will lock in with them over a period of time that as a percent of the premium of the captive, that will be their fee for handling the claims.
Competitors, they vary significantly depending upon what part of the world that we're talking about. Here in the U.S., there's been a long-standing number of competitors, Sedgwick, Broadspire, Corvel, York, and so forth. There's a couple of the insurance carriers with Helmsman and Travelers. They have Constitution State, we will compete with them. If you go outside the U.S., you go over to our operation in the U.K., there's a little less of a focus with the TPAs. We actually compete with a lot of law firms. Law firms themselves are in the business of handling claims, we'll find ourselves working with or competing with them.
You go down to Australia and New Zealand, there is a TPA presence, different names than you would find here in the U.S., with the exception of one, Xchanging, as it was recently bought a couple of years ago here in the U.S. by Sedgwick. They don't own the piece of the business that was in Australia. That remained independent. We compete with them. Other than that, we actually compete in Australia and New Zealand with the carriers. They actually go out and try to acquire business in the same way that we do. I mentioned geographically where we compete. It's still the majority of our business in the U.S., but we're seeing significant growth in Australia, New Zealand, and throughout the United Kingdom as well. Organic growth. What we're doing to drive organic growth.
I mentioned a minute ago, I think one of our primary focuses is go where the tide's rising. A couple of places for us where that is one with the carriers themselves, where we're doing carrier outsourcing contracts. We're seeing faster growth in that segment of our business. The other one that I mentioned is with the group captives. We're seeing significant growth, much higher growth in some of our other segments with them. The third area is outside the U.S. Our growth in the international business has been, relatively speaking over a number of years, quite strong here. The marketplace here in the U.S. for the traditional part of our business, the commercial accounts, is a highly competitive space, probably a much more mature business than the other pieces of it. The other thing we've been doing is looking at getting into other product lines.
I mentioned that a significant share of what we do is workers' compensation. We're seeing some opportunities to get into other specialty lines, professional lines, medical malpractice, professional lines for architects, law firms, and so forth, getting steeper into some areas within the liability space and the general liability space as well. With the efforts in New Zealand and Australia, we're also getting into the disability business. We don't really do that here in the U.S., but that appears to be another significant opportunity for us. I talk about our business outside the U.S. I think there's still lots of opportunity in front of us in terms of being able to expand and plant new flags around the world. We're fairly disciplined about thinking about that. It has to be markets where there's an established legal system and a way of doing business.
We want to make sure that we're building systems that will be able to accommodate multiple languages. The other thing that's always, as we think about international expansion, it's a bit easier to hang a shingle and open up a brokerage office. For us to build a claim operation, to have the systems, the infrastructure, and what you need in order to be able to run a claim operation, having a few claims doesn't do us any good. We need to have line of sight towards significant volume before we're going to be willing to plant a flag in a new country. The last thing in terms of driving organic growth is essentially just the delivery of a darn good product and service to our clients.
Our focus is to deliver a superior outcome, to be able to prove time and time again that the result that a client is going to get with us is superior to what they would get with our competition. That's a challenge as well, to be able to prove it definitively, but we're getting better and better every day with the investments that we're making to be able to sit down with clients and look at their experience over maybe the recent years, whether an existing client of ours or a prospect, and talk about what we can bring to the table in a way that's actually going to change the trajectory of their loss experience. Couple of other metrics around growth.
We're a mid to high retention type business throughout the world, and actually probably a little bit stronger in Australia and New Zealand than it is in the U.S. Generally speaking, it's mid to high single digits. Let me move on to M&A. We actually have done three deals this year. Not necessarily revenue-wise of significant size, but in terms of our business, they've actually made a pretty significant difference. We bought a property player by the name of Symmetry in New Zealand, and it took us out of being solely focused in personal injury into the property space, which actually has made us very attractive to a number of the carriers down there in terms of outsourcing parts of their operation. We've seen nice uplifts from that.
In the U.K., we bought a company by the name of Strada, which was heavy into the trucking and motor business. That's been contributing to what has been actually substantial organic growth within our U.K. operation over the last 12-18 months. More recently, just this past September, we bought a company by the name of National Transportation Adjusters here in the U.S. This one's kind of interesting, and if I could find 10, 15, 20 of these, we'd do these all day long. This was a small, probably a couple million dollars in revenue, long-haul trucking expert. They didn't really do a lot of claim handling, but they were advising self-insured clients in the trucking space. What the combination with us enabled them to do is actually start handling claims themselves.
This was a couple million dollar business of which, since September, I think we've seen three deals, probably in excess of $2 million-$3 million, to us, simply because they can combine our claims handling prowess and expertise and our operating platform with their specific expertise in long-haul trucking. As we're looking out in the M&A space to the extent that we can find more companies like that, and they exist out there, and bring them onto our platform, that would be absolutely spectacular. Productivity and quality, this is a business where scale does matter. I'd qualify that, though, by saying that you have to think about it in the context of a line of business, because when we build a claim system, it's got to be specific to handling a property claim, a workers' compensation claim, a general liability claim.
One system doesn't handle all types of claims, but there are synergies or opportunities to gain scale advantages with just other aspects of our business when you get into the accounting, finance, the overall IT operation, and so forth. We are, as others have talked, we do have a significant portion of the population within our service centers in India. Gallagher Bassett's got about 300 people doing various things for our organization. Some of it more in the administrative areas, some of it directly involved in the claim handling. The other thing we're looking at very specifically is, as of probably about five, six, seven years ago, probably before my time, we didn't operate necessarily on single systems for liability or single systems for workers' comp across the world.
We've made significant strides there in terms of unifying the technology platform throughout the world, which both helps us from a service standpoint, there's also advantages from a cost standpoint there as well. As it relates to quality, we're pushing quite hard on the technology front to do things that distinguish us, that make us more efficient. We can operate a lot of the claim handling, a lot of the connection with the injured workers, a lot of the connection with the claimants is done now via mobile applications that we have in place. That's changing each and every day.
We've made significant investments in the analytical platforms that our clients are using as well as our teams are using in order to be able to evaluate, diagnose, and determine whether the results that we're delivering are the best that they possibly be, and also point the client's team and our team in the direction of which claims are most likely to be the ones where we need to spend the most time on. One of the other things we did more recently, too, that I think is going to play a big part in terms of overall quality is we reoriented our operations so that we do, I mentioned carriers, I mentioned commercial clients, I mentioned captive operations. We have dedicated operations to each of those. We pulled those apart.
There is a level of expertise that one needs to be able to serve those client bases in the best possible way, by having dedicated operations, that puts us in a very strong position. The other thing I'll mention is around security and data privacy. We obviously have a lot of information, health information, that needs to be tightly protected. We deal with organizations that expect that of us, and I would say that our infrastructure and the investments that we've made has put us in an extremely strong position. In nowadays, when we get RFPs in, that's actually a pretty significant part of the discussion, that they have to believe that we are sufficiently protecting their data on their behalf before they'll do business with us.
Oftentimes they'll bring in a large number of their IT professionals and live within the bowels of our operation to see whether that's indeed the case. Moving on to the culture. You've heard a couple of stories in terms of how it comes to life inside the Gallagher organization. It's a prominent part of Gallagher Bassett as well. It's a key in terms of being able to attract people day in and day out to the industry, and it's the people in our business that do the work, and we've got to be able to attract the best and the brightest claims adjusters in order to be able to deliver the quality service. Oftentimes when people walk in our front door, they make it very clear. When I'm out and about in our operations, they'll say it is different at Gallagher Bassett.
It's different here than it is in Sedgwick. It's different than it is at Broadspire. That means something to us, because our clients expect that we're bringing in the best talent. I'll reference as others have, how that culture comes to life. Just last week We've got a program that we run here in the U.S. where we select each year the top 10 and ultimately the best resolution manager in the country, as well as the best supervisor. We've got about 3,500 people here in the U.S. You have to meet a certain level of performance in order to be able to apply, and then you actually have to fill out a pretty lengthy application and go through a pretty lengthy vetting process. I think this year we had somewhere in the neighborhood of 300 to 400 people apply.
Last week, the top 10 resolution managers, our adjusters, and supervisors come into Rolling Meadows and sit in front of my leadership team. Actually, Pat was there all day long, kind of telling the stories of who they are and the great work that they do. It's quite impressive when you sit back and kind of get yourselves away from the numbers, and see what our people are doing in terms of putting people's lives back together day in and day out, and the passion that they have for doing that, and the impact that they have on people's lives. Lastly, I'll turn it over to you guys for some questions. Just as a reminder in terms of how we distinguish ourselves in the marketplace.
When we're out talking with a prospect, what are we saying to ensure that they understand why we're the best place for them to be? One is I talk about delivering a superior outcome. We've got to be able to prove that the claim result that they're going to get with us is better. As I mentioned, we're getting far better at being able to do that, sitting down with them, looking at the data, looking at their prior experience, and looking at what the prospects would be working with us. We still are well-known and do a pretty darn good job of customizing our operations. It's not a one-size-fits-all operation.
When you're working with McDonald's and how you handle their employees that get injured versus you're working with Costco and how you handle their employees that get injured, or a customer that comes into Costco that has some sort of incident, or a customer that comes into Whole Foods and has some sort of incident, they don't want those things all handled the same way. We get high marks for being able to customize our operations to the specific needs of their strategy and their culture. We've got a brand, I've mentioned a couple of times here through the course of my comments that it's all about care and compassion. Our clients want darn good results, but the fact of the matter is we're taking care of their employees.
The fact of the matter is we're touching and interacting with their customers, and we need to do that with a heart, and we need to do that in a way that recognizes the importance of those two individuals to their overall business. Lastly, or actually two last comments, one is the connection to Gallagher, and that comes up time and time again in our discussions with prospects and our existing clients, because interestingly, I've mentioned this many times, it's probably somewhere in the neighborhood of 80%-85% of our business comes from brokers other than Gallagher. That's always an intriguing discussion.
At the same time, the benefits that we're seeing being associated with the Gallagher organization, in terms of the financial strength that we have, whether it's to go out and do deals, whether it's to make investments in technology and so forth, is extremely important to us and I think separates us from a lot of our competitors. When we get into the carrier marketplace, in particular, the relationships that you've been hearing about all morning are extremely important to us in terms of being able to sit down and have conversations that I would say most of our competitors are not able to have with the markets themselves. The last piece is the global footprint. We're continually seeing opportunities to talk with our clients, whether it's carriers, whether it's individual self-insureds, about how we can serve them around the world.
I always point out one example. One of our larger clients is Compass Group, a food services company, and through partnerships, we actually handle their business, their claims in upwards towards 60 countries around the world. We see that as time passes, becoming more and more important. With that, I'll field any questions you guys might have.
This is Jay Gelb from Barclays.
Yeah.
We hear more and more about these virtual insurance companies. My guess is they don't have large claim staff on their own. What type of opportunity is that for something like Gallagher Bassett?
Well, I think in essence, we got a number of them that are clients. I could give you Arch Insurance when they started in 2002, we were their claim operation. You go to Starr, when they started up a few years ago, we're their claim operation or a significant share of it. We're talking to a number of the Insurtech companies. We do work with Lemonade, we do work with Hippo. I'm trying to think of a couple of other ones where probably one of the most difficult things for them to do is to build a claim operation. You got to go buy a system. You actually hire and have people on staff. That's a tough thing to do. To be able to use us as an opportunity, basically, have a turnkey claim operation there is pretty attractive. We're seeing more and more of those opportunities.
It's a combination and you can even think of it as in the traditional carriers, where they may want to get into a new line of business. They might want to expand geographically with our national footprint here in the U.S. and our depth and breadth. There's a good opportunity there. That's why we're seeing the carrier business Or that segment probably grow at a faster rate than the other parts of our business. We would expect that to continue to grow over time. One of Pat's favorite stories is there will be a day when his grandchildren or great-grandchildren will be asking, "Did insurance companies ever handle claims?" I think that's a real possibility. It's not going to happen tomorrow.
There's still a lot of times when we talk to the senior leadership teams of carrier operations, the mindset is we need to control the claim handling. I get that. In some cases, that's the culture, that's longstanding history. Some of that's going to be hard to unwind in the near term. For the guy who's trying to build an operation from a standing start, in particular, it's pretty darn attractive to be able to have a solution like us at the ready, that will deliver good quality service in a way that's customized to their specific needs.
Thanks for that.
Yeah.
My follow-up question or separate question is, given that this is a scale business and we're seeing good growth over time on the top line, what kind of margin potential do you see for this business? It looks like over the past couple of years, the adjusted EBITDA margin's been running in 17% range.
Yep.
Is there an opportunity for that to move up over time?
Yeah, I think over time, yes. We're still making pretty significant investments in the business as it relates to expanding internationally. As we talk about other product lines getting into the specialty business, there are costs to get into those specific operations. The other thing, too, is when I mention that each one of the client operations that we're building, whether it's a carrier, whether it's for McDonald's, they're all unique. It's not a standard operation across every claim that we're handling. There always are going to be some limitations with that being our value proposition. I think over time, as we get bigger, especially in some of the shared service functions, continue to utilize even in a more extended way or expanded way, our India service center. Yes, there will be opportunities to see some sort of margin expansion.
I wouldn't probably pick a number in terms of what that would be.
Last one. I know historically the business has been focused on workers' compensation. You talked about looking to get into professional liability lines as well as expanding in general liability, it seems like this type of business would be tuned up perfectly to handle small auto insurer carriers claims. That's a pretty consistent coverage state by state, carrier by carrier. Why isn't that an opportunity?
It's personal lines.
Right.
Right now all we do is commercial. It's not to say that we couldn't get into that business. It would be a different business for us. I think right now, in terms of the opportunities on the commercial side, they seem quite significant to us. It hasn't been a near term push for us to look at that. Over the long haul, sure, why not? Now, I think trying to go in and compete with Progressive and Allstate, and the State Farm in terms of the investments in infrastructure that they have, it is different.
I'm talking about small state mutuals. Do they need to have their own claim staff in pick a state?
You're probably asking the wrong guy. The answer, I don't think they necessarily do. I can even take it to the commercial side. There's a lot of small regional players that we're having conversations with that may have a claim staff of 50 people, may have a claim staff of no more than 200, and they're sitting here, they're starting to see that workforce age. They're also seeing that it's now time to replace a piece of technology. Gee, we got to invest in mobile capabilities. It's like, man. The fact is, the scale of the investment in a lot of respects isn't necessarily that much different at the foundational level for some bigger guy.
That's where for us to come in and have that conversation with them, that we're an alternative, and we can still build that claim operation for you in a way that it looks just like it's yours. We can label it any way you want. It's your claim operation. We'll segregate the thing off. I think there's endless opportunities as it relates to the carriers. It's not going to be a short journey simply because you got to change the mindset of people that have been in the business for a long time to believe that we need to handle our own claims because that's an important interaction that we have with our insurers.
Thanks, Ron Bobman. Acknowledging the very small property share that you have.
Yep.
I'm just curious to the extent you have any interaction with claims coming out of Hurricane Maria in Puerto Rico, I'm wondering if there's any commentary you could provide.
We actually don't have a lot of claims in those areas. I couldn't speak to a lot of stories. We actually had a whole bunch up with Hurricane Sandy, but we've got a diocese book of business. We've got some public entities in Florida where we've been significantly involved. It's nothing that is going to change the trajectory of anything in terms of our business given the scale of that. A lot of our clients do business in Puerto Rico, but it's not involvement that we would have directly with them.
Any change in underlying trends in workers' comp claims? They've been declining for a while. Do you see any?
I think there's a couple forces here. I think the workplace continues to get safer. There's nothing changing whatsoever with respect to that. Maybe if we start seeing some new business startups, they tend to be a little less safe when they start up. We would see that business through our carrier relationships, because that's where we would see the smaller clients. In terms of the overall trend, I think it's continuing to decline. Secondly, just the overall economic growth within the client base, we're still seeing about 1%-1.5% growth within that. The other thing that's interesting is, and we were just having a conversation with some folks when I was down in Australia, is the ongoing question as to what degree can you handle a claim straight through with total automation. Different people have different opinions on that.
There's the actual claim, did the incident take place, which that's declining, and then there's how much human involvement will there need to be. We're still a strong proponent and believer that for the more complex claims in particular, you're going to need an adjuster sitting there handling the claim.
Any change in medical?
Medical is still. If you look at our underlying claim costs, medical costs are still skyrocketing. The utilization of our managed care services, as part of a work comp claim, is still in proportion to previous years. It's increasing. That is a component. If I were to break apart the work comp claim into, let's say, having two fees, there's the core claim handling fee, the processing of it, and the managed care fee. The managed care fee is driving a lot more of the growth than the core claim handling fee. What's interesting about that, though, is it's a little bit of what we're seeing is the clients are getting more sophisticated on that.
They basically spent, I think, probably the 20 years before I came, and during the time I've been here, driving us to see greater efficiency on the core claim handling price, hadn't maybe spent as much time and attention to the managed care side. Them, the brokers, who are really driving the buying of our services, they are focused intently or very aggressively in that particular area. That is a growing challenge for us. Just the utilization of medical services and the cost there continuing to increase from everything that we've seen.
One last one.
Thanks. There's been a growth in the number of runoff insurance companies looking to buy or I guess, reinsure legacy blocks of business of insurance companies. Is that a growth area for Gallagher Bassett? Is there a friction created between the runoff acquirer and his handling of claims in contrast to the primary company?
We have a couple that are clients. We've looked at that. We actually, in the U.K., one of our larger clients is. That's exactly what we do for them. Some of it even is with some of the state funds that we would get involved with. One of the challenges there is the motivation that they have in terms of handling the claims. I'm talking a lot about adding value, getting superior outcomes, treating employees well, and so forth. That isn't necessarily the motivation of the runoff guy. Our value proposition, we're trying to figure out is whether it can be well suited for that market.
The other thing that's interesting too is if we were to do that, we want to make sure that if at all possible, to build a relationship where there's some continuity in terms of the ability to grow that business, that it's not just once and done, and then it just tails off. We build up an operation, and then it goes away. We'd like to, with some of those companies, to have kind of a long-standing relationship and see some sort of even flow of the business. I don't think we've unlocked the code on that in terms of being able to see that as a significant area of growth at the moment.
Thanks, Scott.
Thank you.
Next up, we have Doug Howell. He's going to talk a little bit about our financials, CFO commentary, and clean energy. Doug, the floor is yours.
Sounds like I'm on. For those here in N.Y., we do have a note that says this is going to be a working lunch, but it's 11:10 A.M. If you want to get up, there is lunch out here, but I'm guessing it might be a little early, but you're welcome to take it after we're done or bring it back in if you're hungry. By a view of everybody here, should we just keep moving, and you guys can pick it up on the way out or eat it after we're done? Great. Here's what we want to do. Today, I'm going to do my typical thing of kind of giving you a little assessment financially of where we are around the world.
I want to talk to you about as we go into the budget season a little bit on things that I'm seeing, some observations there, then we'll probably spend a little time on tax reform because I know nobody's interested in that. I think we'll wrap it up with Q&A. I think we've got about an hour together here, so I think we have a lot of time that we can get through this. First and foremost, how do I feel as we walk around the world? You heard a question earlier today about margins and organic growth, right? We think there's opportunity for margin expansion to get above 3.5%, 3%, 3.5%. Q4's a little harder to get margin expansion. If you recall, most of our margin expansion happens in the first two quarters of the year.
In the back half, since we give our raises midyear, you don't see quite as much margin expansion. I think that's consistent with what we spoke about during our earnings call a month or so ago. Going into next year, organic, I think if we can stop having about a point of headwind that we've had because of rates going down, you probably will see organic better than what we did this year based on the environment now. Things like Brexit, things like tax reform, all of those can weigh into that. By and large, we feel like the operations are pretty healthy around the world. Somebody asked Tom Gallagher about margin expansion in Australia. Remember, that's about a $200 million business down there. We're nicely in the low 20s now, so maybe three or four points on that over the next couple of years, like Tom said.
I think the bigger story there is that's a business that was really struggling with organic growth. We knew that when we bought it in 2014. It's really returned to nice organic growth numbers, and our New Zealand operation is doing really well there, too. Canada's got nice margins. Canada's got decent organic growth, consistent kind of with the U.S. In the U.K., we put together our big operation, the big acquisitions we did there. Really three of them there, Heath Lambert, Giles, and Oval in 2013, 2014, and that integration is largely done. You'll see in the CFO commentary that we've got maybe $0.01 this quarter or something like that coming through. That's all good. There was a comment, I think Elyse asked about a lease termination charge that we intend on taking in the Q4, non-cash, about $0.09.
That should actually add a couple of pennies next year, because we'll save $5 million-$6 million a year on terminating that lease. There's a couple of them in there, actually, but it adds up to about $0.09 non-cash charge in the fourth quarter. U.S. business, you heard Mike Pesch, that was his first time on stage this time. Mike is really a terrific leader. It's great to have him on board. I say this joke all the time. I joined Gallagher 14 years ago, and I'm the new guy at the table around Pat's table with Jim Gault and Dave McGurn and Jim Durkin going, and Bill Zabel and Mike Pesch joining, and then to find out they've got 25 years with Gallagher. I'm still the new guy at the table. It's nice to have them take leadership positions.
Mike's era will be interesting in the U.S. because I think under Jim Gault's era, he really moved it kind of from a standalone franchise model where we had a lot of people out there running standalone independent branches that did their IT, their accounting, their middle office service, and ran sales. Mike Pesch's era is going to be one. Most of that centralization has been done. We still have opportunities. Standardization, centralization has been done around the 175 location that Mike runs. His era will be much more of organic growth. I think that's the thing that we're really looking to Mike, and he's hitting it right at the right time. Jim Gault always talks about he joined in 2003, right when the hard market ended, and he spent 12, 13 years centralizing the process.
Mike is hitting it when we're getting into what I consider to be a stable or firming market. It'll be a nice era. Still have opportunities there for efficiencies and quality, but that's a pretty well-run organization. Now to bolt on continued acquisitions, we're still seeing an opportunity in Mike's business in the U.S. retail space to bolt on really terrific partners that are terrific at selling, have great relationships with their customers, value our capabilities, and now they can come and use our infrastructure. That's a really big competitive advantage, in my opinion. I think it's something we worked on for 12 years. Vishal, as you heard, wasn't able to make it in from India today for his portion of the presentation. Vishal and I have been shoulder to shoulder on that effort for 12 years, so I can take questions on that if you want.
Similar journeys, Bill Zabel in the benefits business in the U.S. His journey of using offshore centers of excellence is just starting. The consulting business is a little bit of a different type of business to provide resources offshore, but he's got great opportunities on that. That's been a business that's grown through acquisitions, grown through organically. They have a lot of standardized processes already, run nice margins, so that's a really healthy business for us right now. One piece of business that probably has margins in the upper teens is our wholesale business in the U.K. It's an $80 million business, something like that, but we really see they've done a really great job of putting new MI in, getting their systems in place. We see opportunities for that to go. RPS, you heard Joel Cavaness talk about what's going on in our wholesaling business.
Kind of exciting to have that business in our portfolio. Like you said, 75% of his business comes from non-Gallagher, if I have that right, folks. We're seeing some market turn in that. That's kind of the early spot where we see market turn. Behind us today, there were a bunch of our regional leaders that are on the sales side that work for Mike Pesch, as I had some hallway conversations with them. The market's there. The market's firming across all lines. I think Pat's observations about stable up three, four, five percent rate increases leading to organic somewhere better than what we're doing this year, all is tying together. Where am I right now as a CFO? The next three days, I go back to Chicago this afternoon. It's the culmination of our budget process. We'll have some tidy up.
Here's the dilemma that I'm in this year. For the last three years, our budget process has been about integration, has been about standardization, has been about really harnessing the capabilities of the organization to get us up to where we are today. These budget meetings are going to be the first time where all that resource and capability that's been working so hard for the last four or five years or a decade, there's going to be a big ask in the budget meetings to turn those horses loose and really start doing things to enable the organization to sell more insurance. It's going to be a twist in the budget process, where before, what are we doing to integrate? What are we doing to standardize? What are we doing to move office locations? What are we doing to get people up on systems?
Where now all of a sudden we've got all those capabilities in-house that are going to be looking to run a new course. I'm really excited about the next three days, and it might be the first time where we've got to say, we've got so many great ideas, we've got to stack rank them across divisions and decide which are the ones that we want to fund. Because before it's just getting up to table stakes. We have to fund it. We've got to pay for the integration. I think we spent $100 million or more on integration over the last couple of years. Now those people have opportunities to enable the business. For me, looking to next year, a little rate behind us. We've got organic growth in every single one of our businesses.
We've got margins in most of our business up where they need to be. Now they need to redeploy people from doing things to selling insurance. You'll see that evolution there of hiring more producers and needing fewer middle office and back office people. Then there's all sorts of exciting opportunities for us to do. We talk about the digitization. Mike Pesch talked about that. Joel Cavaness talked about that. In Insurtech and Fintech right now, there are two types, in my view. There's those types that sell insurance, and then those types of technologies that help us service business better. I'm not so excited about a lot of the distribution models, to be honest. We've looked at 1,000 different Fintech startups and that I'm still not a big buyer of that for our commercial middle market because we don't sell a package policy.
Understand they're buying four or five policies from us, not one standard package policy like you have as auto and homeowner. The Fintech that's developing on the service side is extremely exciting. Robotics, AI, other efficiency type of Fin and Insurtechs. Vishal's right at the hub of that in India. That is our innovation spot. We've already standardized, now we can automate there. That's terrific because you can take the folks over there and redeploy them into more higher value-added jobs while we automate it. That will be an exciting part of our 2018 story, is how do we go firm ashore on that or strong onshore on that to automate this with some of the technologies because they're there. Things are happening. Our Australia operation, I know Scott touched on it because I stepped out.
They've got some bot opportunities there that will really dramatically improve their service delivery down in the Gallagher Bassett business in Australia. It's an interesting era. I think that we're really in a good position. I think the brokerage business in general is in a good position. I think that there's a lot of wind at our backs or at least not wind in our face. Overall, I feel good about it. I'm going to touch down through the investor CFO commentary. Not a lot of change on FX. We talked about the workforce and lease termination discussion. We talked about margins. I don't know if Scott touched on this or not, but in the Gallagher Bassett business or the risk management side, remember we had 10% organic growth in the second quarter.
I've kind of warned that we're probably in the 2%-3% for the fourth quarter just because of the timing on some of that. There's been some nice wins that they've got coming on, I feel good about that. I think the margin will be somewhere between 16.5%-17%. Feel pretty good about supplements and contingents from what we see coming in for the fourth quarter. Nothing there that's changed. In the corporate segment that you'll see on page three and four, really by and large where we were before with maybe just a little bit more of a bullish look on our clean energy investments. I think we ticked them up a few million dollars in the quarter there. There's nothing too terribly exciting there.
Rollover revenue, we've had a nice acquisition pipeline, and I think that we're pretty well-- for us, whatever we close between now and the end of the year, it's not going to contribute much to revenues or to EBITDA anyway, just because when you end up with one one-hundredth of the business that comes on in the last half week of the year, it's not going to add that much. Yeah, I'll break it out for you. It'll be in the adjusted brokerage segment is where we'll put it. Well, I think that I would consider it an adjustment. We always have a line workforce and lease terminations, we'll put it there. I would guess most people will ignore it for purposes of establishing estimates. I don't know if I said that the right way or not, Yeah, that'll fall into the brokerage segment.
Remember, that's a non-cash $0.09 too. Mostly non. Mostly cash. Brokerage segment margin expansion in the fourth quarter I mentioned. It's going to be a little tough unless we post something above three and a half, something like that. Free cash, we've got $400 million of cash in the balance sheet right now at the end of November. M&A pipeline, there's probably 50 deals at $225 million of revenue that obviously that's what we're working on now. I see going into next year, we're still paying pretty fair multiples. I think that a multiple in the sub eight range is where we'll end up for the year. We're still seeing a lot of people that value our capabilities and services that are willing to take a fair price. The smaller deals we like, that tends to work well for us. We bolt them into our local franchises.
I was in the hall, there's a nice little broker here in Manhattan that I was talking to our leadership of the Manhattan office that they'll just roll that in. That's a nice little acquisition. That's shares this quarter. We did issue some shares for a tax-free exchange, a couple hundred thousand shares, and we'll see if we get those bought back or not by year-end. I think that's it on the base business. Do we want to stop and take a few questions on that, then we'll plunge into tax reform, then maybe if we have time, I'll talk about Revenue Recognition too.
Sounds good.
Bob's excited about Revenue Recognition. All right. I guess James is up first.
Hi, Doug. Yeah, I guess my question is just a follow-up on your cash commentary. You said you've got $400 million in free cash. I think you had $100 million in incremental CapEx this year. Can you talk about cash generation for 2018? I think it's usually in the $400 million-$500 million range.
Yeah, I think we'll probably be a couple million ahead of that next year. My guess right now, I think we have about $800 million of cash available for acquisitions or share repurchases next year, might be the best way. After we pay the dividend, after we pay interest, after applying just a guess on organic growth that's not outlandish. Again, we'll have some CapEx projects that I've got to look at over the next couple of days to see where those will go. We've got a healthy budget for that, I think we're okay. Yeah, $700 million-$800 million is what we'll have for either M&A or acquisitions next year, or for share repurchases next year. Elyse was going to ask the question, would we sit on cash for too terribly long? No, we'll buy shares back with it. You have another question.
Yeah, it was actually related to that, I feel like usually you guys do point to this $800 million or so range, and you say, when do we get to the point where if the deals don't materialize, the deal flow might have been a little bit light than you expected this year-
Yeah
where you will decide to buy back stock. Then the other question, if you want to tie it together is, if there is this tax change, will that have an impact on multiples on transactions if you see companies actually having lower tax rates? Do you think that that will spur an activity maybe before some of the changes? How are we thinking about that?
Great questions on how does that work. The fact is, we had $300 million at the end of October. A lot of the cash, just so you know, is overseas, and Tom told you that we're looking for opportunities there. I'm not so excited to bring that cash home yet, because if we can bring it home after tax reform, it's financially better for Gallagher, okay? Just realize if we're building cash balances, some of it's international versus domestic. Put that in the box. Multiples on acquisitions. Interestingly, in a multiple pay per acquisition, by the time you deduct the amortization for the goodwill that you pay for in an acquisition, if you do an asset-based deal, you basically get to deduct a goodwill over 15 years. That gives the effect of bringing the real tax rate down to about 22% anyway.
By the way, you take the amortization based on what you pay over 15 years. You can do that math. It brings the effective tax rate on acquisitions down to a number that's closer. Now, how much will that in tax reform? Maybe it'll take it down to 15%. I haven't done the math in my mind. Do I see that as a meaningful change in the multiples that are paid for acquisitions? Probably not. Would it mean then that the amortization doesn't have as much value, and we'd be willing to do stock deals that we currently don't do, we do asset deals? Maybe. There's a host of issues about latent liabilities that sits inside of a shell.
We typically buy the assets out, and the seller owns the shell company, and if they've owned things inside of that shell over the last 30 years of their family owning it, they get to keep that versus us. I don't think it's going to be a meaningful decrease. I think it'll be interesting, the interest shield that the PE firms currently get with high leverage in acquisitions. I haven't mentally worked through that yet. If that interest isn't worth as much, but the cash that they're generating is worth more, maybe it offsets, but I'm guessing there's some type of maybe trade-off there that would take a little pressure out of the PE firms.
Does it level the playing fields a little bit?
Yeah. It levels it for us a little bit more.
Right.
Sounds like we had a marching band in the next room. I'll work through that. I don't really think it'll have a significant impact.
Okay. A couple other questions. You said contingents and supplementals, it seems like would be a little bit stronger in the fourth quarter. I know they were kind of flat in the third quarter. Does that tie into the organic growth view, I guess, is all in, meaning Q4 is more or less the same as the first three quarters?
Yeah. Let me make sure I understand. I don't see us having significant increase in supplementals and contingent. Not much new news since what we said in the commentary. I wouldn't read that as being stronger.
Okay.
We'll see what happens here in the next few weeks. By and large, when we talk about what do we feel for organic, it's all in. We refer to it as on. The ability to distinguish between some supplementals and base commissions has always been a little bit difficult. Then we have some contracts that are a hybrid base supplemental and contingent that all go in there. By and large, we refer to kind of our all-in organic growth, which would include supplementals and contingent. When I say that the fourth quarter feels a lot like the third quarter, and maybe just a bit better, that would include my understanding of where our supplementals and contingents would be.
Okay. Then you guys, about Capsicum Re. At some point, I thought you guys had the option to acquire the remaining stake that you don't own. Can you just update us on the thought process there?
Sure. I'll tell you. First of all, it's been a great partnership with the Capsicum Re partners. We own 20% of that, and there are certain opportunities for us to start buying pieces of that out or all of it out in 2019. It's still too early to tell where we are, but I can tell you that the partnership between those folks and our folks, particularly in London, it's been a surprisingly positive outcome to me.
Thank you. I had a question actually, probably intended for Mike, but I ask here anyway. About your producer compensation, could you tell us a little bit how are they compensated? Do you have any incentive program to encourage that organic growth?
Basically, our producers in the retail space make a percentage of whatever they sell. New business will be a little bit higher than renewal business. As a result of that, they already have a built-in incentive for new business. Let me just say that on average, our person gets 30% for new business that they sell, and they get 20% for renewal. The definition of new business is net new on the book of business, by and large. If a guy has a $1 million-dollar book of business and he comes into next year and he grows $100,000, he'd get 30% of the 100 growth, and he'd get 20% on the net book of business. There might be new business underneath that, but otherwise he just gets 20% on his $1 million bucks. Just for your new business, 30%, renewal business, 20%.
We pick up all the house costs, all the sales costs, all the service costs, everything. Oh, is there any pressure on the comp? I think that our people are always getting courted by. It's a competitive business out there to hold onto our producers, but I don't see anything that is worrisome by any means. We haven't lost. I'm struggling to think of any producers, particularly in the U.S. or even the U.K. or Australia. We've lost a few. We'll always lose a few a year. By and large, they're pretty sticky with us. They understand. They're basically partners of ours. When they've got a book of business like this, additional incentive plan, they already have an incentive to sell more insurance, right?
Doug, you had mentioned that in your new budgets, you're going to be putting forth a big ask, which grow the business. You've got the infrastructure in place. Do you have any experience, or have you had offices where you've kind of gone through this transition, everything was in place, and then you did the big ask in the past? Is this something that you can quantify for us? Is there a track record in history?
Let me rephrase. I just think there's so much capability inside of the organization. As I come into budget, everybody's going to have a lot of great ideas. That's really what I'm saying on this. Our IT people are going to have projects they want to do, our finance people are, our operations people, the sales folks, the marketing folks. There's just going to be a lot of ask that comes into the budget. It'll be an interesting thing because we're going to reconcile things that make us grow more rather than just getting our operations to where they need to be today.
The ask is going to be the ask of you.
Yeah. That's it, yeah.
Rather than the ask of them.
Right. It's interesting because they're going to be able to fund a lot of this on their own, and then we're going to have to talk about what things they want to fund that we're going to have to say, "Listen, we can't make this division go without in order to fund your project.
Is your point that more of that should be oriented towards growth rather than infrastructure?
Yes, that's my point. Yep. That's exactly what it is. I think these are going to be enabling and accelerating type discussions versus just getting us up to where we needed to be on common systems and common processes and compliant with regulatory needs at integrating real estate. These are going to be acceleration type discussions, which is actually pretty exciting as a CFO to sit there and listen to that. I say it this way, there's no fun in going out and buying a new washer and dryer, is there? Before you had clean clothes, it broke today, and tomorrow you got clean clothes. There's nothing exciting about that unless you just like white goods. I don't know, maybe you do. That doesn't get me excited.
Buying a new car, putting on an addition on the house, putting in a swimming pool, doing things that improve the quality of your life or the success of your life, they tend to be more exciting opportunities. Before we've been replacing washers and dryers. That's what we've been spending a lot of our time over the last three years. It will actually be something that I'm pretty excited about listening to. Now we got to make sure we get payback on those. It's just a different era that we're in right now that for me as a CFO, I haven't been in this era for four years, something like that. That's what I meant by that, Mark. Other questions on the base business? We can come back to it. All right. Let's talk about tax reform. All right? This is the big caveat.
I just want to make sure, and because I know people read transcripts after the fact, I may stop and make sure I give the caveat a couple of times through here because it might be back three pages earlier. We really don't know what's going to happen. Right? I don't think any of us can predict what's going to happen. Is it going to be the House version or is it going to be the Senate version? We can read about that, but as one of you said in the hallway, it could be just a completely different third version that doesn't have certain pieces. There could be pieces that come in that are in neither the House or the Senate. Do I characterize for the brokerage business and for Gallagher, the House bill as a better case than the Senate? Yeah, kind of.
Maybe that we'd prefer the House bill to the Senate bill. I want to make sure that we go through things that we kind of know about both of them to give you some ideas about it. Right? This is a guess as good as yours. I think they start deliberations tomorrow on the conference. I think that's public record. I'm sure that hour by hour, there'll be comments that are made. I'm sure there'll be political comments as well as really comments of substance. Here's what we're seeing from the different bills. First and foremost, they both seem to be aligned around a discussion of a 20% or 22% federal tax rate. Could it go to 19%? Maybe. Could it go to 23%? Maybe. Could it be someplace in between all of this? Who really knows, right?
There is a number. Let me talk about a 20% scenario. For our brokerage and our risk management segments, globally, we're reporting in the brokerage segment about a 34% effective tax rate. If the U.S. rate goes to 20%, that number probably would blend in somewhere around 25% or 26%. Just the mix of our U.S. business with our international, it would bring that number down. In our risk management segment, that right now is around the first nine months of the year is around 38%, it would probably bring it down to 27% or 28%. The impact of the U.S. would be about a reduction from 35% or 34% to 25% or 26%, 38% down to 26%, 27%, 28%. By and large, that translates to cash.
It does mean that we would pay less cash taxes paid for our brokerage and our risk management segments. All right? Not only does it translate to a GAAP rate, would pay less cash taxes in the U.S. If the tax rate does go to 20%, that means we would have to revalue our deferred tax asset on our balance sheet. If we did that, we would have a one-time, and I will say non-cash write off, because it is a non-cash today write off, let's be a little careful about that because a deferred tax usually turns into cash in the future. I don't want to say absolutely. It's non-cash today, but in the future, the rate bringing it down.
I think there's some tax planning strategy that we can deploy prior to the effective date of the law, which would probably mean that we would have a $10 million-$15 million non-cash write off of our net deferred tax asset related to our brokerage and risk management segments together. Right? A pretty manageable write down of the deferred tax asset there. There's a couple other things that we know that just when we talk about our core operations, like there's the provision on excess interest limitation on debt. It has to do with the mix of U.S. debt versus foreign debt. We think that that may cost us $5 million-$10 million a year if it comes together in one of the Senate or the House versions. We think we're going to be able to offset most of that with tax credits that we have.
Therefore, we don't believe that it would be much of a cash difference for us. Base erosion tax. We don't have that much in foreign tax payments. We earn foreign payments or payments to foreign subsidiaries. This whole idea of exporting cash to foreign countries is what the administration's seemingly trying to clamp down on. We don't do that much of it, primarily our offshore centers of excellence. It's not a big number. There's a 4% of expense type safe harbor. We'd be well below that. I don't believe that the base erosion tax would have much impact on us. There's a foreign income transition tax, i.e., taking all your profits from overseas, earnings and profits.
I'm using generalized terms here, don't quote me on this will all change, is that that probably would be a $20 million-$30 million one-time transition tax that basically frees up all of our historical profit. Again, we believe we'd offset most of that with our tax credits. We probably don't have much of a cash impact on that number, but we might have a GAAP charge $20 million-$30 million bucks on this. I think that there's, in the law, the ability to bring home profits from foreign operations without tax works well for Gallagher. We have substantial cash producing operations in New Zealand, Australia, Canada, and the U.K. that generate a substantial amount of cash, and you heard me earlier that we kind of leave sitting over there until acquisition opportunities.
If we can bring that money home, we can always put it back in. If we can bring it home without having to pay the bump up tax from where they're at 20% or 30% up to our 35%, that's good for our business. That would be a win. There's not an impact on that, but I just want to tell you that. Tax credits probably are the place that are of most interest for us. It all interplays with how does a tax credit work relative to AMT. Obviously, eliminating AMT is a good outcome for us. Leaving AMT at 20% would result in a non-cash write-off of our deferred tax assets. We would lose the value of those deferred tax assets if it stays at 20%.
An AMT in between would not necessarily lead to a write-off of our deferred tax asset, but it might lead to an extension of when we can utilize those. We have a 20-year life on those tax credits. I don't see anything in here that would cause us to lose those tax credits forever, but the ability to recognize them on our financial statements, if you go out and you say, "I'm going to recognize a tax credit in 2037," might be hard to pass the valuation allowance tests that you have to put up for a deferred tax asset. Let's just say there is a number between zero is better than 20%. I can't predict where it's going to be in between there. We have about $600 million of tax credits, $200 million probably don't apply in this case. Don't worry about those.
$100 million are AMT credits. I think the House bill had it that they were just going to pay those back to you over 4 years. You just get a check from the government. I don't know if that will survive. The Senate version, I don't think addresses that on what to do with AMT credits. These general business credits, there's $300 million of them, that at 20%, we'd probably have to take a non-cash write-off for those. At 0 would be no write-off. That's the spread on that. I don't know if that's best and worst case, but that's kind of House versus Senate. If you boil it down, our core operations drop their tax rate to 20% or 22%. That's good.
If we have to take non-cash write-offs for some of these things, that's not great, but it's something that doesn't impact really the ability for us to go forward. Pat actually said it at the front end, a lot of what we did on this was to do good for the environment, but also to bring our tax rate from 30% down to 20% in the U.S., and it looks like that might happen anyway. I would say that we're watching this minute by minute. It's going to change a lot, but hopefully that kind of gives you a dimension on what possibly can happen. I'll stop there, and I'll open it up to questions. Only 18 hands. Great. Sarah got the nod for herself.
Hi, Sarah DeWitt, J.P. Morgan. Thank you. That was very thorough on tax. Maybe just put it all together, how much would it increase your adjusted earnings on a pro forma basis?
Great question. I didn't do the math. I looked back to Ray to see if he remembers that. Here's the thing. Take our first nine months, adjust the tax credits down, adjust the effective tax rates to what I spoke to you, and redo the math, and that'll show you the gearing. It will increase the core business brokerage and risk management EPS. Remember, this has nothing to do with EBITDA. It really doesn't have that much to do with cash taxes paid other than they'll come down. We're already not paying
Wouldn't there be some offset from less of a tax credit in a given year?
Oh, yeah. Absolutely. I think that, well, credits are worth a dollar regardless at a 20% rate or at a 35% rate. They're worth a dollar, so you don't have the revaluation because of the tax rate differential. Remember, for our brokerage and risk management side, we don't allocate any of those credits up into that brokerage and risk management segment. You can take our brokerage and risk management EPS year to date, recompute it at the lower tax rate that I gave you and divide it by 180 million shares outstanding, and you'll get the new EPS on it, because we don't put any tax rates up in our core brokerage and risk management operation. That all goes down in the corporate segment.
Right. The earnings would be less from the other segment, from the clean energy.
Sure. Absolutely. Yeah. The earnings that we receive off the clean energy investment, I don't think any of you are giving us an EPS credit for that. We've talked about that for years, that that's a non-recurring, non-core business, and that's why we don't put it up in the brokerage and risk management segment. If the whole clean energy program went away, you can go to that one line item in the shortcut table and just take it out, and that would give you the delta on it. It would lead to lesser total GAAP EPS because the savings in the tax rate in the brokerage and risk management segment is not as great as the temporary earnings that were being generated on a GAAP basis on the clean energy line.
That will be something that you've got to finesse in your models or take a look at, but it doesn't change our EBITDA. It improves our cash flow. We've always said that GAAP EPS, for purposes of really looking at what Gallagher does, is not probably, in our opinion, the right metric to use because those are non-sustainable earnings, and we've said that for 10 years or seven years since the program started.
Just to follow up, on the AMT, the worst case of the Senate bill, 20% AMT, you're above that in your brokerage and benefits in Gallagher Bassett, so it wouldn't be relevant to that area. What I didn't follow is how it would affect clean energy-
Okay
at all on the cash. Does AMT work its way through? I know you weren't able to use your future tax credits or recognize them on the balance sheet and your DTA. I understand all that, I didn't understand the earnings impact.
Let's go back and make sure everybody understands what we were doing in the past, is that our brokerage and our risk management segments, the way we calculate income tax expense for them is to take the country in which they generate income, take it times their statutory rate, and that's what derives that 34% effective rate in the brokerage segment. If you take the U.S. statutory rate from 35 to 20, that portion that's in there can't help but lower that rate. There has been never a tax credit allocated up into the brokerage or risk management segment for the last seven years. We've kept that pure down in the corporate segment.
The corporate segment basically has some M&A costs, it has interest expense, and it has some general corporate costs, and then it has the net earnings from clean energy, which is really negative pre-tax for the cost to generate credits, and then the tax credits that are generated come through as a benefit of income tax, and we get net earnings over them. Visualizing that to the shortcut table. You can see it on the investor presentation on page five, if you want to visualize it. If for some reason, the AMT doesn't get fixed, that line will go away. We will probably stop producing new credits that were scheduled to expire in the next four years. You'll do new computations up above for the brokerage and risk management with the lower effective tax rate, and that will be our new go-forward earnings.
No clean energy line, lower tax rate up in the brokerage and risk management segment.
Why does, in an AMT world, clean energy go away? I guess I'm losing that a little.
All right. Clean energy credits, there's two types. Specified credits that reduce your tax rate to 8.75%, from 35 down to 8.75, and then general business credits that reduce your tax rate from 35 down to AMT. That's 20%. If we have a regular tax of 20% and an AMT tax of 20%, you have zero headroom for tax credits. That's what the squawking is about that's happening right now. How do you have an AMT tax that's equal to your regular tax? Well, mechanically it's possible, but it really kills all innovation. R&D, solar, wind, clean fuel. I still haven't figured out how accelerated depreciation would work in that. Is that considered an add back for AMT? This idea that an AMT survives at 20% is clearly not impossible. I just don't think it's practical.
An AMT at zero, well, remember, there's already a long-standing minimum tax that's in our code, not alternative minimum tax, but minimum tax that says you pay 5%. Even when the House bill, I believe, if my memory serves me, I could be wrong, might change. Top of the transcript, all this could change. I think the minimum tax is already there. Clearly, just eliminating the AMT already has a floor in it at 5%. Companies are going to pay 5% of the tax. If that survives, we take our tax credits. Our regular tax would be 20% and our tax credits would be used from 20% down to 5%, which is about the same number as taking it from 35% down to 20%.
The earnings rate would go down by 25% or the run rate in earnings in a 5% AMT world?
I think in a 5% AMT environment or just minimum tax environment, you would see no change in what Gallagher is doing and has been doing until you wake up in 2022 and we no longer are generating tax credits. That would be an absolute no change environment, except under net line, we would have probably more cash earnings and we would have higher EPS because of the core businesses not having a 35% or 37% tax rate.
That's the example.
Yep
came to what we're talking about.
Correct. If there were no AMT, our example that used to be posted on the website, but we don't feel comfortable with that. That was a pure speculate. I didn't feel comfortable putting a spreadsheet out that says, this is what happens with the House, this is what happens with the Senate. Truthfully, there's a lot of information in here, and there could be unintended consequences of one piece of the bill that In fact, I don't think we even got the Senate bill until Wednesday. I think it was all handwritten notes until Wednesday of last week. We're still digesting, but I just didn't feel comfortable to lead somebody to believe that the guess that we're saying is 20% tax rate and zero AMT. I don't know. It's going to be zero or 20 or some number in between.
That's why I just removed it from that. That was the scenario that we provided last year.
Over here.
Just a follow-up on the write-off for the DTA. $10 million-$15 million. On top of that, is there also a write-off on the $300 million in business credits? Because a $10 million-$15 million write-down, it just seems too low to me because the value of all the tax credits and the business credits is much higher.
No. Core business, brokerage and risk management, write-down $15 million-$20 million or $10 million-$20 million, whatever I said. What is the DTA related to tax credit? The total is $600 million, of which we believe that $200 million are well protected under either law. $100 million is a little obtuse to me. I don't know where AMT credits will come back. The House wants to just pay you back in cash. The Senate doesn't specify. I don't know exactly mechanically how AMT credit carryovers will work. General business credits of $300 million are sitting there largely, almost all of them produced, the best I can reflect, from our clean energy investment, and that would be the non-cash write-down that we would take on that.
If AMT survived at 20% and there was no other carve-out provision to allow solar wind, clean energy research development credits that were already earned to be earned in the forward. I don't want to say it's the worst-case scenario, but it kind of is a $300 million write-off. I think we've got $50 million of net assets on the books that would have to be written off at our plant if we shut them down. There's lots of ways for those credits that were generated in the past to still have value going forward if there are certain carve-outs, provisions, or if the AMT tax is eliminated or reduced dramatically. You're looking at the right $15 million in the core business. No, never mind $300 million in the clean energy business would be kind of the impact on that.
Here's the thing. I'm not going to say there's misery in company, but this is a big issue that the Congress needs to fix. This is a consequence that I think dries up innovation. Really a tax credit is nothing more than a subsidization for innovation, right? You have subsidies that are direct payments from the government. You have tax credits that are innovation-spurring type subsidies. I don't know how you eliminate certain subsidies that come through the tax credit line and yet preserve subsidies that come through just disbursements where the government. I don't exactly understand how agricultural subsidies work, but I think you just get a check, right? For those. Why is that? In our case, our innovation is the subsidy is through tax credits. We're watching it closely.
Clearly, there's every clean energy type investor out there or owner of projects that's working hard with their congressmen and their senators. I think that we're hopeful that they'll wake up to this. I think if you read the popular press, everybody seems to acknowledge that there's something has to be done with AMT, right? The popular press doesn't go into closed doors and turn votes, right? We'll see where that comes out.
Then just one quick follow-up. I kind of lost you when you went down to the clean coal business. The tax reform is going to be a positive for brokerage. It's a positive for risk management. You get to clean coal and the other business, and it seems like it's going to be a negative, but not enough to completely offset the benefits of brokerage in risk management. Is that right? There would be a full offset.
All right, first of all, that's a business that has an end-of-life business in 2019 and then 2021, right? The clean energy line in our financial statement is it's always had a sunset of 2019, 2021. If that went away completely, you would have an increase in core business EPS. You would have basically no impact on EBITDA for the core businesses. You would have improved cash flows for the businesses because they're not paying as much core tax, and our clean energy investment line would go away. We'd just shut the projects down. We would disable the plant and probably go dormant on that until there's a fix in the law, right? That would be the net impact to EPS.
Probably would be a net non-cash EPS would go down by a net number because you're going to not get as much EPS benefit in the brokerage and risk management segment compared to the earnings that are created by clean energy at this point. If you value us on EPS, I would really strongly encourage you to take a look at that and see if that's really the right way to do it.
Only in a 20% AMT.
Yeah, correct. Only in a 20% AMT setting. I think there is a crossover point where we would say we have enough tax credits on our balance sheet that we don't need to generate more clean energy. We might shut it down a few years early, right? There is a number somewhere between zero and 20. I would rather not venture a guess. 5%, not a problem. 10%, probably not a problem.
500%.
Probably not, right. Again, that all depends on how they think about specified credits, how they think about AMT credits, how they think about what goes into computing minimum tax base. The other thing too is it allows us to, if we don't get this repatriation ability, we have the ability, and we leave it that we'll bring the money home, and we can use tax rates. There's lots of ways to use these. It just comes down to a 20% AMT rate is not good right now for that business. It's great for our core businesses, but for that one line item that's non-core to us, it's not the answer we'd like to have.
Hi, Ron Bobman, survey return to shareholders. To the extent that at the end of the day, the tax changes across your balance sheet and income statement generate greater after-tax cash flow, is there a reason that shareholders should not assume that the lion's share of that recurring improvement is delivered to them by way of enhanced dividends?
Yeah. Let's see if I can restate the question here to understand. I believe that a lower effective tax rate to make us competitive with other corporate income tax rates around the world is a positive benefit for the shareholders of Gallagher. It's positive because our core operations throw off more cash just domestically. It's a positive because bringing money back from overseas operations is a positive. Remember, we don't have much issue with this base erosion tax, is what they call it. It's a positive because we don't have a lot of impact because of the interest expense. Everything that we're talking about from a lower income tax rate is a positive to our core businesses, which is really how we look at what we do, how we post our results.
There's a reason why we don't post the clean energy credit up against the businesses that are generating the taxable income, because we know it's a finite program. We've known it since we started in 2009. That's why we isolate it to one single line item in that shortcut table on our financial statements. We think tax reform, either the House or the Senate for our core business is a positive for Gallagher, positive for the shareholders.
Why won't the recurring portions of the cash flow pick up?
They will. The recurring portions in our core business cash flows will improve.
No, dividends, I'm talking about.
Oh, dividends. Dividend, we have the ability to pay to our. Sure. Absolutely. Yeah. If there's more cash flow. I'm sorry, I didn't understand the question. Absolutely. That would allow us to have more free cash flow to make a decision about acquisitions, dividends, or share repurchases. That's all we do with our free cash. We do nothing else with it other than those three things. Yes, it would be one of those things we'd have to look at the dividend policy. We've been raising it a penny a quarter for the last five years or seven years, something like that. If we have $0.04 a year, a penny a quarter. If there's free cash flows, the board may look to just say, "Well, maybe we should do that more through dividends versus through share repurchases." That's something that we'll make a decision on.
We usually do that annually in January. I don't know if we'll have all this sorted out by that time on their decision, but I think that, yes, absolutely, it creates more cash for shareholders.
Just want to confirm the EPS. Your third quarter CFO commentary said if the overall tax rate going down 20%, AMT eliminated, your EPS or former EPS will be up 10%. You take into consideration potential sunset on the Clean Coal business, which contribute about 20% of your overall EPS. The net net with a lower U.S. corporate tax rate 20% and without Clean Coal, your adjusted EPS could be down like 10%. Is that the right way to think about it?
I don't know. I'd have to do the math on the page for you. I don't have that answer committed to memory right now, so I hesitate to ask. If you look at it, you can go to the clean energy. Like I said, take the year-to-date EPS for brokerage and risk management, recompute it at a lower tax rate, remove clean energy 100%, and see what you get.
Okay. On the Clean Coal, current run rate is about $130 million.
Yeah
This year.
Yep.
Do you see grossing that the next year?
Do I see what?
Gross, like additionals or Clean Coal?
No. Listen, let's say AMT goes to zero. I think that our production levels that we have right now are about at the top end. We've said that for a couple of years, that we thought by 2018. We do have a couple plants that are available for rollout yet. They would only be able to run, by the time you get them rolled out, it'd be mid to late 2018, and they could burn 2019, 2020, and 2021 before they sunset. The payback's fast. The payback's only six to eight months on these a lot of times. We still have that ability to do, but I don't think that you'll see much growth in that line the way we sit today.
Thank you.
I just have a follow-up on the Clean Coal. What is the present value of the Clean Coal cash earnings right now? Does that change the cash earnings and the present value of that under if you have AMT or if it's eliminated?
I don't know what. We don't compute what the NPV is of our future tax credits going forward. That's not something we've ever provided. If you want to do that, I'm not seeing that anybody's doing that, I'll be honest. I've looked at a commentary from you. I don't think anybody's giving us any value for this. As a matter of fact, if you just look at it, I think that we trade at a little bit of a multiple that's below the broker basket in general. The fact is, there's no value being ascribed to these anyway. I've never seen anybody take EBITDA times a number less debt, add back excess cash, add back $600 million receivable from government. I've never seen anybody do that. I don't know where there's value being ascribed at.
We think there's substantial value because for years it's taken our tax rate from 35% down to at least 20% or a little bit lower in the U.S. We believe that it's creating cash that we in turn invest in the business. I don't see it in the valuations or hear it from anybody's commentary or read it in anybody's notes or whatever. I don't know how to answer your question. What would be the NPV of.
I guess, does it change if AMT is in there or not in there?
Sure. If AMT is zero, it probably wouldn't change. If AMT is 20, you probably would have the present value of zero coming forward. That's probably where it would be. Again, we still have $200 million of credits that we think we're going to get for sure under either proposal Change, obviously. We think there's $100 million of AMT credits. I haven't figured out how we get that cash back yet, so there's this $300 million that's kind of in flux. That's really what that would be. By the way, here's the thing, is I'll say this, I don't think AMT equal to the corporate rate is good for America and innovation, regardless of Gallagher's position on that. I just don't see how that's good.
There are jobs in these industries that the way I read it, solar jobs would be lost, wind jobs would be lost, clean fuel jobs would be lost. I believe the way the research and development credit works too, is that you're going to kill U.S. innovation that is dependent on government subsidies in order to fund that innovation. I think that's bad for future prospects, and I believe that most of our Republican congressmen and senators would see that also as something needs to be done to continue. If we get tax reform, it's good for America. Let's make sure that we continue to encourage innovation. All right. Is that clear as mud? Just remember this. Any type of write-offs we're talking about are non-cash. By and large, almost 100% non-cash.
Anything that reduces the core business effective tax rates, I think is good for Gallagher, good for shareholders. Anything that terminates our clean energy plants or investments early, because remember, these sunset in two to four years anyway. If it causes us to shut that down, I don't think that's good because that means there's going to be a whole host of other types of industries that have to shut down. We're not alone in this. I just believe there'll be some place, I hope, is the best way of saying it, that will fall somewhere between the House and the Senate on this, and it preserves these industries. They're really pretty amazing industries. No. There's not a negative cash flow scenario in any of these discussions that I can see at this point. We've worked on it hard for the last 10 days. This isn't a back-of-the-envelope guess.
This is a pretty educated guess. We see this as a net benefit for Gallagher. However, except for the clean energy side. I can't say it enough. There's a lot of people that work in these spaces. There's millions of jobs across the U.S. that are devoted to clean energy, solar, wind, innovative-type opportunities. I don't see how that's good for anybody for that to not continue to have some type of tax credit opportunity. All right. That's coal. That's that. Maybe any other questions on core business? I got a couple minutes left here. Maybe I'll make a comment or two on Revenue Recognition.
You can talk about clean energy and X.
Oh, boy. Would I like to. I think that our fourth quarter is looking a little bit better, I think, than we thought just a month or so ago. That's good. I think our plants are running well. The environmental improvement there. I think coal is favored. It's okay to burn coal. I think that there's a need for it. As the economy heats up, maybe I shouldn't use that. If the economy heats up, it consumes more energy. Coal plants are the lever on/off, on/off. If demand increases for that coal. You still have competitive pressures for natural gas. You have competitive pressures for disabling inefficient plants. This program only lasts two years on a couple more of our plants and only four years, so I don't worry too much about the decommissioning of plants going forward.
Some of the innovative work that's coming out to make electricity better and the demand for it is pretty exciting. I spend a lot of time listening to some of our partners talk about where there's opportunities. I'm very bullish on just the concept of clean energy, clean coal. I think there's opportunities there. We'll see whether the innovation is still encouraged through tax credits.
when you're doing deals that you've got a tax or
We never really price an acquisition based on the fact that we're not paying much U.S. income tax on them. We don't pass along those credits to the price of the deal that we pay. The only place that we've said is that when you look at the ability to repatriate cash, when we're buying deals in low tax jurisdictions and we have the ability to bring it back to the U.S., we're really getting the cash flow back into the U.S. at their tax rate, the lower tax jurisdictions, Australia, Canada, New Zealand, the U.K., because we bring it back and we use our tax credits. Bringing that cash home, it really allows us to do M&A. Nobody prices a multiple. They see a headline multiple.
I think we paid 9 and change for the Wesfarmers deal down there, maybe 10 if you put a couple bad guys against it, or just negative items against it. Bringing that, we paid for that, and it's at a 30% tax rate versus here, a 10 multiple at a higher tax rate isn't the same multiple. You pay a higher multiple. The U.K., those deals are throwing off cash that we can repatriate at 27%, bring it back, use our tax credits. Really gets us the advantage. We don't price it in, Bob, but it does help us with our cash flows. All right. Anything else on Revenue Recognition. Everybody knows that there's a new accounting standard coming that will change the timing of when you recognize revenue, and there's also some deferred costs that go along that.
Where are we in the process? When I return to Chicago tonight, I'm hoping that we've run parallel. Again, our November numbers are done, they're in the books, and we are starting to run parallel. The operations are doing a good job of adopting this new Revenue Recognition standard. It's expensive. It's costing us $1.5 million or $2 million bucks a quarter, something like that, in order for us to get this up and running. What's the net effect of it? Still quantifying that. Probably we'll put that out in our year-end 10-K. For Gallagher, we're seeing it being a positive cumulative effect of the change. All right?
What that means is that when you redo the new standard, redo the books on the new standard versus the old standard, it's going to say that comparatively, our revenue recognition standards of the past are more conservative than the new revenue recognition standards of today. That happens because you pull contingent commissions from one year to another in some cases, and it also happens because we tend to recognize our revenue when we bill a customer, and you'll have to recognize revenue on the effective date of the policy. In an installment payment type business, we might have been recognizing revenue 12 times over the next year if they pay monthly. The new standard will require to recognize that all on day one with a little deferral for the service cost. What does it mean?
It means that typically on the effective date, we're kind of feeling that 70% of our revenues are going to be recognized on the effective date. About 20% of the commission revenues are going to be recognized over the next three months, and 10% in months four through six, eight, nine, 10, something like that. There'll be a little bit. It's not exactly an unearned premium reserve like you're used to in the carriers. That would've been nice, take it divided by 12, but that's not the way the standard works, is you match it with your service load. We have material service loads after the fact, the way we feel it right now, to service policies, to issue auto ID cards, endorsements, changes, et cetera. There is a load there.
We're going to restate going back to, we use the full retrospective method at this point, which means we'll go back, and we'll do the cumulative effect of the change as of 12/31/2015. We'll restate 2016, 2017, and then 2018 will be on the new basis. There's also an expense deferral component, that if you have costs that you incur before the policy effective date, you capitalize those as a DAC, and then you recognize them on the effective date on that. It will add a little complexity for you to get through, and here's how we hope to help you with that. All right? Is we hope that in March, we're going to be able to provide some type of filing that will go back and recast our historical 2016 and 2017 numbers to put it on the new GAAP basis.
You'll be able to see what are all the entries that have been made to recast that under the new accounting. Hopefully, we'll have an investor day that will take you through that, and so that we can go down through each item. No promises, because we're trying to do 30. It's taken us 50 years to develop the accounting that we have right now for brokers, and we're redoing it in 18 months. We're doing our best to be ready. I feel good that we're running parallel at this point, but there's still a lot of things, and this is a small industry, trying to get attention from those that are issuing the rules on a very small industry collectively is a little difficult to do. At the end of the day, it doesn't change who we are as a company. It doesn't change what we do.
I think it will show you that we've been conservative in our accounting practice of the past. It's interesting. I pick up a lot of companies that have restated or that have already adopted the standard, and the first thing I do is I go to the equity section, and I go, what's the cumulative effect of the change? When you stack them up, if it's negative, that means that they had a more liberal recognition method than the current standard. If it's a positive pickup, it means they had a more conservative recognition. Interestingly, of the five that I've looked at, I think four have had negative revisions, and one of them has had positive revisions in there. I can't imagine that this standard was invented because they were too concerned about conservative revenue recognition.
I think that when they put it in to conform with international standards, I think that you'll see that our revenue recognition's been a little conservative. By and large, like I said, it doesn't change who we are. It doesn't really change our cash flows. It won't change how we operate, really. I don't see us saying that, boy, we've got opportunities to do this. Let's do it. I'm not seeing where it does that much. We're not going to change how we pay our producers off that. They get paid on cash. That's something. Our debt covenants at some point will have to be recast to reflect this, but if we've already been conservative, that might help us on our debt ratio a little bit. On that, we'll see. I'm not seeing huge negative out results as a result of what we're doing today.
Just remember, we're not going to recognize 100% on day one. We'll probably have to defer some of that, a little bit like an unearned premium reserve, and we might have a little bit of a DAC. It's not a really big number for us because our producers, they get paid based on what they sell, and we recognize that at the time of the cash flows. That means the effective date of the policy. We don't have long periods of compensation that go on. Most of our contracts are annually renewable, so you don't have these long-term contracts where you've got to spread out the revenue over many, many years. Almost everything's an annual policy. A lot of our service business is basically levelize work throughout the year.
Gallagher Bassett has a claim runoff obligation if they have a customer where they agree to service for the life of the claim versus the life of the partnership. There'll be basically a deferred service obligation there that goes up on their books, but I would say it's not meaningful relative to what we've been doing now. All that can change. Anybody confused? Tax reform could change too. That's where we are in the Rev Rec. Questions? Any change in seasonality? Yeah, Kai. Thanks for the question. The question was any change in seasonality? Yep. I missed that point. Right now, we're seasonally smallest in the first quarter. Our second and third typically are a little bigger, and then our fourth is just a little bit smaller, by and large. But the first is noticeably smaller.
That will change. I think our first quarter will become our largest quarter. Significantly larger, I believe. The reason why that is, that's the benefits business, because almost everything incepts on 1/1 in the benefits space, unless you're doing public entity and that. That's going to be the big, and I would guess the other brokers will have that phenomena also, is that their first quarter will become quite large. It's in the corporate. You read in the corporate side, it's in the corporate line of corporate. We've just put it down there to implement the new systems and go through this. It's largely public accounting fees, tax consulting fees, system fees. We've been paying for it along the way. I have not adjusted it out. It's just footnoted there. All right. I guess that's it. Parting shots.
I'm very optimistic about the business, very excited going into the budget process. Think that we've got some wind at our back. We'll navigate tax reform. Then we'll have the answer in a week, hopefully, or two weeks, and we'll know. I think at this point, fingers crossed for a really good conference and a good outcome for American business. That's what I think is going to pop out on this. All right. Thanks, everybody. Thank you for those on the webcast. Grab your lunch, bring it back in if you'd like. Disconnect.