Good morning, everyone. I'm Ray Iardella, Vice President of Investor Relations, and next to me is Marsha Akin, Director of Investor Relations. We both want to extend a warm welcome to you this morning, including those of you here in New York in the room, and those who are listening via the webcast. We have a really great lineup of speakers today. The format will be about 20 minutes of prepared remarks from each one of our speakers, then we're going to open it up for Q&A. The one note that we would ask, hold all questions until we can get you a microphone for the benefit of those who are listening via the webcast. With that said, I'm going to hand it over to Marsha, who's going to run through some additional logistics and introduce our first speaker.
Thanks, Ray. Again, like Ray said, welcome to everybody here and on the webcast. Glad to have you join us on this December morning. We're going to stay pretty close to the agenda. For those of you in the room, it's in front of you. For those of you on the webcast, there's a link on our Event Details page. You'll see it there. We're going to begin with Pat Gallagher here in a few minutes, but just a few items. We are going to be staying close to the agenda, but note that at 9:30 A.M. we will be having a break. For those of you on the website, there will be silence during this time. No worries. I'll come back and announce when we're beginning. That's 9:30 A.M. We're going to stay strictly to the schedule, we'll start at that time.
You'll note, those people on the website, that our historical information is out there. We've also just posted our newest CFO commentary, dated December 13th. For those of you in the room, I've passed it out. You have it in front of you. Also, we filed that CFO commentary as an 8-K. You'll see that out there as well. Lastly, I just want to go over our legal statement that we say in every meeting. It's important to note that some of the comments made today by our executive management team may be considered forward-looking in nature and are subject to all of the laws and risks of the security laws and described in our filings within the SEC, which may actually cause results to differ materially. Having said that, I am now going to turn the meeting over to Patrick Gallagher, our Chairman and President and CEO.
Pat, the floor is yours.
Thank you, Marsha, and welcome everybody. Really pleased to have you with us today, and happy holidays to everybody as we get ready to end the year. It's amazing to me that we're coming to the end of 2016. As you get older, time goes faster and faster, and it wasn't that long ago we were having an IR meeting in Itasca and boom, we got one now in December in New York. Thank you for taking the time to join us today. As Marsha said, what I'm going to do is spend probably about 15 minutes with some prepared remarks, and then I'll go to questions and answers. I think we got a great lineup today.
We basically have all of our operating folks that are running our businesses, the individual businesses, here for you today, and I think they'll do a good job of letting you know why we're so excited about the position we're in, where we see the future going, the team of people that we have to make that future happen, and we are really in a great position. My key message is, when I look at the enterprise today, and I think back on my 43 years of working in the enterprise, I've never been as excited about the positioning that we have as I am today. If you think about our industry, there's literally limitless growth opportunities. We're a vast industry and incredibly fragmented.
When you look at Business Insurance's roster of top 100 agents and brokers just this past July, we believe there's 30,000 agents and brokers in the U.S., probably another 30,000 globally. Something on the order of 50,000 to 60,000 agencies and brokerages around the globe, trading in about $5 trillion of total premium. To be number 100 this past July, you did $25 million in total revenue. That's 100 in the U.S. Think about that. There's maybe 29,900 agents and brokers that are smaller than $25 million. This year we'll finish over $4 billion. We'll grow our enterprise over $400 million. The opportunity to continue to do that is virtually unlimited. As I look around the room, I see a lot of familiar faces.
Most of you, all of you, have heard me say this before, but what we're going to talk about today, and what I like to start off with, is what we're trying to do to grow shareholder value. There's really four things. Those four things are grow organically, do the best we can with mergers and acquisitions, get the best independent agents to join us, become more productive, and continue to increase our margin, and at the same time, increase our quality. For the first time today, you'll hear from Vishal Jain, who is our Chief Customer Service Officer. He'll talk about what we're doing globally on the whole quality front in terms of serving our clients. The fourth thing we work on every single day is to maintain a unique and differentiated culture. The culture is our secret sauce.
Let me just hit on those four things, what we're trying to do and why I'm excited about those. When it comes to organic, the first thing you got to work on is making sure you keep your clients, and our retention is nicely in the 90s, so 93%, 94%. We do a very good job at keeping clients. The second thing you got to do is get new ones. How do you get new clients? Well, as you know, we have all kinds of specialties, call them verticals if you will, niches or niches, in which our capabilities, we believe, are second to none. If you want to compete with us in higher ed, religious and not-for-profit, construction, real estate, we're going to be incredibly tough. Those niches are what drives new business in the door because we're more than a broker.
When it comes to those areas where we have deep expertise, we help people grow their business. We do an incredible effort at cross-selling. In studying our book of business, we realize we do oftentimes less than two lines of cover per client. Most clients will buy anything from eight to 12 lines of coverage. If you include the benefits, life insurance, voluntary benefits, et cetera, it can even be more than that. These are clients of ours. These are people that have already said yes to us. Tremendous opportunity to bring our fellow property casualty and benefits people together, to expand from just doing the general liability and property to doing the workers' compensation and the benefits, et cetera. Cross-selling is huge and an incredible opportunity, we're getting after it all the time.
If we hold onto the business we've got, if we push hard for new business, and we can attract that business, we'll grow organically. Interestingly enough, our data capabilities have gotten so much better over the last five years that we literally know almost everything about our book of business. We know the lines of cover we do by the clients. We know what our renewal retention rate is. We know what's happened with increases or decreases based on rates and exposures. One of the things we've learned from using salesforce.com is that 92% of the time, we compete with somebody that's smaller than we are. When you look at that and you think about that 29,900 agencies that are less than $25 million, that's who we compete with every day.
You don't need to take an account away from Marsh or Aon or Willis for the rest of our careers and still be able to grow the business. When you look at that, I believe every time we send a team out to work on a new piece of business, we should win. I really believe that. I think we've got the capabilities. I think we can do the job when it comes to doing the coverages right. We should win, but we don't. Why don't we win? We don't win because it's very hard to break the relationship. The relationship in the insurance brokerage business is very tight. People have picked somebody as a trusted advisor that they like, and to be able to split that relationship is difficult.
Now you take that 29,900 agencies in America, most of them are run by baby boomers. Many of the companies that are looking at us right now as potentially doing their insurance are run by baby boomers. The next generation, I believe, will break those relationships, and our capabilities will even be stronger when it comes to growing our business organically. When it comes to mergers and acquisitions, this is a core competence. This is something that we've been doing now, we've done over 500 acquisitions since 1986. I can tell you that when you see a press release that says that we've divested an enterprise, that will be a failed acquisition. When you see those, you should realize that we don't have those very often. Very rarely do our acquisitions fail.
That doesn't mean that every one of them is a financial home run. It doesn't mean that every single time we bring somebody on, we triple their book of business. I do believe one of the reasons our organic growth, quarter in and quarter out, we have been number 1 or 2 in organic growth against our reporting competitors for the last 10 years. I believe one of the reasons for that is that we release some pent-up opportunity when we do an acquisition. We'll buy somebody that's a little bit smaller. Average acquisition size, ex the large ones we did in 2014, is about $4 million in revenue. Very nice tuck-in returns on those, by the way, are outstanding. Those people tend to come with just the people that are handling the business, and we add an awful lot of depth to their capabilities.
I believe what ends up happening, well, in fact, I know this, these people have not had a chance to write some accounts locally that they couldn't do because of their size. When they have our capabilities, the first thing they do is call that friend that they've known for a long time and say, 'Now I can do it.' If you look at mergers and acquisitions, our competition, by and large, is private equity firms. The thing about private equity is pretty interesting. What's the competition? What does it come down to? The private equity people are selling the idea that you don't need to change. Why would you sell to Gallagher? You sell to Gallagher, you're going to change your agency system. You're probably going to be asked to take on interns. You're likely to be asked to participate in their verticals, their niche capabilities.
Why wouldn't you just sell to private equity and change nothing? Then what we'll do is we'll keep you with a little skin in the game, and we'll sell it again. You're not only going to get the first pop, you're going to get the second pop, and you don't have to change. By the way, that sells to some people in the marketplace. These private equity firms are successful at that sale. That's not who we want. If you go to Gary Levine and Ross Afsahi in San Diego, you say, "Gary, Levine & Company sold to Gallagher. You had private equity bids on the table. Why did you pick Gallagher?" Gary's going to say to you, "Because I wanted the change. Why would I sell my enterprise if I wasn't going to change anything?
I'm at the point that I can get my enterprise to, with Gallagher, I can double it," and he has. That's the secret sauce. I will tell you that well over 90% of our acquisitions are successful. That doesn't mean they're financial home runs. What it means is the entrepreneurs that built the business stay with us. They love to sell insurance. I know to all of you that are investors, that sounds creepy, but you're looking at somebody that loves to sell insurance, right? I really don't know why that happened, but it did. We find people like that who just love to be out selling insurance, so we bring them aboard. Third thing we're working on is productivity and quality.
Probably one of the greatest learnings I've had in my career is the entire centers of excellence and service centers that we've built in India, in particular. Just an incredible story of success and quality. You offshore some work, regardless of what Mr. Trump thinks of that, it actually has helped us add lots of jobs in America. You offshore some work, and you kind of do it originally thinking that what you're going to get is a bit of arbitrage on the cost of the employee. That's not the program. The program is the quality level that you get. All of a sudden, you realize that when you do this, you can enhance the quality that you're providing to your clients to a level that's measurable. I'll give you an example. I was at a Bobby Reagan conference just a year ago. I was on a panel.
Bobby Reagan is an investment banking firm specializing in our industry. I asked the crowd, there were probably 200 people in the crowd, all of them agents and brokers, "How many of you can tell me what level of quality you deliver when you're issuing certificates of insurance?" By the way, certificates of insurance are really important. If you're a contractor, if that cert's not right, you're kicked off the job. You're still paying your people, you just can't work. You have to have a very high-quality certificate in the hands of the general to get your people on the site. We issue those at 99.9% accuracy. By the way, we know that. We measure every one. We'll do 2 million certs out of India this year, and we will issue virtually 100% correctly. By the way, if the address number is wrong, that's an error.
My point to the community, to the agents community was, I said, "If any of you put your hand up and tell me that you can tell me your level of quality, I'm going to say BS. I don't buy it, because none of you are measuring it." What we've developed out of India is a series of services that have heightened our quality to a level that our E&O has been completely decreased. The reason we went to India is our E&O losses, that's our malpractice, were going up fast. They were growing faster than our revenue, faster than our headcount, faster than our earnings, and we were like, there's a big problem. The root cause of that problem is we weren't doing a good job checking our policies.
We started with that service in India, and we have broken that curve and our errors and omissions. We have increased our margin 400 basis points over the last 5 years, and in large part, that's because of the effort we've put in to productivity quality coming out of our service centers in India. Fourth, the culture. It's organic mergers, productivity, margin improvement, and now culture. I can tell you, because I have been around the world this year. I can tell you, and many of you I see in the room have been to Itasca, so you've got the feel. You've seen the fact that we're very prideful of the fact that we feel like a smaller family business, although we have 26,000 people working together around the world.
When I travel to Auckland, Sydney, Melbourne, India, London, Canada, Central and Latin America, all around the U.S., I can tell you that the culture holds together. I see that, and this is one of the things I'm really proud of. You can't legislate that, right? I can't send a memo out to the people saying, "Herewith, you will work together. Now you're going to support each other." When I'm in Auckland and I find out that the two women that are our senior public entity people in the U.S. have been to Auckland and Wellington to help us open up our public entity practice in New Zealand, it works. A hand went up saying, "We've got an opportunity on public entity business. We're good at risk management.
We don't know anything about public entity." These two people in the U.S. say, "We're on an airplane." Now we are doing extremely well in New Zealand on public sector. Same thing happened in Australia with higher ed. We've got an opportunity on a university in Perth. Is there somebody in the higher ed practice? Well, the head of our higher ed practice gets on an airplane and goes to Perth. We now have the predominant practice in Australia in higher ed. This hangs together. I had the opportunity a number of years ago to meet the head of the Gallup Poll, and it was fascinating. They were working on and felt that they had accomplished this, and he was explaining how difficult this is. They're trying to do a survey of the human race. They wanted to ask a few questions literally across the globe.
He was explaining how difficult that is, because to ask a question in London in English is different than how you would ask the question in New York. Now try to translate that to Chinese or Japanese or Russian, and you understand how difficult it is just to ask the same simple question of everybody, right? What's fascinating to me is that in 1984, my uncle wrote what we refer to as The Gallagher Way. It's 25 tenets. It's our value statement. It's what we say is how we want to run our business. Everywhere I go, everywhere around the globe, whether it's Mexico City or whether it's Santiago, Chile, or whether it's Toronto or whether it's Bristol, England, that document is hanging in the office.
It's literally exhibited everywhere across the globe, which tells me, interestingly enough, a document written in Chicago English resonates globally as a cultural statement, as a statement of values. That, I believe, is really unique. One of the things I preach to our people all the time is to remember we don't own anything. We rent our property, we buy computers. Every morning around the globe, 26,000 people decide to get up and come to work at Gallagher. We better be thankful for that because if 24,000 of them decide one afternoon, "This sucks," we don't have a company. We recognize that. We recognize that what we are basically is a network of individuals that come together to serve our clients. Couldn't be prouder of being named by the Ethisphere Institute as one of the world's most ethical companies five years in a row.
Really disappointed this past week. J.D. Power came out. We had won the J.D. Power Award the very first time that they did a survey of the highest quality of brokerages in America. We won that last year. We came in second this year, which really pisses me off. The world knows it. We didn't come in second by a lot. We came in second by a little, but nonetheless, we were second. We're focused on not having that happen again. Again, thank you for being here. Those are the four things we're committed to. Again, when I think about the enterprise and the position that we're in, start with the fact that the business is huge. Think about the capabilities that we've developed. It's interesting, 43 years ago right now, I started my career knocking on doors selling insurance.
I could not have said this then, but I can today. Any account of any size located anywhere in the world, we can do it. Focused on small business. We're going to do really, really well in small business. Vishal will talk about that. We're focused on personal lines. We go all the way up to the Fortune 1000. In every single one of those categories, we can do the job. Any account anywhere in the world of any size, we can be helpful. That's a level of capability that is just incredible. When I take a look at where we are from a perspective of up-and-coming young people, you probably all noticed that in the past quarter we made an announcement on basically three promotions. Jim Gault will become chairman of our property casualty operation, 1/1.
Tom Gallagher will continue to report to Jim and will be our president and CEO of our global property casualty operation. Michael Pesch will take over the United States. When you include myself in that reporting chain, all four of us are interns. Came through our internship program. Very unique. This past summer we had 300 kids in the internship. When I look at it globally coming up this summer, it'll probably be over 400 people that we'll be introducing to what we believe is the greatest business on the planet. Again, thank you for being here, and I'm happy to take any questions you might have. Yes. We need a mic, Marsha.
Marsha, Quentin McMillan from KBW. Pat, thanks very much for the commentary. I just wanted to ask, as you look forward to the 2017 outlook, obviously a lot of people are talking about what the Trump presidency is going to mean in terms of stimulating economic growth and inflation. What do you guys think that that's going to mean for organic growth opportunities into 2017?
If the president-elect follows through on his infrastructure plans, that will be fantastic for us. Secondly, if the Republican Party follows through on their plans to try to dismantle or change, let's put it that way, change Obamacare, I think all of you have heard me say this before, I was not in favor of the Obamacare legislation, for ACA. I didn't think it was good for the U.S. It has been a boom for Gallagher. It's been one of the greatest pieces of legislation ever to hit for us because of two things. One, it's so darn complicated, every single client needs an awful lot of consulting help, and two, it creates so much need for sophistication that our smaller competitors can't compete.
If you add that to the fact that we might get huge infrastructure spend, one of our largest vertical, our largest niche or niche is construction. We're really, really good at construction globally. We're very strong in construction in Canada, the U.K., the U.S., and Australia, New Zealand. Any place there's going to be an awful lot of infrastructure spend, I think will be great for us. By the way, a little bit of inflation helps our business as well.
Hey, Pat. Greg Peters, Raymond James.
Yeah, Greg, how are you?
One of your competitors, Aon, has announced a possibility of selling part of its HR solutions business, and I was curious, when you think about your benefits business, what are the puts and takes on you keeping your business, or what's your parallels? How should we read that as it relates to Gallagher?
We don't do any HR outsourcing, we're not in that business. We have done over the past 10-15 years, and Jim Durkin will speak about this later, but we've done, I think, a magnificent job of diversifying away from just doing health and welfare, right? We're not just a health insurance broker. We do HR consulting. We don't do a lot of HR outsourcing. We have a whole suite of things that when we talk to our clients, we don't talk about their health insurance, and that's what we're here to talk about. We're not just here to talk about what are you going to do health insurance for your clients. What we're here to talk about is how your philosophy fits around total rewards. The number 1 expense in almost every client that we deal with is their personnel expense.
They spend money on their people. The number 1 issue that most managements will talk about is the fact they need to recruit and retain their best people when you step back and don't just talk health insurance, you don't just talk life insurance or voluntary benefits, whatever, you look at the entire suite and say, "What is your philosophy around recruiting and retaining?" That's where we're good. We can plug and play in literally every feature of that, with the exception of doing a bunch of HR outsourcing. We don't do it.
Thank you. Kai Pan with Morgan Stanley. Pat, last year this time, I believe that you gave a little bit downbeat guidance for organic growth for 2016. It turned out you were wrong. The results were much better than you expected. Now, given what you know about economic outlook as well as pricing outlook, do you think 2017 will be a better year than the 2.5%-3.5% range?
Kai, if you think about where we've been over the last two years in terms of organic, it's bounced around a bit. If you remember, last year in the fourth quarter, frankly, we had just a tremendous December. I've got my legs and toes and fingers all crossed that we're going to do that again this year. That was almost 5% organic in the fourth quarter last year. We did almost 5% organic in the first quarter. Then we dropped all the way to 2%. Then we came back to 3.5%. It bounces around a bit. What I think about for '17, it seems to me we should have pretty much more of the same. We should take into '17 the momentum that we have in '16.
I would hope that we would do as well as we did last year in the fourth and the first quarter. I think it probably feels more like how we did in the third quarter this year. Let me give you my personal philosophy around that. I'm proud of the fact that virtually every quarter, we tend to be number one in organic growth. Again, I think a lot of it comes from these small acquisitions that are opening up to new opportunities, the Levines in San Diego, et cetera. Having said that, the fact that I'm proud of it, I believe we should do better. I believe that literally 99% of the time when we go out to sell an account, we should write it. We don't. Okay? Again, it's the relationship thing. It's hard to break. I know we have the capabilities.
By the way, I've been in dozens and dozens of presentations over the last few years. I will tell you, I'm kind of blown away. We're good. We're really good. I've been in energy presentations, I've been in construction presentations, higher ed presentations, medical malpractice, directors and officers, benefits. We put a team on the field that is really good. I'm flogging the organization to do even better.
Elyse Greenspan, Wells Fargo. Sorry, two questions. First, in terms of the organic outlook, how do you see some of your international businesses? I guess it's still maybe an improvement there and stable in the U.S., or how do you see the components geographically for 2017?
Well, our emerging markets business. The question was, how do I see the outlook geographically for organic growth? Is that right? When you take a look at the economies that we're in that are emerging economies, Latin America in particular, those economies are growing at a little bit higher clip, and we're smaller there. My hope is that we would have a little bit better organic in those areas. When you go to New Zealand, we have a very large market share of the New Zealand market already. Nonetheless, we've got some pretty solid organic growth there. In Australia, I think we have opportunities to improve. We were a little negative. We knew this when we bought the firm in Australia. We knew this. We had a bit of negative organic, and we're now to about flat there.
I would like to see us break into the positive territory there. We've been very strong in organic in the U.K. I think that should continue. I think that we'll see strong organic in Canada. As I said a minute ago, I think the United States will be kind of more the same in 2017 as to what we saw in 2016.
Perfect. Thank you. Then you made a comment in terms of acquisitions and competing against private equity. As we think about a higher interest rate environment, what level do you think we potentially need to get to before maybe private equity interest in the brokerage group does wane, or do you not see that on the horizon? Just how do you think about that in terms of the M&A pipeline for Gallagher?
Okay, if you go back in my history, the competition for the brokerage space 20 years ago was the banks. I find it kind of analogous to that. I used to sit with people and say, "Look, if you want the absolute top dollar going in for your business, the banks 20 years ago were the ones who paid." I said, "What I'll do is I'll write you a letter that says, 'I really want to buy your business.' Then don't even talk to me anymore. Take that letter, give it to the bank, get the most money, and go." We had people that did that. It's fine. Just don't waste my time. Private equity buys firms in our space and levers them up, in some instances, seven, eight, and nine times EBITDA. That's a gutsy move. I give them credit.
A number of them have been very successful. It's attracted all this attention because they've been successful. I wouldn't sleep at nine times EBITDA in debt. If interest rates start to move, if some of these roll-ups don't get the 10, 12, 13 times EBITDA that they're planning on getting when they finally sell them, because I will tell you, I'm not buying them. I'd rather do my own selection of small businesses than have you select them and then try to sell them to me at a higher multiple than you paid. That doesn't make a lot of sense to me. I got plenty of opportunities to buy them without having to buy your roll-up. When I look at that, I think, it's like anything. Markets come and markets go. We're in this business strategically for the next 100 years.
They're in this business to flip the thing in three to five years, maybe seven. At some point, we all know that when you play musical chairs, someone doesn't get to sit down.
Thanks. Jay Cohen, Bank of America, Merrill Lynch. Two questions, Pat. First is, you have, I think, a pretty good glimpse into what the U.S. economy, maybe even other parts of the world, but certainly the U.S. economy is doing right now. What are you seeing out there based on interactions with your clients? Secondly, just give us an update on what you're seeing from a pricing standpoint as well.
This is interesting. Good question. First of all, I would say that in the second and third quarter this year, the economy slowed down a bit, maybe a touch even the first. We're a proxy for that in a lot of ways. Our clients' exposure units, if you take a look at our revenue, we know that rate and exposure took just a bit less than 1% off our revenue for the first three quarters. We didn't get a bounce from a lot of economic activity, right? We also are a proxy for that, and Scott will talk about this later, is when you take a look at our claim counts at Gallagher Bassett. If claim counts are going up 2.5%, 3%, 3.5%, that's a result of putting more shifts on and having more people working.
Didn't see that in the first and second quarters or the third quarter. When it comes to rate, here's what I will tell you. Anecdotally, as I travel the globe, everybody tells me the market's softening and softening substantially. Having said that, when I take a look at what's actually happening, I know that rate and exposure has taken less than 1% off my revenue. When you find that catastrophe-exposed property is decreasing 12%-15%, but then you turn around and look at transportation, oh, what are you talking about? As I've said for years, what I believe has happened is that the macro cycles are out of our business. You're going to have cycles within coverage areas. D&O is soft. Medical malpractice is soft. Transportation is hard. These tend, in my opinion, to kind of even themselves out.
When I'm in an office, I'm going to hear the anecdotal story that, my God, we had this great account. The premium was $500,000, and this year they got it for $350,000. That's a true story. What I'm not hearing is the one that went up 7%. It needed to go up 7%, the carrier wanted 7%, the client knew it needed to be 7%, and it's up 7%. There's a bit of an offset there. As I continue to watch every single quarter, every single month, what's happening with rate and exposure, it's holding very tightly around that 1%. To me, that's good for our clients. There is nothing good for our clients around a hard market.
2001 was our last hard market, and all it does is piss everybody off and sets you up for all kinds of competition the minute the market starts to soften, and then you got a soft market that goes on for 10 years, and everybody's just banging it, banging it, banging it, and then they get jacked again. I think we're done with that. I think you're going to see these mini cycles because people know what the pricing needs to be. When you think about it, that's been holding now for about seven or eight years. It's been pretty stable market, which is good for clients.
Time for one more quick question.
Mark Hughes, SunTrust. Excuse me. If the Affordable Care Act is repealed, is that bad or good?
Oh, no, it's great.
The repeal is great.
Yeah. All change is good for Gallagher, right? It confuses our clients. You're going along, by the way, they change the rules every quarter. We've got 30 people in our compliance department, 23 of them are lawyers, and we're running a law firm around compliance. Those people are going out basically as fee-for-service people every single day. The reason is that this thing is really complicated. If they repeal part of it, all it really is the same act with a lot of changes, right? If they repeal the whole thing and we go all the way back to what we had five years ago, clients are going to be totally confused. Do I have to keep my 26-year-olds or not? Now, Trump is saying, 'I like that part of the rule. I like not having pre-existing conditions.' Well, what's repeal?
What isn't repeal? Where do we stand on this whole thing? Frankly, the more confusing the landscape is around healthcare and what our clients need to do, the better for Gallagher's business. By the way, I don't want to sound anti-client. We're pro-client. That's what we're doing every day is helping them understand the landscape. It's difficult. I can understand the fact I spend a ton of time on this for our own company. If you take the amount of time I spend on our property casualty renewals, it's 15 minutes a year. I can't tell you what my work comp deductible is. I'm telling you, I'm spending hours a quarter on health insurance and what we're doing for employee benefits. It's complicated. Anyway, thanks very much, everybody, for being here. I really appreciate the opportunity, and I think you're going to have a great morning. Thanks for your questions.
Thanks, Pat. Next up, we have Jim Gault, who is our new chairman of our global property and casualty brokerage operations. Jim, the floor is yours.
Thanks, Marsha. Good morning, everybody. You just got a window into our once-a-quarter board meetings, where there is a section where Pat wants all the heads of the divisions to give the board members an update on the business. He always throws the ball to me first. Being a property casualty guy, he starts out, and he basically gives my report. Half the time, when he is done, I look at the board of directors, and they look at me for this big, long, flowing report, and I will go, 'Well, he covered everything. Any questions?' He did cover a lot. I have my little notes here, I am going to try to avoid being duplicative on some of the things he said, but I probably will touch on a couple of them here and there.
As a P&C guy, which is how he grew up in the business and what I am, it is in his blood, he knows the business very well, as you can tell. It was mentioned that on December 1st, a message went out to the field, a press release. I have moved to the position of Chairman of Brokerage Services. Brokerage Services is property casualty insurance worldwide, and it is the U.S. and basically the rest of the world, right? For the last four or five years, I have been concentrating on the U.S., and Tom Gallagher has been concentrating on helping build out our international platform. Tom has been reporting to me. Tom did a terrific job in the U.S., building a really powerhouse region in the Midwest. That is one reason why we wanted him to help us build out the international side.
Tom has done a great job there, it was time for me to move up and let Tom take the position and continue to lead the franchise. Pat also mentioned that Mike Pesch, who came out of our internship program, has moved up as well. He was leading the Midwest region. Mike is in his mid to late 40s. He is a really sharp guy, MBA from Northwestern. His entire career has been with us, and he is going to do a terrific job as well. Let me split like we always do here. I will take the U.S., and I will turn it over to Tom in a minute when I am done, and Tom can take you through the international side of the business. Together, Brokerage Services, however, is more than half of the company. Probably 52%-53% of the revenues come from property casualty business.
The U.S. is about 26% of that. We place about $8 billion of premium through the U.S. market, and we are a middle market broker. I know our risk management guys, we do a lot of risk management business. We do a lot of bits and pieces and big chunks of Fortune 100, Fortune 500 companies, but there is only 500 of them, right? If you think of it, and we have talked about this in the past, if you think about the commercial insurance marketplace, it is like a pyramid. You have got the biggest accounts up here, very few of them, you get all the way down to the nail salons and drugstores and barbershops down here, thousands and thousands. You have got this big pyramid, right? Where we play is right solid in the middle market there. That is really where we are really good.
That's where our client count comes in for the most part. That's where we drive most of our profits and revenues from. We do have a lot of the small business, and I'll talk about that in a second in terms of what we're trying to do with that to get more efficient and grow it. Really, our sweet spot is the middle market. We do six things. Number 1, we help clients assess what their risk exposures are from a property casualty standpoint. We help them design a program that fits their needs. We then will market that with the carriers that we think match up with the type of risks that our clients or prospects have. We will then place it if we're successful in getting the order, and then we will service it. If the client has any losses, we're an advocate for them.
The cycle repeats itself because every year, we renew accounts the same way. You put the information back together again. You design it. There may be some changes. You may add something. You may change something. The cycle continues to repeat itself. It's those six things we do every day. Think of it in terms of your own homeowners. Everybody here, I'm sure, has a renters policy or homeowners policy, right? If you've got a house, you're insuring that for fire. Your mortgage company will make you carry insurance on the property, right? You need property insurance for your first party, the buildings and contents and property, and then you'll have liability in case someone gets injured on your property. You've got automobile. The commercial insurance business is just the same, really.
If you're talking about factories that have buildings and contents, you've got time element for business interruption. You've got liability for not just slips and falls, but for product liability and third party liability that companies could be held responsible for. You've got workers' compensation. You've got automobile. It's just on a larger scale from what you would purchase, if you think about it, as analogous to your own homeowners insurance. We get paid four ways. Predominantly, we get paid commissions on insurance on the policies that we place. They'll vary. They'll vary upon the carrier, the coverage, and they could vary because our own people may negotiate something different, and I'll touch on that a little bit later. Secondly, we get paid on fees. Now, we disclose everything. We disclose every dollar we make to our clients. It's their choice.
75% or so of what we earn in the U.S. from a revenue basis is commission-based. Our clients really, when you disclose what we're making on a commission base, it's not a big deal. We have 25% of our clients that will say, "No, we want you on a fee." We'll go on a fee. We'll negotiate that fee based upon the services that we provide. We'll talk about that fee every year. It's a negotiated fee that we think is fair based upon what we provide and what they think we do for them. The third thing is we get supplemental income. Supplemental income is a percent or two. It varies upon some of the carriers. Not all carriers pay supplemental, but it's an additional point that's paid basically to the profit center for the business that's placed with that insurance carrier.
The fourth part is contingent income. That's based upon the profitability of how certain lines perform. Not every insurance carrier has a contingent plan with us, and they all will vary, and not every line goes into it. Some lines are not that profitable, so you won't get a contingent. Others are very profitable. There's business they're looking for, so they'll want to see if they can drive more business through us and pay us a contingent. We disclose that as well. In the USA, we've got about 175 locations. We finished last year with about 4,200, 4,300 employees. Our organic growth has been, the last couple of years, pretty consistent. It's been the low to mid-single digits. It's interesting. Pat kind of touched on this. We have regions.
We had six regions, now we have what we call our Small Business and Affinity Region, which again, I'll talk about later. We have these regions that are throughout the U.S., Northeast, Southeast, Midwest, South Central, West Coast. Those regions will vary at any time, depending upon the economic conditions, what kind of wind is behind the sail in terms of what's going on in that particular part of the country. For example, the West Coast has been performing very well the last couple of years. It's the Sun Belt. It's a desirable place to be. There's a lot of activity out there. You get to the South Central, that tends to go with the energy markets. Right now, the energy markets aren't doing quite as well as they would. I think in Texas, 70% of all businesses are somehow affected by what happens in energy.
If it's booming in Texas, you'll see our South Central region be a leader in new business and growth, and if the energy markets drop off a little bit, you'll see that they're not leading like they could or have in the past. They're pistons that are up and down, it all comes together somewhere between the low to mid-single digits in organic growth. Our margin is in the mid to high teens. I like it where it is. Where we play in that middle market in the triangle right here, if we start driving that much higher, we will not be able to invest in the type of services that that middle market needs. We really like where it is. By the way, we've come a long way.
Only four or five years ago, we were in the high teens, low 20s, we made a concerted effort to get better at everything we do, Pat touched on a lot of that. The quality, the reorganization we've done in the backroom to drive out inefficiencies, going on one platform, driving out E&O costs, being really cognizant and diligent about every dime we spend has paid off in terms of improving our margin. I'll go through those four parts that Pat touched on, hopefully a little bit more granular in terms of organic growth, our M&A or external growth, productivity, I'll make a couple of comments about our differentiation. On the organic side, our new business is running, again, up and down pistons. It depends on what region of the country. It can be 10% of trailing revenues. It can be 15%.
It depends on, for example, out here just recently, we've hit a lot of really good life science businesses up in Boston. A lot of good sales up here. On the West Coast, we've had another good year out there for new business. It all depends. Some up and down, it depends on what's going on in terms of certain niches, what's going on in certain geographies. It's a combination of all things, but it's between 10%-15%, averaging in the low double digits. On the renewal side, on our book of business that we have, we tend to run somewhere between the low 90s-mid-90s in terms of renewal retention, and that's dollars and cents. That's not client count. Again, it all depends.
You could have a region that's had just a terrific year in renewing a lot of business, and they'll be at 95%. You have one that's at 90, 91 or 92, and it doesn't take much to look into. You find out that they might have lost an account or two, a big account. That could move the needle in one region down a point or so. Together, we're in the low 90s-mid-90s, which is really pretty strong. Our platform is, Pat touched on this, the niche platform. 80%-90% of what we do is driven through expertise and our niche practice groups, whether they be industry groups or product groups. We've got 20 to, depends on how you count them, 20-24, 25 of them that are organized across the nation with leaders who help drive the business. We track that business.
For example, construction is doing very well this year. Higher ed is doing very well. Public entity is doing very well. We tend to every year see which groups are doing well. I mentioned life science. Life science is doing quite well. It's a smaller base, but it continues to grow very well. The niches that we have, again, are 80% of our business. I mentioned the small business, what we're doing there. What we've done over the last couple of years is extract most of the small business, not all of it, but most of the small business, small accounts, out of the regions, and we now have a national region called the Small Business and Affinity Region. We got in the affinity business a couple of years ago. That has been a home run for us.
We were not in the affinity business, and we had an opportunity to hire a guy by the name of Kevin Garvin, who understood that business quite well. We've done a series of acquisitions and are building out that platform. Affinity is growing at double digits. It's doing quite well. Well, a lot of those things that help Affinity get efficient and grow, we think we can move over to the small business platform and get that to grow better. Our small business tends to shrink a little bit more than the regular middle market business. You're talking about small little startups that tend to sometimes do well, some don't do so well. That business doesn't have quite the strong retention rate that the main middle market business does. We still write a lot of it.
The fact is it just doesn't grow the way it should. We think we can take the platform and the efficiencies of Affinity, we can marry that with the small business, we can grow it better. We've got one of our really sharp guys, Jay Eshelman, who is leading this charge now, and we're really excited about that. In terms of organic growth, we have a playbook, I've talked about that here before. We put together the things that we want our branch managers to do to drive the business. We want them to spend 75% of their time trying to grow the business, trying to grow the top line through selling, servicing, coaching, using some of the products and services that we have, some of the initiatives. Let me touch on those initiatives.
We have what we call Gallagher Advantage. Gallagher Advantage is a couple of panels. We didn't invent this. Other competitors have done this, we think we're pretty good at it now. Advantage panels are excess liability, professional liability for the middle market, we're building out some other ones, builders risk and boiler and machinery, we're building them out for some of our niche practice groups. These two, excess liability and management liability, are both well established, we've been running those for the last couple of years. It's very simple. You go to four or five insurance carriers that like middle market D&O professional liability and umbrella liability, and you say to them, 'Look it, we want a better form. We want competitive pricing.
If you will do that for us, we will then give you an opportunity to look at this business when it's open for renewal and when it comes up for renewal.' We have been able to place more business through these panels. The clients get a better product. It's going to be competitively priced. It's going to have a better form. The insurance carriers, it's much more efficient for them. By the way, our business is very inefficient, particularly when it comes to how business is transacted with insurance carriers. What this does is it really cuts down on the inefficiencies of quoting and quoting and quoting and finally hitting on one of every four or five, basically.
It gives them a much more efficient way to get business that they like, they pay us an extra point or two to manage the whole process. Everybody wins. The client wins, the carrier wins, we win. Pat talked about this, our data. Our data is much better than it's ever been. We went on one agency platform about three or four years ago, now it gives us information that we never had before. We know exactly what we're getting paid on every placement that we have. We know if there's a particular individual or an office that doesn't get enough commission based upon what the schedule is. Now, there's always a lot of good reasons for that.
Many times, the insurance carrier or the salesperson needs to negotiate a different commission level to get a coverage placed or for whatever reason it needs to be done, it makes sense. Over time, sometimes it doesn't need to be renewed at that reduced commission rate. We're driving some really good results in terms of getting fairly paid across the board on our commission rates. We also have what we call white space project, and Pat mentioned that before. He didn't call it that, but he said we place 2-4 policies on average on just about every client. That's true, where our clients, the average middle market client, could buy upwards of 8-10. That means that there's either a competitor on those other coverages or they don't even perhaps purchase them.
We're working with our production staff to take a look at each client and say, 'Look it, here's what this client buys from us. We know what this particular client should be buying based upon the book of business. Who is selling this, or are they actually buying this? We should have a discussion with them on that.' We're getting some real good traction on white space. We talked about cross-sell. We're trying to help our benefits business with our P&C business and back and forth. There's a huge opportunity there. I think only 10%-15% of our accounts utilize Gallagher Benefit Services and vice versa. There's a ton of gold in the hills where we already have a relationship, and every year we continue to drive the results better and better. We've been on this for about five years.
We still have a long way to go. Another initiative we have is called Smart Market. Smart Market, this kind of got misconstrued, I think, a little bit in the last meeting, let me be real clear on what Smart Market is. Smart Market is we're selling renewal data to insurance carriers that want to see what matches their appetite. It's very similar in some ways to the Gallagher Advantage platform that I talked about. We have about 7 or 8 insurance carriers that want a window into what our renewal, and by the way, our new business is. They'll get limited information based upon what we're working on. If it matches the type of SIC codes or geographic spread or whatever the business is, if it matches what they like and they know is a good profitable line or type of risk for them, they'll tag it.
Then we go to the production staff or the producer and say, "Hey, if you're going to remarket this, have you thought about XYZ insurance carrier? They really want to take a look at this." Now, again, I go back to the inefficiencies of our business. This is really good for the insurance carriers because what happens is, we work on a lot of new business, and probably 1 out of every 4 or 5 risks that we take to market on a new piece of business, we actually close. There's another 3 or 4 that churn and churn, and the carriers see much more than that. They'll get tons of submissions from all kinds of brokers, right? They've got to go through these stacks and stacks and stacks and decide what they're going to work on and not.
We have been able to do that with those that have been on this platform longer, you can cut that down and actually improve the actual success rate, which in the case of some of it's gone up like 20%, 30%, 40%. All of a sudden it makes a lot of sense for the carrier. It makes a lot of sense for the insurer because you're matching them up with a carrier that likes that business. It really is a good deal for the insurance carriers. It's a good deal for the clients because they get matched up better, it's a good deal for us because it ends up, we get paid a little bit for giving them the data and managing the process, but it's more efficient for us as well. It's a win-win-win.
Pat already talked about rates, first party rates. Property rates are going down a little bit, not by a free fall. There's a little bit of pressure on those, on rates down. Casualty, workers' comp, flattish, maybe a little bit down. Professional liability, flattish, maybe a little bit down. Auto liability is going up a little bit. Altogether, it's kind of a flattish down little bit, but it's nothing that we can't manage our way through. It's not unlike past soft markets where you renew an account at 10% or 20% less than what you had the year before. Oh, man, I better wind this up pretty quick. Yeah. He talked about acquisitions. We've done 14 this year, anywhere from $700,000 in annualized revenue to $12 million. We still have a long pipeline and list.
There's a lot of great reasons why people want to join us, expertise, our team, reputation, the volume that we have with insurance carriers, helping them hire new people. One of the things, I was on an acquisition opportunity last week, we were going through all these, the principal said to me, "That sounds great. Is there anything else that you can think of?" I said, "You know what? Yeah, there is one." I said, "When you go through an acquisition, it's a lot of upheaval for your employees." I said, "A lot of anxiety is built up. When you join us, it's the end of the line." In other words, we're not buying somebody only to flip them again or to be bought out by another competitor. We want to integrate them and make them part of our team.
If you go in other paths, you may end up in a spot that you may not want to end up in. If you come to us and help us build our enterprise, it's the last stop along the way. That resonates with people that say, 'I love my team. I don't want the anxiety. I want to put them in a home where they feel comfortable, and they can build a career.' It's a different message than some of our competitors have. Anyway, I'm excited about my new role. I'm the luckiest guy that's ever been in this business. Pat and I started together 43 years ago. Pat's uncle and dad told us of a dream when we started in 1974 full time, that this little $3 million agency was going to be a billion dollars someday, we laughed, right?
His dad and his uncle promised us that if we could help build this thing, they'd turn the keys over to us, and they did. I've had a terrific opportunity to be part of this, and I still want to be part of it. I feel it's time to turn the keys over to the next generation and give them the same support and help to build the business that Bob and John did for Pat and me. That's my prepared remarks. I'm sorry I got carried away there. I'll take any questions you have. Yeah.
Questions? Okay.
Hi, Charles Sebaski at BMO. If I heard you right about the margins today in the high to mid-teens.
No, I didn't say margins high in the mid-teens.
In the 20s.
Yes. It's in the mid to high 20s.
Mid to high 20. Okay. I'm curious on what the pressures are, or are there any, on competition for people. You talk about the intern program you have and growing the business from acquisition, but I'm thinking about on the lateral side, on maintaining margins and the competitive environment where people pressure the cost of doing.
It's a war for talent. It's an absolute war for talent. There are a lot of great people in our business, and if you don't recognize that and take care of them and give them a career path, promote them, give them the honors and awards that they're due, you're going to lose them. We spend a lot of time going through who the real talent is, both on a production side, those that choose to make that their career, and those who want to get into leadership roles. We do a really, really good job of identifying who those people are that we think are going to help us continue to build the franchise, because there's a war out there. We don't want to lose a good person.
Yeah. James Naklicki with Citi. You gave us some numbers around, I believe, the new business growth. You talked about 10%-15%. It's my understanding that you're at the lower end of that right now. If GDP picks up, and let's say doubles under a new administration, where do you see that going? Could we go to the high end of that?
I would hope so. What I was saying was that new business as a percent of trailing revenues runs anywhere, depends on what area of the country, what region, from low single digits to the mid-teens, right? Some regions are going to be at 14%-15%. Some are going to be at 9%-10%. Together, new business is averaging in the low double digits. Right? Yes, if the economy picks up, if expansion takes, if our clients are growing, their exposures are growing, they're hiring more people, that increases exposure to loss. It gives us a lot more to do in terms of helping them manage the expansion. Yeah, it should help our business.
Thanks. Ronald Bobman. I had a couple of questions. The newer service you're offering carriers where they identify an SIC code, for example, and I guess in a certain geography.
Smart Market.
Smart Market. Thanks. Are you revealing the name of-
No
the actual insured?
No.
Okay.
No.
Are you charging for that?
Yes.
Is that a revenue pickup?
We sign up insurance carriers to have a window into it, they'll get a series of offices. We don't just throw a bunch of data at them. We actually give them the data that they need to look at to decide whether or not this meets their appetite. Then we actually have a Liazon that works with our branch and with the market to try to see if we can work this through the system. Not everything that gets tagged, the carrier gets a look at because they'll say, "Look, I got a big loss with the current carrier. We're not going to move it." There's a lot of good reasons.
If there's any opportunity to say, "Hey, have you ever thought about this carrier?" By the way, we've had a number of successes where a production person has stood up in a production meeting and said, "My God, I'd have never thought of XYZ company." They tagged it. I took a look at it and showed it to them, and they killed it. They did a great job. I would have never thought of them.
I had a question relating to sort of new Chubb and the initiative, the early days of an initiative to focus on sort of the middle market. I'm wondering if you were to fast forward three plus years from now, what impact do you think that will have on the competitive dynamic of the middle market, that new Chubb will have on the competitive environment?
Well.
Thanks
I think the new Chubb, in a couple of years, could have a big impact. ACE and Chubb together kind of complemented each other very well in terms of what was some of Chubb's strengths weren't necessarily ACE's, and vice versa. They're smart people, and I have a lot of respect for those guys. I think that it's very likely they'll be a big force. They already are. I think that it's going to be good. I do. I think they'll be good at what they do.
One last question.
Yeah.
On Smart Market, if I'm an insurance company, I guess I would feel as if I don't sign up for this, I'm not seeing certain business ahead of time. I'm at a disadvantage if I don't sign up for Smart Market. At the same time, other brokers are doing this too.
Aon, Marsh.
Right.
All of a sudden, I've got to pay all these guys just to see business, which is eating into my margin. At the end of the day, am I happy about these developments?
Well, the carriers that are doing it are because they're upping again. Some will just say, "We're not going to participate in that platform." We presented it to all of our tier 1 carriers, the ones that have the biggest volume. We're talking to our tier 2. If you look at the number of Smart Market carriers and the number of branches that we have, there are still all types of opportunity in the Gallagher book. We'll sign up a carrier, and they'll look at 15 offices. Well, as I said, we have 175, there's a lot more opportunity for others to participate if they choose to. Some do, some don't. Some say, "Look, we know how much we're going to pay a broker for everything that happens, right? We're already there. We're not going to pay for that." Okay, that's fine.
We want to offer it to as many as we possibly can, and by the way, manage it properly. We don't want to just do this and then say, "Okay, well, here's the list. Now you go figure it out." We've actually set up a managed process to follow through on the commitment that we've made, that we're going to talk to the producer to make sure that this is a bona fide opportunity. If it's not, we're going to tell you why. I don't think some of the other platforms do that.
Okay, thanks, Jim.
Okay. Thanks, everybody.
All right. Up next is Thomas J. Gallagher, who is the President of our global property and casualty brokerage operations. Having said that, Tom, the floor is yours.
Today our business around the world is about a $1.2 billion business. You'll remember 2011 we did Heath Lambert. It's a retail and specialty business in the U.K. 2013 we did Giles Group. It's an SME and affinity play in the U.K. 2014 we did Oval Group. It's an SME and commercial middle market retail broker in the U.K. We then moved off to Canada and did Noraxis. It's a specialty middle market broker in almost all jurisdictions in Canada, and we closed out the year with the Wesfarmers acquisition. It's already been three years since we did the Giles Group acquisition. We're coming up on three years in Noraxis and on Wesfarmers and on Oval Group. The best thing I can tell you is that there's been no surprises. These are people who wake up every day and do exactly what we're doing in the U.S.
They're trying to take care of their customers. These are agencies that were small town agencies that came together in roll-ups generally with their customers trying to take care of business day after day. Many of these principals still work with us today around the country that they're in. I will also tell you that the most important thing, we talk about it all the time, is that they're proud to put on a Gallagher jersey. They're very proud of it because as we had one of our merger partners in the U.K. say that they've never moved a position from one company to another and have had seven different jerseys on.
That they're with Gallagher, they know this is home, that they can build a career, that their teammates can have a career, that they can continue to take their business forward in the best interest of their customers. When you look around the world, what do we look like? About $350 million in the U.K. in the retail business, $250 million in the specialty business. Australia and New Zealand, about $300 million. Canada, about $135 million. There are ancillary places around the world we have it. Pat talked about emerging markets in South America. We see tremendous opportunity there over time. I'll limit my remarks today largely to our large geographical footprints and talk about the opportunity that we have inside of each of those places. Jim Gault talked about the $8 billion of premium that we have in throughput around the world.
We've got more than 7,000 employees outside the U.S. and about $7 billion for premium throughput. We do the exact same thing that we're doing in the U.S. Pat talked about it. Jim talked about it. We talk about doing organic growth. We talk about acquired growth. We talk about operational excellence and efficiency, then how do we drive the culture? We look around our business, it's always about organic growth. For me, organic growth is a number of things, but there are three or four core components of it. It all starts with retention. We talk about retention in the low nineties right now. How do we find a way to improve retention all the time? How do we make certain that we've got great customer satisfaction? It's a focus of our attention around the world. Feet on the street, boots, people who are accountable.
Somebody asked a question about there's fierce competition for people. There are inside of the industry, but we're not looking for people necessarily that have a book of business because it feels really good one day, then when it comes through the system, you can't grow off of it. We're looking for people who wake up every day and want to hunt. Where do you find that? We talk about our internship program. It's a sales program in an internship program. We also go beyond our industry to people who really are professional salespeople. It's a heck of a lot easier to teach somebody insurance than it is to teach them to sell. You either have it in your core or you don't. So we measure it all the time. Third thing we do is we are actively pursuing teams, not to say that we don't.
We've been very successful at pulling teams into the company this year, particularly in the London marketplace, Australia, New Zealand, even in Canada. It's been a great year for team recruiting. Organic growth is also about specialization for us. If you think about all of these little businesses that have come together for us around the world, they didn't have niches. If I'm sitting in London, I call them niches. If I'm sitting there with these people as I go out and I travel all the offices, and I've been to most of them, they're incredibly excited about the opportunity to find expertise. We use Salesforce very effectively around the world today, just in one phase of it in Chatter, where a person sitting in a remote office in Scotland can be communicating with somebody in Australia about their skill and their expertise.
Give you a great example of it. We've got a guy, Sevenoaks in London. He runs transportation for us. He's one of the world's best transportation people when it comes to buses. This year already, written a big account in the U.S. and two in Singapore with our team. One guy because he's that good. He's working on another account in the U.S. we hope to close in the next quarter. If we can pull that leverage, if we can pull our teammates from around the world to constantly be thinking about what we can do. We picked up, you've never heard of it, or most of you haven't, netball. The entire netball system in the U.K., because one person was able to tap into all kinds of resources of people that did sport in the U.K.
If we can continue to harness this year after year, where we build businesses where everybody's excited about working together, the opportunities are endless. We also talk about product. Product is so important for our teammates. When you're in a small office and you've got a local area that you're concentrating on, if you can deliver product to these people, it's a great differentiator. Cyber liability, unique product offering. Doesn't matter whether you're in Australia, you're in the U.K., or you're in Canada. If we've got unique cyber liability product offering that these people can go on out and sell, we've got a pen and a program for them, it's terrific. We're constantly trying to develop product. Constantly trying to develop product. Huge part of what we're going to be continuing to do around the world. Let's move on to organic growth.
When we look at organic growth. Excuse me. Acquired growth. Look at acquired growth. Pat talked about it, the 30,000 agencies in the U.S. and a similar amount of agencies around the world. We get hit every single day by agencies wanting to sell to us. Every single day, all over the world. There are places we're interested in being in and places that we're not. The key for us right now is how do we do great bolt-on acquisitions for us in places where we're already established? How can we do acquisitions that help build our organization and build muscle into all these places? In the U.K. alone, we have an active list of agencies that we prospect. Canada. We haven't done acquisitions in the U.K. for a couple of years for the basis of pulling these acquisitions together and really getting them to work effectively together.
That'll change. We'll be back in the business. The board of directors for our team in the U.K. will determine when that is, and once we're ready to do it, we just continue to move ourselves forward. Canada. We're constantly looking at small acquisitions, either to expand where we are or to actually come into one of the offices that we have. Australia and New Zealand, same thing. Pat alluded to the fact that we are a huge presence in New Zealand. It's hard to drive huge organic growth there. There are still, even though we've got such a presence, there's still hundreds of agencies in New Zealand that we can actively pursue from a merger strategy. Why do they choose us? They choose us because, as Pat alluded to, Jim talked about it, we're not private equity. We're not a rollup.
I know exactly what they do, because I've done it my whole life. I wake up every day and I know what these people have done. You're thinking about a small market broker. Can everybody else talk about that with them? They talk about the joys of being a broker, about the difficulty that they have, about the markets that they have, the opportunities that we can bring to them. We are a unique offering, and people actually understand that. We see tremendous opportunity for us in our established markets, as well as continuing to expand slowly and carefully around the world. Operational efficiency. I'm going to touch upon it briefly, but we've got Vishal Jain with us this morning. Vishal talks about all the things from a level that's completely different than anybody else. Let me just isolate a couple of items. First, operational efficiency.
U.K., many, many, many different platforms that were being used, all the way down to 96% of our retail business today is actually on one platform functioning. By the time we finish 2017, it'll be up from there. Not all of it will come in 2017, but 96% of it is done. Canada. We pulled everybody onto Epic in Canada. That's virtually done at this point in time. New Zealand went through an agency system change a year ago. We're actually taking our Australian business and putting them on the same platform. If we can get all of these teams operating effectively together on individual platforms, think about the opportunity for us to drive better behavior, better operations, better systems. Then you bring in the Gallagher Service Center. You see the opportunities there for our teams to get even better. Great story. U.K.
We've been now with these retail business for the last three years. We're working very hard at trying to get them to understand that the retail support that they can get from our service center is not a threat but an opportunity. We've actually sent a number of people from our retail offices to India to see what it is that we're doing. They've come back as huge advocates for what we're trying to accomplish. They've come back believing that the opportunity for them is tremendous. If you use a paperless society, you know every document you need to index, so it goes to the right place in a file so that you can find it. They nicknamed this one process that we have the magic mailbox. Because you put it in the mailbox, and it winds up going to your account in the right place.
They love it. It saves them time on every single transaction. If we can get that advocacy throughout the U.K., and we will, because of the work the team does, we will completely upend everything that they're doing. The margins we talk about, margins that we strive for are, without question, achievable for all of our businesses around the world because of what we're doing in the Gallagher Service Center. Finally, the culture. Culture is so important. I hear it all the time. Maybe you don't hear it in London because they're all a bunch of cynics, but when you get outside of London, when you get into remote places in New Zealand, I don't know if you've ever heard of Invercargill. Okay, that is the end of the earth.
When I'm down there and I'm talking about being Gallagher and want them to feel as part of this family, they get it. When I'm in Darwin, Australia, when I'm up in nowhere, Canada or Scotland, they get the opportunity and the power of being part of an organization that really understands what they do, that comes from where they came. Culture is incredibly important. Pat talks about having the Gallagher Way show up all over the place, it shows up all over the place, not just because we're walking in the office, but because it resonates. It truly resonates for all these people around the world.
While I've been incredibly blessed to have a great career inside the organization, Pat and Jim have asked me to come on up and do more in the U.S., I can't tell you how excited I am about it because what we're doing right now is really building one global broker. I've had the opportunity to work with Mike Pesch for the last 15 years, and he's absolutely outstanding, and I'm incredibly excited to be able to work with him again in the future. That's my remarks. Any questions? Yeah.
Bob Glasspiegel from Janney. Congratulations, Tom-
Hey, Bob.
On your promotion. It seems like the outlook for the U.K., which Pat said was strong, is a little bit better than it was a year ago. In light of Brexit and all the confusion, there's been sort of no mention that there may be future hiccups there. Do you think concerns about Brexit to the economy are overblown? What's your perspective from-
I-
Having spent time there on what's going to happen in the U.K. from a macro perspective and then for Gallagher specifically?
I'm not an economist. I will tell you, as I travel around the country, there's more industrial output happening around that country today than there was a year ago. There is more activity happening inside of the U.K. than there was a year ago. What's happening in London is just a very small thing. That's all finance, that's all specialty. Around the country where we are in our retail business, all of that, all over the country, the economy is not slowing down. The economy's actually gaining momentum.
Will be for a while?
It actually does, without any question about it. Without any question about it.
Hi, Sarah DeWitt from J.P. Morgan. As you look at the acquisition pipeline, do you see any bigger deals similar to what you did in 2013 or 2014, or it'll be all weighted towards smaller deals?
At this point, they're none on my horizon, none.
Okay. Thank you.
Elyse Greenspan, Wells Fargo. In the past, you guys have spoken to the margins on the international side within the U.K. and Australia as being areas we are looking to bring the margins into that kind of mid 20% range. Just kind of over what kind of time horizon do you see the margin improvement and those segments getting to that 25% level? If you can just.
Sure
give kind of an update there. Thank you.
Sure. When you look at the U.K., as we continue to take the operational excellence of our Gallagher Service Center, get them onto the same platform. The platform has happened, the service center is rolling out. We have confidence that over the next few years, we'll be able to continue to move our margin in the right direction. I can't set an exact date because you'll hold me to it, but I will tell you, we will constantly be working on and improving the margins of the business in the U.K. If you look at the retail business in Australia, it's moved significantly already into the low 20s, and it will continue to move forward as we find ways to drive organic growth, retain our business, and drive operational excellence.
I would look toward constant improvement inside of those businesses until we get them to where they should be. Yeah.
Kai Pan, Morgan Stanley. Thanks, Tom. You're sort of in charge of a global P&C operation.
I just wonder, given your perspective or your experience internationally in the past several years, what do you think you can bring over to improve the U.S. operation and any potential for global collaboration cross-selling?
Sure. Kai, it's a huge focus of all of ours. First of all, there's so many learnings that we can take from the U.S. and continue to drive around the world that we can actually, the things that we've been successful at, Jim talked about them already today. It's the organic sales book. The playbook that we have. It's about driving Smart Market that we have. It's about the opportunity for us to take Advantage products. Put another way, Advantage products, can we create panels for many different specialties around the world? Can we ourselves, Pat talked about cross-selling and working with each other and driving the white space out. Can we trade with ourselves better around the world? In the U.S., are we placing business with ourselves? In Canada, as they come in, are we working with our own teams?
Can we drive our niches throughout all of our business around the world so that we can leverage? Talk about it in the case of the transportation, but can we do that 20 more times around the world where we can actually drive a very differentiated product? I see tremendous opportunity for us. As I said, my conclusion is to build one global broker so that we are truly operating together effectively as one business.
Any other questions? Okay, thanks, Tom.
Thank you.
With the schedule and starting with our next speaker. His name is Jim Durkin, and he is the head of our employee benefits consulting and brokerage operations. Jim, the floor is yours.
Marsha, thank you. Everybody hear me? The mic's on, sounds like. Good morning. Thank you for giving me some time today. Feel free to ask questions as I go through my presentation, or if you want, save them for the end. I'll stop when you want to stop. As Marsha said, I'm president of what we call Gallagher Benefit Services. That's the employee benefit, human resource, consulting, brokerage side of the business. I'll try to do a little level setting as I always do, since I never know who's new, who hasn't heard the story, as well as we've got people perhaps listening in that might not know exactly what we do. Think in terms of the employee benefits that you receive from your employer. Think in terms of the compensation strategies that your employer might have in place.
Think in terms of the human resource related issues that your employer might have working with one of you. That's our job, to help our customers manage those areas of their businesses. Simple terms, that's the value hopefully we bring to our customers. If you think about the business today, we're about 25% of the brokerage segment from a revenue standpoint. We've got about 4,000 employees right now, and we've got over 190 locations that we operate and conduct our business out of. Wherever possible, we try to be jointly housed with Jim Gault's team, the property casualty retail side of the business, for the obvious cross-selling opportunities. Sometimes we just can't because of leases, because of the way a merger might come on board, Our strategy is always to physically be housed in the same building. It works well.
It creates a nice partnership, gives us a much bigger footprint, Hopefully it does drive more cross-selling results. Today, we're located predominantly in the U.S. We do have locations in Canada and the U.K., Both of those are footprints that are starting to grow very nicely for us. In the U.K. and in Canada, the things that they do there in terms of providing benefits, helping their employees with HR and compensation issues is very similar to what we do here, as is Canada. It's a nice fit. We're able to collaborate, share a lot of the tools and development that we're doing.
Kind of our value proposition really boils down to or revolves around, if you think about our customers today, they're spending about $0.60 out of every dollar of revenue they generate on their employees, whether it's compensation, whether it's benefits, whether it's the indirect costs associated with keeping them employed, That's our job. Our job is to help that leadership team have a strategy in place, how they're going to get the most value out of that $0.60 out of every dollar they're spending on their employees. Less today than it's ever been about selling product. When I started in the business a number of years ago, my value proposition really revolved around bringing product solutions to the table. I still need that as a skill set. I still have to help the customers navigate through the product alternatives.
The conversation starts with what's your strategy to manage that $0.60 out of every dollar you're spending on your employees, and what do we do to help you get the results you want to get? At some point down that line, we have to be able to bring products to the table to meet those needs. It is a different value proposition. Actually, I think it's a more exciting one. When you think about our market, we focus on what I define broadly as the middle market. That's employers with maybe 100, 150 up to, say, probably 5,000 employees. That's our sweet spot. We do a lot of business between 150 and employers with 1,000 employees. They don't have extensive benefit staffs. They don't have extensive HR staffs.
They're really looking to us on somewhat of an outsource basis to help them manage that $0.60 out of every dollar. In my view, it's a great end of the market because they need our help, and they're willing to pay us for the advice and the consultation that we bring. If you think about, I touched on some of these things, but if you think about the core practices in terms of what we do, a big part of where we spend our time is on the health and welfare side of the business. That's the core life, dental, disability kinds of coverages. I talked about compensation consulting, but we also do work on the retirement voluntary benefits. Thank you, Marsha. We do have a private insurance exchange strategy, which I'll touch on in a moment. We call it Gallagher Marketplace.
We also do work in terms of executive benefits. Those are kind of the suite of services, the capabilities we bring. If you think about from a revenue standpoint, while today a significant portion of our revenue still comes as a commission, it's totally disclosed, totally transparent. The conversation we have with the customer goes like this, "Here's what I'm going to do for you. Here's what we've agreed you need in the way of services, capabilities, resources, here's how much I need to get paid in order to deliver those capabilities and resources. You can have it paid as a commission. We can put it in the insurance products that we might be placing. You can pay us a fee, or in some states where it is legal, matter of fact, most states it is legal, you can pay us a commission and a fee.
It's up to you how you want that money to come to us." What's interesting is the middle market customer, more often than not, says, "Put it into the insurance products so the employees help pay part of the cost." Up to them. We really don't care. We just know we need to get paid for our services because we bring value. Sometimes I get questions on the competition, who do we compete with? That really does vary by market. In some marketplaces, there are local players that we see all the time. We might not see any of the national players. It is typically, think about our peer group, depending on where they are in a geographic market, we may see them more than we see the local players. It's still, I think Pat probably made this point, it's still a very fragmented business.
Relationships do play a role in how customers make decisions, especially in the middle market, we can compete with a whole host of people at any given time. The business we think has had some good growth. We average over the last five years from an organic standpoint, mid to single digit organic growth. Our profitability, our margin, we've got a target margin of 25 points, EBITDA, and we've been running north of that for some time now. We think it's a profitable business, and we've had some good growth in it. As I said a moment ago, the business has changed dramatically. I think it's going to continue to be more driven by advice, by consulting, by helping the customer, less about product.
A couple meetings ago, actually, I think the last meeting, I think I shared with you, it is still available on our website if you'd like to see it. This is our 2016 Benefit Strategy and Benchmark Survey. We took a little over 3,000 of our customers as well as potential prospects, firms that were willing to participate in the survey, asked them for information about their benefits programs, about what they're doing from a human resource standpoint, then analyzed. We brought together our retirement specialists, we brought together health and welfare specialists, brought together our pharmacy, we go through all the business we have, we analyzed the information and generated a whole series of tools and reports that our consultants can use.
What I found most interesting when I sat down and read through the data is the top three operational priorities that the 3,000 firms said were important to them are right in our sweet spot. It's exactly what we do for our customers. If you haven't seen the report, the top three operational priorities that these people told us, their number one priority is they continue to struggle finding ways to attract and retain a competitive workforce. Compensation and benefits, human resource, all those kinds of things impact your ability to attract and retain a competitive workforce. Controlling benefits costs was their second top operational priority. That's what we do. Their third top operational priority was finding ways to grow their revenues. If you've got a productive workforce, you have a much better chance of getting your revenues to grow.
To me, it's exciting that our customers are telling us they need help in exactly our business. If it wasn't lined up like that, I guess I'd get a little nervous. The fact that it's so nicely lined up, I find very encouraging. The last couple of meetings, I've talked about our emphasis on changing from a sales leadership, a sales management environment that was perhaps not as well defined as we wanted it, to one that is more process oriented, has more discipline, has more accountability in it. I think we've made a lot of progress the last several months on that. We're starting to see some improvements, starting to see some better results overall.
In any organization, you have producers who really don't need a lot of help, and you kind of want to get out of their way, but the bulk of the team can certainly use some coaching, some mentoring, and that's where we've been spending our time, trying to get them to be more effective at penetrating the existing customer base and making sure they have the skill sets to develop the new business opportunities we need to grow the business. So we're seeing some good signs there. The mergers, I've talked about mergers in the past. Merger strategy, I think, has been a very, very successful one for us. Over the past five years, we've done about 115 firms, trying to add in the ones we've done so far this year. We're probably close to $400 million of annualized revenues.
As I've said in the past, to me, it's less about the revenues and the earnings that we get from these merger partners. Not that that's not critical, not that we don't value that, but the real value is what they've been able to bring to the organization. Our strategy is to build a top-tier international employee benefits human resource consulting firm. There's a lot of tools, that's a very detailed term, a lot of tools we don't have today. There's a lot of stuff we're trying to build that we don't have that the merger partners have been able to bring to us. I've touched on this, I think, in the last meeting, some examples in the pharmacy benefit space.
Right now, our customers are spending upwards of 25% of their total healthcare spend on pharmacy, and we needed more in-depth, greater resources, greater capability to help them manage that. We were able to find a firm called Solid Benefit Guidance, who's got some real expertise. They joined us about a year ago now, they're helping us build our suite of tools and resources to help our customers manage that $0.25 of their total healthcare spend that's on pharmacy. We also brought on a firm, Integrated Healthcare Strategies. They focus in the human resource compensation consulting space and very specifically helping hospitals with their doctors. You think about the consolidation that's going on. Hospital groups are buying up a lot of doctor practices, the challenge they're having is how do we compensate those people? How do we manage those people on a go-forward basis?
How do we make sure that they're satisfied with being part of a much larger organization? These folks specialize in that, it's a very fast growth area for us. At the same time, we brought on a firm in Charlotte, Burns Fazi Brock. They focus on essentially executive compensation in the credit union space. Fast growth, really excited about what they're doing and how we can push that out across our entire business. Here, just this month, we brought a firm on in San Francisco, Altman Cronin, benefit consultants. They're a pension actuarial, they do a lot of consulting around cash balance plans, that's a growing area in terms of retirement business. They bring some real depth as a consultant from an actuarial standpoint that we've been looking to build, so we're excited about how they can help us grow that space.
In the U.K., we did an acquisition called Argentis, so it helps us expand our footprint there. They're very similar in terms of their resources and capabilities, but in some of the things they do, in particular in wealth management and the way that's done in the U.K., they really broaden our capabilities there, and that's an area where we see some growth opportunities. Again, our strategy is always about finding partners, finding people that can build out the tools, the resources, the capabilities, and the footprint, and bring revenues and growing profits. I think we've had good success doing that. We do have a full-time team. We have five people full-time whose job it is to do nothing but prospect, bird dog for these kinds of opportunities.
We have a team of people that are dedicated then to getting them in the organization, integrating them, and getting them on board successfully. I guess it's probably worthwhile since it's kind of timely, talk a little bit about the new administration and perhaps the impact that they might have on our business. I guess I'll have to start with, I don't really know what's going to happen. During the election process, it was very clear we're going to repeal Obamacare. They seem to be walking that back a little bit. I don't know where it'll end, but I think you can probably look to a couple of areas, maybe for some signs. If you think about the House Republicans, Paul Ryan, you think about perhaps our new Secretary of Health and Human Services, Congressman Tom Price, they both have put out bills. They've introduced legislation.
They've talked about what they think the solution could be or should be. There's a couple of the key components, if you look at both of their plans, that likely could be something that the House, the Senate, the Democrats, and Republicans could all agree on. I'm not saying they'll get there because I'm sure it'll be very contentious, but these are perhaps components that we might see. Both the GOP House plan and Congressman Price's plan both talked in terms of retaining the employer portion of the way healthcare is provided today. There isn't talk about eliminating what we do, helping our customers provide health insurance to their employees. There's over 150 Americans today that get their healthcare through their employer, and both of these plans seem to indicate they want to continue that. There's no talk of moving away from that.
There's also talk about providing refundable federal tax credits to help individuals who don't get an employer-offered program, to help them purchase insurance through the private marketplace. You see that talked about quite a bit. At the same time, they have been talking a great deal about promoting and expanding health savings accounts. Again, giving the employees more opportunity to save money, to be involved as a consumer, making decisions, putting more of the onus back on the individual patients. They both have talked about eliminating the individual and employer mandate. They've also talked about they want to make sure they keep the preexisting condition limitation so that's been removed. Don't let that come back into the marketplace. And allowing children to stay on their parents' plan up to age 26.
Those are sort of the common themes that I see in both the GOP plan as well as Congressman Price's plan. I would look to those things possibly to find their way into some compromise. I don't think this is going to happen quickly. President-elect Trump was out there this week, I think signaling that, he's also signaled that he doesn't want to use his term, take a wrecking ball to the current legislation. I think it's going to be probably more in line with these kinds of things. I don't know. I'm reading and trying to stay in touch like everybody else. I'll give you a quick update on our strategy around Gallagher Marketplace.
Again, I've talked to you in terms of our strategy has been to, from a benefits administration standpoint, from a building our own private exchange to have partnerships with the right vendors as opposed to trying to build it, trying to do it all ourselves. It's difficult for us, I think, to only bring one solution to the table for our customers. We've created what we call Gallagher Marketplace. We're in the process of building a front end tool that allows our customers to access a whole variety of vendors that will bring those capabilities. Today, our first partner, and still a very strong partner, continues to be Liazon. They bring a lot of capabilities in terms of the private exchange marketplace.
I also think it's important where this is all going really is more a conversation around defined contribution as opposed to just a private exchange strategy. Employers are looking for a way to give employees more choice and push more cost to them. The most effective way to do that is what has happened in the retirement space with going from defined benefit pension plans to defined contribution pension plans. That's what's happening, I believe, in the health and welfare space. The model we're building allows our customers to bring that defined contribution strategy to their workforce. Liazon's a key partner. We've also added GoHealth. GoHealth is able to help us with individuals. A lot of times employers have individuals that are not covered and they're looking for solutions.
Through the portal, they can get access to that, it also helps with the people that are post 65 who might be looking for insurance. An employer can offer something to their entire population base. We just are in the process. We've reached an agreement. We're moving forward. We're going to be adding a company called Businessolver. Businessolver brings a variety of benefit administration capabilities as well as from a private exchange standpoint, it's another alternative to what we do with Liazon. We also have currently ComPsych. ComPsych is a firm that is essentially EAP and wellness, it's a great add to the platform to help our customers as they try to help their employees deal with sometimes very difficult issues, as well as focus on how do they take better care of themselves. We've also added Healthcare Bluebook.
Healthcare Bluebook is simply a firm that helps employees find the best provider for the best price. Again, our strategy is to have a series of vendors, a series of firms that can help us deliver to our customers a solution rather than trying to build it all ourselves. So far, that strategy is working pretty well for us, in my opinion. We're able to meet the customer's needs without having to own it and try to manage it ourselves in a marketplace that is still very competitive, and it's not clear to me who the winners are going to be in this. High level, I guess that's what I have. Do you have any questions?
Sure.
The microphone.
Chuck Sebaski at BMO. If the Trump administration and the House Republicans did take a wrecking ball, and you mentioned that your margins are running above plan, above 25%, and organic growth has been very strong, how much of your current beating goals and high organic growth is predicated on the current legislation? If there was a wrecking ball and there was a complete repeal without some of these benefits, what happens to your business? I'm just trying to figure out how much is embedded in the current growth and margin profile.
Actually, I don't think that's a question that I can answer. The reason I say that is they can't just repeal it and not replace it with something, right? If you think about the vast majority of our business today, there's 150 million Americans that are getting their healthcare through their employer. That's what we do. I don't see the Republicans, I don't see the Democrats today saying gone, because they don't have a solution for that. What are you going to do with those 150 million Americans?
I guess I'm thinking circa 2008, before the Affordable Care legislation went into place, if you went back just to the general operating paradigm of 2008, what would that mean to the margin?
No change.
No change.
No change. I told you, the top three priorities of our customers really have nothing to do with healthcare reform. That's what we do. That's what we've been doing. Now, we have benefited from the complexity. Obviously, we bring more value. It's been harder for smaller players to compete because we've had to build, and I've talked about this before, we've essentially built a 35-person law firm within our business that 10 years ago I never would have envisioned building. I don't think that's going away. If tomorrow they said we're repealing it, when we replace it with something different, who's going to help our customer navigate through that? The Department of Labor continues to crank out legislation that impacts our customers. The states continue to crank out legislation that impacts our customers. I don't see it going away. I could be wrong, but I don't see it.
Hi. Hey, Jim. As a follow-up to some of your comments, could you just provide some additional color around the number of new enrollees you might have on your Liazon Technologies platform by year-end, and then relative to what you already had enrolled? I know I've asked you this before, but if you could go back and remind me, are you on salesforce.com?
Yeah.
Are you using the same? I think you're using a different accounting platform than Applied Epic, or can you just give me the?
Got it.
The reminder on that, please?
Right. I will start with the last part of the question. Yes, we are using Salesforce as an organization, as a company. It just makes sense for all of us to be on one platform. Because our business is a little different than the property casualty business, we have had to build and lease essentially 2 different accounting platforms that help us track our revenues. One is a homegrown and the other, I cannot remember the name, but it helps with our fee and reconciling the billings associated with when we bill our customer based on fees, tracking the hours. It is not Epic, but it is something that we have built for our business. In terms of Liazon or Gallagher Marketplace today, currently we have got about 145 customers that are on the platform and probably about 35,000 covered employees. That is not lives in terms of employees and dependents, it is employees.
The pipeline is very full. I will tell you, the last couple of months, it is really jumped up significantly in terms of the activity that is going on. We will see what happens going into next year. Correct.
All right.
I am talking about next year already. People have made decisions for this year. That is where we are today. 145 customers right now as of today. I do not remember that number. I can certainly get that to you. It is growing. If you remember 2 years ago, there was certainly an expectation that this Gallagher Marketplace would take off. We have seen some good growth, it has not met anyone's expectation. There is a parallel. If you look at what happened when employers went from defined benefit retirement plans to defined contribution retirement plans, that is where we are right now. It is that transitionary period of time. There is huge interest on employers' part in getting into a defined contribution strategy for their health and welfare, and the private exchange strategy helps them get there. It is coming. It is not there yet.
We have time for one more question. Jim, can you talk about cross-selling and maybe share some numbers with us to demonstrate either the opportunity or the success that you've had in cross-selling?
Yeah, I think probably the opportunity is the better way to look at it. Between Jim Gault and myself, we're penetrating, if you look at our customer base, we're penetrating less than 10% of each other's customers base. There's huge opportunity. Lots of energy going into that, lots of focus on it. At the same time, excuse me, there continues to be big opportunity to round out an existing account. Call that white space. We're spending a lot of time on that to help us with our organic strategies. Okay?
Okay. Thanks, Jim. All right, next up is Joel Cavaness. He is the head of our U.S. Wholesale Brokerage division. Joel, the floor is yours.
Thank you. Morning, everyone. Thank you for coming out to hear about all of Gallagher and, specifically on my end, the division that I run, which is the wholesale division in the U.S. We commonly are referred to as Risk Placement Services. The reason why we're called RPS is that we deal with both Gallagher and non-Gallagher owned organizations. We do about 80% of our revenues with independents. We do about 20% of our revenue with Arthur J. Gallagher. The GBS division, which Jim and Tom, and now Mike Pesch all run, are our largest client. That's certainly good news, and they continue to grow. We don't have anywhere near 100% of their wholesale placements, which is great because it gives us opportunity to look at them as a client and continue to grow with them each and every year.
It's a lot of fun to be able to do that. When I was up here and I was thinking about Tom and Jim and Jim and Pat being with the organization over 40 years each, then me, I'm almost 31, I'm the new guy. That's kind of funny, after 31 years, you get to be considered the new guy. A little bit of history on RPS. We started RPS 19 years ago from scratch with four employees in downtown Chicago. We didn't really have any clients or customers or markets or anything, then from that auspicious start, we've been able to parlay that into about 1,500 employees in about 85 locations. We place about $3.2 billion into the general insurance marketplace, or what we consider our marketplace.
We deal with about 17,000 agencies across the country, which is very exciting when we talk about organic growth factors and levers. We'll talk a little bit more about those 17,000. We're excited to have that kind of a distribution. We do business with lots of agencies, small, medium, large. The largest is Gallagher. We're happy to be their largest wholesaler, and we like that positioning. When you look at our clients and you look at what we're able to do with them, it's all about adding products, as Doug and I talk about, just selling one more of everything.
If we go out there and we work hard and we go and meet with our retailers that we do business with, and we sign up another one and another one and another one and another one, if we can take our entire broad base of products and programs and sell one more to each of them, that's institutional growth. We can grow organically very quickly by just signing up more retailers and selling more product. Anytime you have 17,000 people or organizations out there selling for you, it can be a very dynamic thing. Talk about our businesses, the four different things that we do, that we specialize in. We're MGAs on behalf of lots of insurance companies. We have about 35 different insurance companies that we actually underwrite on their behalf.
We have underwriting personnel in many of our offices who actually make risk decisions on behalf of insurance companies. To be clear, we don't take any of the risk. We are commission-based, and we are profit-based. In other words, if we make money on behalf of our insurance companies, then they share in that profitability with us in the form of a profit-sharing agreement. That's actually our largest business. Our second business is our brokerage business, which is doing individual risk transactions. To give you an example, somebody has a wind-exposed hotel on the coast in Florida, and they need wind coverage. They'll come to us because we have the market who specialize or are willing to accept a high-risk account to wind.
They'll come to us, we possibly could model it through one of the various analytical models that we use, then we go out into the general marketplace and try to match up that particular account with an insurance company who's willing to take that particular type of risk. Then we give it back to that retailer to hopefully sell. Through that process, we share in the commissions of that placement. We do that in all kinds of areas. We do it in property, we do it in casualty, we do it in workers' compensation, we do it in healthcare, we do it in executive lines, so D&O, cyber, et cetera. We do a lot of it. We like that business. It's typically pretty sticky. The standard markets generally don't play in that. They'll play in the fringes.
We have rate environments where things will go up and down based on capacities, availabilities, but you don't see generally the standard markets wanting to get into high-risk things. Transportation, trucking, all of that type of business, they generally stay away from. Our third area is programs management. We have various homogeneous-type programs in the market that we manage. It could be bicycle manufacturers, it could be a social services program, it could be a golf course program, it could be a workers' compensation program, it could be some self-fund administration business for workers' compensation. Lots of things where we have a particular specialty, so insurance companies will, again, outsource the underwriting to us, and we'll go out into those 17,000 and publicize the fact that we have an expertise in amateur sports, whatever it might be.
Again, we share in the profitability of the program and continue to operate. Lastly, we have a standard lines business where we make very small retailers look big. What we do is we give them access to markets that they couldn't otherwise access. A Chubb, an AIG, an ACE, well, an old ACE, now Chubb, all these insurance companies where they want a certain amount of premium to continue to operate with them. These smaller independent agents can't generate that kind of premium volume, so we own the contracts, and we give them basically access to those contracts and look at the business that's going in. It's highly transactional. It's a lot of personal lines business. We do it right now mostly up here in the Northeast. It's been a wonderful business for us.
Those are the four different businesses that we specialize in. I can expand on any of them when you would like. Our revenues, again, are generated from three main areas. Our three main areas is the commissions in which we share on each of these placements. We also have a lot of fee income, because, by nature, a lot of the underwriting business that we do, it's typically smaller. We do things down to under $1,000. In those particular cases, we would add fees to make it worth our while because when we do underwriting, we do a lot of underwriting services. We issue policies. We run MVRs. We do all kinds of outsourced activities on behalf of these insurance companies.
To give you an example, in that particular case, we might write a bar, tavern, a restaurant, whatever it is, in New York City, that's maybe a little difficult because of the experience of the owner or the operator. That policy might be very small. It might be $1,000. We'll underwrite it, and then what we do, which is kind of the productivity part, is Vishal, who's going to speak, I think, in a little while, we've been able to work with Vishal, and we have our entire backroom for all those policy issuance and indexing and cataloging and everything that we do on behalf of the insurance company. We actually do it with part of Vishal's group in India. We have 200 associates that are part of RPS, dedicated only to RPS, and we do a lot of backroom services there. It helps our productivity.
Candidly, what it's done over time, because the way RPS has grown, both organically and through mergers and acquisitions, what it's been able to do is allow us to become standardized. If you can imagine that you take 40 businesses doing it 40 different ways, your policies all come out looking differently. By outsourcing that to our associates in India, we've been able to become very standardized. We look like one organization that way. When you get a policy from us for Scottsdale Insurance Company, they all look the same. It's been able to ratchet up our ability to be more standard, to be more effective, to look like one organization. It's been something that the cool part of being part of Gallagher is we get to get the best practices from all the other divisions.
The playbooks that Jim Gault have for organic growth, we get to look at, we get to go through, we get to duplicate it for our business. Those are the things that we've been able to do through Vishal and his group. We get to handle best practices. Our competitors, give you an idea of what our landscape looks like. This has always been in the past, a very fragmented business. Lots and lots of small competitors. Over the course of the last 20 years, the business has become more institutionalized, more larger competitors. We got out early in the MGA space, we gobbled up a lot of the best MGAs in the country. That has been able to do a couple things. One, it makes the leverage in our business a lot better and easier.
We get more activity from the markets, we're able to provide a lot more product. What it's also done is allow us to expand that distribution, that 17,000. Every time you do a merger, you get new customers. It's wonderful. If you take those same set of customers that you merge with you take all the other products and capabilities that we have, you can help that firm grow faster, thereby helping us grow faster, making people more successful. We like that. We do compete with all the normals, so we do compete with the Amwins, the CRCs, all those type of people, all risk. We're in the marketplace competing every day. We think that we have competitive advantages. We're not a roll-up. There's a lot of people out there in our space right now trying to buy into this business.
The people who want to sell typically want to sell to a strategic buyer, somebody who can bring all the things that we can bring to them. Give you an example of that. We talk about our client relations, the people that call on our retailers every day. We have a whole group of people, about 50 people, out in the U.S., and a big percentage of those people, they'll call on insurance agents and brokers across the country, again, selling our products. If you can imagine, every day, we're making hundreds of visits to new retailers or existing retailers selling more product. Becomes very effective. Give you an example of one of the very exciting things that we're working on right now, which is through our e-commerce. We have products now that you can go onto our website, and you can actually transact.
You can buy a cyber policy in about three minutes, do everything from quote it, to bind it, to issue and pay within a matter of moments. We're working on hopefully rolling out many additional products through this site over the course of the next two years. We're excited about it, and again, the good news is you have 17,000 people who need to do that. We've sold 10,000 cyber policies this year. That's exciting. We like that. Any time that you can take our distribution, all our retailers want to do is sell more insurance, and we make that available to them. It works out very well. RPS today, as I mentioned, we have about 1,500 employees. We have 85 offices. Our organic growth rate continues to operate nicely. Some businesses are up. Transportation, as an example, struggled a little bit this year.
We've seen a vast turnaround in that in the last few months, look forward to that prospect. We've done five acquisitions this year. We hope to maybe finish one more before the end of the year, our acquisition pipeline, activity, opportunities are very good. In the program space, there's about 3,000 program managers in the U.S., you can imagine 3,000 opportunity is great. MGAs, there's about 700 independent MGAs across the country, there's a lot of opportunity there. Standard lines aggregation, there's about 200 of those, and we think the opportunity is very strong there as well. Our margin, I'm sure it'll come up, we continue to operate in the mid-20s. It's a healthy spot. We enjoy a very financially healthy business, and we continue to invest in our business.
We talk about organic growth, and we'll talk really briefly about kind of the levers, the opportunities to pull on different levers that'll help us grow. Our recruitment strategy is very strong. It's stronger today than it ever has been in 19 years. Everybody is focused on recruitment, and really, what we obviously do is we try to ratchet up our recruitment. Go out, find people, and it's multitude of ways. Internship program that Pat spoke about is very strong. Some of our top people came through our internship program, and we continue to invest in that heavily. Our second is going out and just finding more people to do deals, whether they're in brokerage, whether they're in underwriting, or whether they're in program management, and continue to ratchet that up. We'll continue to increase our headcount in production.
What we're trying to do is take the bottom and move them up or the bottom and move them out and keep adding in to the top and get more effective, more successful people into that. On organic growth strategy, if you think about the opportunity for us to continue to sell more through the current distribution that we have and then to add distribution every single day. We just signed up a large captive insurance company distribution system. They have about 1,500 agents who are captive to an insurance company. Those insurance companies struggle because sometimes they get overlined in a particular area, they have agents out there to sell on their behalf, but they have nothing to sell. What we bring is, again, we bring products and distribution to them so that they can access us.
They're calling, it's been unbelievable over the course of the last 30 days, the phone calls that are coming in from these people who just want to sell things is enormous. It's hard to even keep up with the amount of opportunities that are coming across the transom. You take that on top of the distribution that we have, you make things available to them via cyber or through small professional lines or all the different things that we can do from a technological standpoint, and it's a very exciting opportunity. Our M&A, as I said, continues to be strong. We get the ones that we want. We don't miss out on a lot that we think is marginal. We're very picky in the program space, as an example.
There's a lot of activity in the program space, there's a lot of activity because candidly, some of these programs aren't doing very well. The soft market has caused them to be disrupted, makes the insurance companies get hinky on the program. If you lose a program, I call it a one-trick pony. When you have a program, you have one insurance company and operating one product, and if the pony breaks a leg, you got to shoot the pony, and the show's over. That's a really bad spot to be in. We're very particular in the programs that we operate and we look at. They have to be running well. They have to have a solid insurance company behind them, and the margins have to be strong on that side as well.
We are rolling out through Vishal and his group, a Model Office project similar to what Jim and Tom and others are doing. We're very excited about this. It gives us the ability to look at an office and say, what do we do then? We broker or we underwrite. We don't need to do all the other services. We can basically centralize those domestically and provide more standardization, higher quality, and other things. We're looking at that right now, and it is my vision, it is my dream to be able to walk into an office, and it's full of underwriting and production people. We don't really need to have all the other services in every single 85 offices. We can put that in three or four offices so that everybody is focused on the same thing, which is underwriting and selling.
We're excited about that for the future. Touch briefly on our culture. We're excited. After 31 years, I still get excited every day to come to work. I get excited to do mergers. I get excited to sell more insurance. I get excited yesterday to go meet with an insurance company in Manhattan who hears about our distribution and says, 'Oh, my gosh. I can use you to access 17,000 people?' They get excited about that, so I get excited about that. All of a sudden, the thoughts and the things, all of a sudden, they have offered us three different products to distribute to our retailers. That helps us in enormous number of ways. It helps us because our retailers know they could come to us for all these products.
We get to sell more products to them, and they'll continue to find new ways to do business with us. I'm excited about that. Our culture allows that to happen. Our culture allows us to retain our people. We do mergers because they won't come to an organization that doesn't feel right to them. Our culture is paramount to our success. We want to maintain it. I think many of the things that Pat talked about, being part of Ethisphere resonates very strongly with our people. I got to take a group out last night in Manhattan. It's a great group. They've been with us a long time. Some of these people have been with us all the way through their internship program and into their 30s. If we can continue to do that via our culture, we will succeed. That's RPS.
I'm more than happy to ask questions. Oh, boy. Marsha gets to select.
Thanks. You very briefly made a comment about transportation coming back, improving. Could you expand on that, please?
Sure. Transportation went through a very interesting period. The market got very hard. A lot of people either canceled, pulled back, put their trucks along the side, weren't investing in new trucking, then it seemed to settle out. We saw kind of a-
Are you talking about carrier, I'm sorry, you're talking about insurance carriers now or the truckers?
The truckers-
Okay. Thank you
put it off to the side.
Yep.
They weren't driving. It seems like over the course of the last few months, things have kind of come back to the middle. We're seeing a lot more activity in submission count, seeing a lot more growth. It's pretty interesting. The market's kind of settled out. There's a good stable of insurance companies now that we employ, that we work with. We have the deepest relationships with the transportation markets in the country. Again, we're underwriters, so we owe it to our carriers to make good underwriting decisions for them. When you look at the stable markets that we have, people are coming to us like crazy right now, and we love that.
I'm sorry, just want to make sure I understand.
Sure.
Your comment was really more about, sounds like the economic activity amongst truckers and less about a change and improvement in the insurance carrier underwriting interest or not.
Yeah, I'm really talking about both. There's more trucks, or there seems to be more trucks on the road right now. The insurance rates are at a level in which you can allow your trucks to be out there. Okay? It's not spiked. We're coming back off of the eight to $10,000 power unit.
Thank you very much.
Hi. Thanks, Joel. Quentin McMillan, KBW. I just wanted to ask about the general M&A environment within the MGA space, in particular. The carriers, particularly in the specialty market, are sort of trying to figure out ways to get closer to the end customer, One of those ways is obviously to acquire MGAs. Can you talk about sort of the competitive dynamics? Has that been increasing? Are you coming up in situations where you see an attractive business of an MGA, where you are competing against some of your carriers who are going to obviously be customers of Gallagher on the other end?
We do, You saw that with AIG. They figured out that maybe we didn't want to do that, They got rid of it. Munich, same thing. Many insurance companies will try to get it for the premium volume, They really don't know how to operate a third-party business, how to keep it going. Typically, they have not over time, if you look through history, been doing this a long time, they haven't necessarily succeeded in taking over programs and then also taking the risk. It just hasn't worked really well for most insurance companies. I think Axis is a great example. They're a wonderful company. They bought MediaPro. They thought that this would be just a wonderful deal for them. It really didn't work out for them.
We can go through the numerous examples, and that's one of the things that we do when we go meet with a third party MGA. It's like, you really want to go work for an insurance company, which is effectively what you've done. When you've sold your business to an insurance company, you've done exactly what counter to the reason you got into the business to begin with, right? There's a lot more compliance and a lot of different things that they deal with that we don't have to necessarily deal with. We do see them. People like Markel have bought MGAs, but they've bought them as an investment in the business, not as an insurance vehicle. Maybe they're probably a little bit of a better example. They'll surprise you every once in a while by buying a competitor.
Generally, we don't see them as much in the space, and candidly, it's cheaper for them to outsource to us than it is for them to operate, which is why they do it. You can counter your distribution costs being a fixed amount versus trying to operate a business where there are too many variables.
What's the latest trends you see in terms of small business startups? Then is the E&S market growing faster or slower than the overall P&C market?
Yeah, I think, well, let me answer your second question first. The E&S business, that's really become very blurred when we talk about E&S, because we all do a lot of different things. It's not just the tough market anymore, the non-regulated business anymore. It's very blurred. If you look at NAPSLO, which is our big association, wholesaler association, and you look at their invest report, your answer is yes. We have grown much faster than the overall P&C market. Your first question was-
Small business startups.
Yeah. What you're seeing is we do see, again, as the economy goes up, that's where we see a lot of our activity. People who don't have experience or don't have a track record or a loss history, that's where we see a lot of our business. It's been going up.
Joel, can you describe what the pricing is like for the products that you focus on versus more of the retail products, if there's a difference?
Yeah. Well, ours would typically be higher because.
The change in price.
Oh, the change in price. We track that across all the divisions. We are a little bit on, especially on the property side, because we write a lot of cat property, and cat property, as I'm sure you know, has been down. We probably, in certain areas like property, we're probably down more than the general business. You go to, as I spoke on truck or transportation business, is up higher than a general business might. Because again, we're riding truckers versus commercial auto, which typically is a little higher, runs a little hotter. Overall, it's small differential.
Quick question about your relationship with Gallagher's Retail.
Yes.
You said that that's your largest customer.
It is.
You don't do all of their business. I guess the question I have is, why don't you do all of their business? Are there products, programs, competencies that you need to build out? Is there something structural where I'm just trying to understand.
Sure
where you sit that you could get more of them.
Yeah. The good news is that we don't write 100% of their business. That's good for me because that gives me opportunity. There's a lot of good competitors in our space. I would tell you that we work very hard at trying to capture more and more of that business. Candidly, I'll be really honest with you, I want our folks to work for it because that shows that they're adding value to the proposition. That shows that we're doing what's in the best interest of the clients, whether the client is my relationship with Gallagher or Gallagher's relationship with their ultimate client. If we do that, we don't have anything to worry about, right? We continue to operate. I wouldn't tell you that we're on 100% even playing field because we shouldn't be. I've known Jim Gault for 31 years.
I've known Tom the same amount of time. Do we enjoy a good relationship? Yep. A lot of our retailers out here enjoy relationships with a lot of our competitors. I don't think so. Some of the large retailers only have one wholesaler. Let me give you an example, and I'm not being nasty here, but give you an example. You own a business, Lisa owns a business, and she's going to give it to one of Gallagher's competitors who's only going to send it to one wholesaler, okay? It's a tough account. It's a, again, a Florida risk. If that wholesaler knows there's no competition, is she getting the best price that's possible because there's no competitive environment out there? I don't know that she is.
I would tell you that in our case, if we compete, either us competing with another wholesaler or whoever it is, we've got to work hard to make sure that the terms, all terms, coverage, price, everything, is the best that's possible and available in the marketplace. Up to 50%. There's a lot of opportunity for us.
We have time for one more question.
Thank you. I actually have two, if I may. First, a follow-up on the pricing is could you comment on the Lloyd's markets pricing, and also do you see standard carriers going into the mid-market?
By the way, just to finish that last, the other good thing for us is every time Jim Gault, Tom Gallagher do a merger, it's a brand new client for us. That's a great opportunity for us as well. Yes, the Lloyd's market. I was just over there about three weeks ago. It continues to be a very competitive environment. The interesting thing about Lloyd's is they try to manage how much capacity they put into the market, especially in North America. We're seeing their appetite broaden. We're actually seeing them get into possibly more casualty business. They've had a big expansion in cyber, a big expansion into some North American third-party liability business, which we hadn't seen before. We're seeing a lot more activity there. Then you asked about the standard market?
Yeah, expanding into competing into the e-
Yeah. Standard markets operate in a fringe with us, so they'll pick around the edges. We see standard markets, and I'll give you two good examples. Instead of them trying to figure out our business and underwrite it at a desk level, which they've never succeeded in doing, what they're now doing is buying specialty businesses. You take The Hartford who bought Maxum, and then most recently, this last couple of weeks, Liberty Mutual buying Ironshore, and Tokio Marine buying HCC. What they're doing is instead of competing, they're actually buying, merging with specialty E&S or specialty businesses. If they do it right, it's probably a much better way to do it, because underwriters and people who write standard markets, they shouldn't be dabbling in the E&S sector. It won't work out well. Thank you.
Okay, Joel.
Thanks, Marsha.
Thank you very much.
Thank you.
Next up, sticking with our schedule, is Mr. Scott Hudson. Scott is the head of Gallagher Bassett, our third-party claims manager and administrator. Scott, the floor is yours.
Thanks, Marsha. I'll follow the same structure that I think previous guys have. I'll dimension GB for a couple of minutes, talk about growth, what drives growth inside the GB business. I'll refer to acquisitions, not quite as prominent for us, but I do want to talk about it for a second. Productivity and quality, then I'll finish with how we differentiate ourselves in the marketplace, then obviously take a few questions if you have them. Dimensioning GB, I'll go back to the end of 2015, we ended up at $730 million in revenue. That's roughly 18% of the entire enterprise. In terms of who we serve, we serve four different types of clients. First one is large commercial entities, all the well-known brands throughout the U.S. McDonald's, Costco, UPS, Waste Management. They unbundle their programs from insurance carriers. We're the claims handlers.
Public sector clients, large school districts. Miami-Dade's a large client of ours, State of Connecticut, State of Nebraska, State of Minnesota, State of Oklahoma, then some municipalities. We also, more recently in the last few years have been serving insurance companies directly, where essentially a portion of their, what was previously handled in-house claims, are now handled by Gallagher Bassett. The last piece, alternative markets. Some of what Joel was talking about, MGAs, some of those programs, those program administrators will look to us to handle the claims. We also have a healthy and sizable captive business where the captive manager will look to Gallagher Bassett.
If you look at the volume of claims we handle, we're paying out somewhere in the neighborhood of about $9 billion of loss payments, then getting probably close to in the neighborhood of a million claims in each and every year. If you look at that, if you compare that to a typical insurance company, that's probably comparable to a $13 million premium insurance company. In terms of how we structure those deals, there's a couple of different ways. They're multi-year contracts on a per claim basis. Sometimes it's for the life of our relationship with the client. Other times it's per claim for the life of the claim itself.
For a larger client that has significant volume, we may have upwards towards 20, 30, 40, 50 adjusters supporting that client, and the arrangement may be on a cost plus, where we have some sort of multiplier on top of that. The last way is a % of premium. In particular, with our captive clients, they'll fix our contractual relationship at a % of their premium. Obviously, it fluctuates with the premium itself that they're paying. We've got people predominantly in the U.S. About 75%-80% of our business is in the U.S., but we've got a large contingent in the U.K. and a growing number of folks in Australia and New Zealand. We have the capacity through other partnerships to handle claims throughout the world.
We've got a couple of clients where we've got a relationship with them where we're handling claims in 60 countries throughout the world. Oftentimes, they aren't our people doing the work on the ground in those locations, but we're the lead administrator. In terms of the competition, it varies a little bit by geography. Here in the U.S., there's companies like us, a Sedgwick, a Broadspire, CorVel, York. There's also those that are owned by carriers, Helmsman, Constitution States. Then there's a number, when we get into the public entity space in particular, we'll find ourselves competing with smaller regional players. Then, more importantly, here in the U.S., for some of our clients, we're actually competing directly with the carriers in a lot of respects as to whether or not a client will want to unbundle and use us as kind of an independent third-party administrator.
You go over to the U.K., it's a little bit different. A lot of law firms are in the business that we're in. There are a smattering of TPAs, not that many. You go down to Australia and New Zealand, we're actually primarily competing with the carriers themselves. Some of them have kind of independent third-party claims administrators in-house. There's a couple of TPAs. Xchanging still has an operation down there, a company by the name of EML, but it's nowhere near as well developed as it is here in the U.S. We've got 5,100 employees as of about a month ago. If you look at over the last five years, our organic growth has been in the mid to high single digits. I'll talk about acquisitions here in a second. We've done a couple in the last few years. We're not as acquisitive as the brokers.
Our margin last year, and we're holding this year, is 17.2% and 17.3%. Let me shift to the topic of growth and what drives our growth. First off is, you go where the tide's rising. Focus on the fastest-growing segments. For us, probably at the moment, our carrier business, where I mentioned that we're actually walking in the front door of a carrier and saying, "Take a look at us in terms of being an alternative to you handling the claims in-house." What's interesting about this is that we're not necessarily going into the core of a large carrier's claim business, but there's a lot of things that they have around the periphery where they have sub-scale operations.
A deal that we've been talking about most recently was with a large personal lines carrier, where they have almost as an accommodation, a commercial insurance business that has workers' compensation connected to it. They probably have in the neighborhood of 100 to 200 adjusters handling that. They don't have the wherewithal to make the large investments in technology and so forth. So we're a reasonable alternative for them to consider. On the carrier front, it was just probably two weeks ago, we got notified, it's not just here in the U.S., a company by the name of Vero in New Zealand. It's owned by Suncorp out of Australia. Due to the earthquakes that had taken place in the earlier part of November down there, they were looking for extra capacity. We've got 20 people that are being put in place to actually supplement their efforts.
Our expectation is that we'll probably continue on into the future, as they're looking for a way, when certain things like that happen, they basically have almost a contingent workforce like ourselves that can support them. That's pretty exciting news for our team down in New Zealand, and we are expecting similar activity in Australia. The other place where the tide's rising is with our alternative markets, our captives. That's been quite spectacular. That group is seeing probably mid to high single-digit organic growth. It has for a number of years now. One of the things that we've done that I'll talk about in a second, we've actually reoriented our operations. If you'd have walked into Gallagher Bassett four or five years ago, you couldn't distinguish our commercial business in terms of our claim operation from our captive business to our carrier business.
In order to be able to provide customized service to each of those segments, we've essentially reorganized in a way that enables us to have dedicated operations for each and every one of those. Product expansion, that's another thing. There's a couple of things that I can point to. About a year and a half ago, what was brought into Gallagher Bassett was a medical malpractice business in the professional lines. That business has been growing very strong. It presents a little bit of a different way of working than we do. It's an operation that we have now that's got about 70 to 75 lawyers that do the work. It's a little higher-end service, given the nature of the claims.
We just brought a guy on board a couple of weeks ago, a guy by the name of Sam Turzich, who's going to build out a number of our other professional lines. On the liability side, historically, we've been primarily standard lines players. We see a significant opportunity to expand into specialty line activity, which I think we're fairly confident is far more sticky as it relates to the client relationship itself. The other one is disability. I'd mentioned to you that, in some probably past conversations, that we acquired a company down in New Zealand that got us into the disability space. We've only been in workers' compensation. These are the injuries that are taking place outside of the workplace. As of about a week ago, a company by the name of Asteron, another carrier owned by Suncorp in Australia, that's our first disability carrier client.
It kind of checks two boxes. One is it's a carrier, where we're going directly with them, two, it's moving us into the disability space. Geographic expansion, we'll do it all day long, but we're going to do it in markets where we're comfortable operating. We ought to have sufficient scale. New Zealand's a good example, where we essentially started from scratch, I want to say it was three years ago. Today we're up to, I think it's about 90 employees in the country, and our expectation is that will grow significantly here in the not too distant future. We are looking for opportunities. The idea of kind of planting a flag and putting one or two adjusters in some country, that doesn't quite work for us. We need sufficient scale, the logical way to get there is through some sort of acquisition.
Probably the primary way we win business and grow is demonstrating that we're better. We're doing that every day as it relates to client renewals and selling new business. We have to be able to go out and demonstrate, and we're getting a heck of a lot better at this. The industry's getting better at this in terms of being able to show that if you're working with us, if you work with Gallagher Bassett, the results of your claims will actually be better. Now, better isn't always necessarily lower cost. That is a factor to drive down the loss experience. In some cases, as it relates to the employees of an organization, they want them treated a certain way. That's part of their overall employee value proposition.
To be able to set up a claim operation that respects the customer of that client, that respect and handle the employees of that organization well, and at the same time delivers a targeted loss result is what we're all about. Being able to demonstrate that if we can do that better than anybody else, clearly we're going to win. We're able to do that. We do that down in Australia in the state of Victoria. Time and time again, we're the number 1 rated agent. I just heard from our team yesterday that the state of Victoria has put an increased emphasis on customer service as being the thing that's going to carry the day over the next year and a half. Our marks are far better than any other agents within that scheme. Then the last thing we're doing is improving sales execution.
Every single day, we're looking for new and more talented salespeople to come in and help us demonstrate to the market that we're the best. We don't have a large sales force. As an example, in the U.S., I think we've got about 15-16 guys. I've just hired a brand new head of our risk management sales here in the U.S., a guy I'm pretty excited about. We're breaking the mold, as I've done a few times here inside GB, and not hiring somebody out of the industry, but an individual with a track record of having built very strong sales organizations, where he's shown the ability to double and triple the sales production of the organization. He's coming out of the technology space. A couple of other statistics as it relates to growth.
Our retention, mid-to-low 90s, so it remains quite strong, and that's everywhere around the world. Claim count growth, that's always an interesting topic for us. The one that I think is most meaningful is we measure it against an existing group of clients over the last 12 months. As I've shared with you guys over the last couple of years, that has dropped. Probably if you go back as far as 2014, we were seeing claim count growth within existing clients upwards towards 3%. Last year, it was about a point and a half and coming down. Right now, we're just under 1%. If you look at it across the type of claims, the liability line is probably growing at a little bit faster rate, closer to 1%-1.5%. Same thing on the work comp indemnity side in that 1+ range.
Then the medical only activity is actually down significantly. Let me shift gears to mergers and acquisitions. As I mentioned earlier, we're keenly interested on doing strategic deals. Volume deals for us, picking up small work comp TPAs, for example, in the U.S., typically those don't go well for us because they're oftentimes organizations where they're underpricing their service, and there isn't a lot of benefit because they've got a client base that is not typically looking for the value-added services we provide. Strategically, when I talk about like MedMal, getting into that business, getting into disability, expanding, having an opportunity to get into other product lines, that's important for us. Geographic expansion. The two we did in New Zealand was a company by the name of Crombie Lockwood that got us into the New Zealand marketplace as well as the disability space.
I mentioned to you we're seeing good growth in New Zealand, which is helpful to us. Then the other thing that they brought was a disability capability that now we're starting to parlay into growth both in New Zealand and Australia. The other acquisition we made, this goes back to 2015, was a company by the name of CAA, Countrywide Accident and Assurance. They gave us a motor capability in the U.K. that we previously didn't have. As a result of that, DHL was one of our big wins, and we're continuing to see other activity as it relates to the motor transportation space in the U.K. Productivity and quality. I know I've talked with this group in the past around scale matters in our business.
One of the things that I think even as it relates to some of our competitors, we basically use a single system. We've got one platform that all of our people, wherever they are in the world, use. There's a few occasions where a client and maybe a carrier will ask us to adjust the claims on their system. If it's something that we're doing, we've got a single platform. That gives us, as we're adding more business, we're not necessarily building new technology platforms. We're expanding our technology capabilities in other ways. Then the other thing that we're doing in working with Vishal's operations in India as well as even within the U.S., we're starting to get fairly aggressive around taking the administrative activity off the adjusters' desks, centralizing those into support centers. We've got call centers we've been building.
Right now, all mail in the U.S. used to go to a whole bunch of different branches throughout our network in the U.S. Now it all goes to a single place. There's activities like that that do give us opportunities to improve productivity. The other thing we got to do is figure out if we're more interested in making sure that the adjusters are handling the claims better at the same time, to the extent we can make them more productive by taking administrative tasks off the desk, that does help. Global integration, that matters as well in terms of productivity and quality. We stood up a group in Australia. We can actually handle claims 24 hours around the clock now because of where we've got people throughout the world.
A lot of our quality assurance work for some of our U.S. carriers is actually being done out of Sydney, Australia. The fact that we've got a connected workforce across many time zones and what we can parlay that into, I think is quite exciting for the organization. We feel that we've got a strong leadership position on the technology side. A number of things what you hear in our business all about is analytics. Analytics, figuring out how to use data to make smarter decisions as it relates to an individual claim, as it relates to a client's overall claim population. Our platform is Luminos, we're making significant strides with that. We do a lot of things as it relates to decision support for the adjusters themselves.
We actually don't make a lot of decisions for them, we're providing them guidance. When should you involve a nurse? Is this claim warranted? Is it worth the expense? Who's the best doctor to put on this? A lot of activity as it relates to technology and analytics on that front. The other thing that's going on is mobile. We've got mobile apps. You can know what's going on with your claim at any point in time. You can know when your doctor's appointments are scheduled. More and more, there's a portion of the workforces that we work with that don't look at that stuff, there's a whole bunch of people, that's the only thing that they'll look at. Last thing, just as a note around productivity and quality.
The data we're dealing with is tremendously sensitive, the things and the advances we've been making in terms of just building the infrastructure that is Fort Knox. It's a very strong fortress. We've got to be able to assure our clients each and every day that it is a secure environment with respect to their data, their employees, so on and so forth. We've been given a number of certifications. We're pretty excited about where things stand at that point in time. Lastly, how do we differentiate ourselves in the market? Just a couple of things. I've talked about superior outcomes. Every day, either with the client at a renewal, trying to win a new piece of business, we're going in, we're not just talking about what we're doing, we're actually getting the data.
We're getting the client's historical loss information, we're trying to, through information and data, demonstrate that we're better. We also have the ability to customize our claim operations to the specific needs, whether they want their employees handled a little bit differently, whether they want their customer handled a little bit differently as it respects to liability claims. We will stand up an operation that takes into consideration a client's specific needs. We're global. We can handle claims everywhere. That's not the case with probably the majority of our clients. A few of them are moving in that direction. Probably the last thing is just the strength of our relationship with Gallagher overall.
I've said in the past that when we were just in the commercial space with the large clients that may be brokered by somebody other than Gallagher, being connected to Gallagher wasn't necessarily a huge advantage. As we're dealing with the carriers and building up relationships as they are handling their claims, our connection to Gallagher is a huge plus. With that, I'll open it up for questions.
Bob Glasspiegel from Janney.
Hey, Bob.
Transportation used to be a pretty big segment, trucks and fleets and stuff. You mentioned DHL, and I think you had Ryder or someone like that. What are you seeing as far as trends in commercial auto? The world is talking about frequency and severity, more trucks on the road, texting and driving? Are you seeing a surge in claim activity?
Claim activity?
Is that on the margin at all changing, or are you seeing less of that in your customer base?
I wouldn't say we've seen a surge in claim activity. A couple of things. I'm guessing a little bit this, but we're probably in the neighborhood of about 13%-14% of our book of business in the U.S. for commercial clients is large trucking companies. UPS, any of you think about even with Costco, a lot of our non-trucking companies run massive fleets. That is a significant share of what we do. I don't think we've seen necessarily an uptick in terms of claim activity. What we're seeing, though, is an increased interest in terms of us being able to help them differentiate themselves and drive down losses.
We're spending more time with them on the loss control side, using our data to help them pinpoint more specifically where are the claims occurring, why are the claims occurring, at what time of the day the claims are occurring. Specifically, seeing an increase in claim volume in that particular segment.
Seeing a texting driving problem?
That would be something I could look into. Nothing that comes to top of mind at this stage of the game, no.
How broad based is the surge in carrier business taking over subscale operations, say, its fastest growing? How broad based is that? That's one question. Then two-
Mark, when you say broad based, I want to make sure I understand.
I'm curious whether you're doing very well with two or three carriers, or you're seeing a broader movement within the sector.
Got it. I would say we're still at the very early stages. The personal lines carrier that I mentioned to you, it really didn't even dawn on them to do this. We were introduced to them through some mutual acquaintance. We go in to have this conversation, and now it makes perfect sense to them. Different than on the commercial side, where clients are coming to us via the broker relationships. This is a well-worn path. We're actually creating the market to some extent with our sales group out there every day talking about what we're capable of doing. Starr's a good example. When they started up, whatever, four, five, six years ago, they needed a claims alternative. Those discussions were relatively simple.
Was that through Dave Pearson?
What's that? Well, no. It was actually with Chuck D'Angelo. I wouldn't say simple, but the need was quite obvious, and we've got a phenomenal relationship with them today, and the growth has been spectacular. I would say, Mark, the fact that we've got a dedicated operation now and that we can point to it, and they can see it, and that it's tailored to the needs of a carrier is a huge plus. The number of conversations is still not where it needs to be in terms of us to see what I would describe as a significant uptick in the growth.
You had mentioned the workers' comp claims. Was it workers' comp medical only? I think you said were down meaningfully, but you said medical only. Was that referring to workers' comp claims?
Yes. The medical only work comp claims, we're seeing less growth on that side than on the indemnity claims themselves. Some of that is due to the fact that there are things that we're doing that the industry is doing, too, in a way, almost kind of limit. We've got a product that's called Priority Care 365, where a restaurant chain will call that directly, and we're getting paid for that service. As a result of that, there may never be a claim filed. With a nurse, they may be able almost self-treat on-site and move on with the workday, which may be a contributor to a little bit of a downtick in some of the medical-only activity. The fact is we're benefiting from that because that's another product. It's just an alternative way of dealing with some of those claims.
It's the work comp indemnity and medical only that are behaving a little bit differently at this moment in time. Yeah.
Scott, what happens if we have a much more robust economy from a claims volume standpoint? You can argue it could go either way, but what historically have you seen when the economy does well?
I think what you will hear about are the first thing that will happen is employment rises, as employment rises, you are going to be bringing people into the workforce that are not necessarily as familiar with the operating environment, are not as well trained, and so forth. You will see a little bit of an uptick in claim activity as it relates to a growing workforce that happens to be a little less mature within that specific business. It is one possibility. The thing we are fighting is the workplace and through technology and everything on the road and so forth, a lot of it is becoming safer. Whether there will be a significant uptick in frequency, just the overall volume.
People coming into our clients from a liability standpoint, one of the things you will see is back to just to kind of demonstrate growth is we have got A&P was a former one. Wakefern is out here on the East Coast, grocery store chain, they have a number of brands. I think ShopRite is one of them. You will see a significant uptick in the summer months on the Jersey Shore, just simply because of the number of people coming into the workplace, or in their case, customers coming into their places. I think you will see an uptick. Whether there is any reason to think that there is going to be a significant increase in frequency, is probably a little less likely.
Okay. We have time for one more question.
Sure.
Hi, Scott. What percentage of your revenue is tied to performance-based contracts or contracts with some kind of performance rider? As you go and re-up these contracts, are you seeing more and more of an interest in this?
Yes. Percentage-wise, the majority of our business in Australia with the states is they're performance-driven. Basically, they give us a base fee, and if we do well, that's how we make more money. In the U.S., I think we're having a number of discussions around trying to move to performance-driven contracts, tying it to the experience of claim handling, better results. I would bet it's probably 20% of them tops, though. Most of our clients, when we get into a discussion is, what I can tell you a typical discussion we had two weeks ago. Yes, if the losses don't stay constant, we want to penalize you, Gallagher Bassett, but if they get a lot better, we don't necessarily want to share with you the upside. It's like, well, that's a little bit tough for us.
There's still a comfort in the predictability of a claim cost me X. The idea of pivoting to where we're actually kind of sharing in the overall performance of it, I would say those are still few and far between. There will be certain activities like audit scores, whether we get the program implemented quickly, whether we're returning phone calls on time. They'll put a little bit of an incentive to make sure that we're adhering to those performance criteria, but it's well below 20% at this stage of the game. I think it will continue to change, but it's a little bit uncomfortable for our clients to kind of take on the overall exposure. From their standpoint, yes, losses go down, I still got to pay my fee. It's not huge yet. It's just, I think, an active part of the conversation with most clients.
Okay.
Is that it?
Thanks, Scott. Appreciate it. Next up, we have a gentleman whose name you've heard all morning from our other speakers. This is Vishal Jain, and he is our Chief Client Services Officer, and you will have him for the next 30 minutes or so. Thank you, Vishal.
Hi. Good morning, everyone. I think some of what I'm going to talk about you heard an advanced preview of or little nuggets, but hopefully I can weave this together into something that's a little bit more integrated and holistic. I serve as the Global Chief Service Officer for Gallagher. It's a role that I have been playing for the last 2 years. Essentially, my focus is on improving productivity, quality, and the level of service we provide. This is across all the divisions we have and all the geographies we operate in. That's what I do. Now, before taking on this role, which as I said, I've been doing for the last 2 years, I spent 10 years essentially building and then managing what is known as the Gallagher Service Center.
I'll refer to it as the GSC for short because I'm going to talk about it quite a bit. Pat gave you a little bit of nuggets of some of the things we do there, and I'll get into some more detail. There were 2 insights that I gleaned from that 10-year experience building a service center. One was that, and Pat referred to this, that when we moved things to the service center and centralized them, we certainly got benefits in terms of productivity and cost. What we also got in almost every case is better quality and better service as well. Today, when we go after things, when we look at things, we kind of want that trifecta of quality, service, and productivity. That was a learning for us and for me.
The second is that as I went around our different offices in the U.S. and elsewhere, looking for work that we could centralize and put into our service centers, what struck me that there were many things that we couldn't centralize, but there was an opportunity to do better in the branches than that. My role now is more holistic. I look at 2 things. I look at what we can further centralize and bring into the service centers that we've got in India and we've set up elsewhere. I'm as interested now in examining what we do in our branches, in our distributed operations, and seeing how we can make that more effective and more efficient as well. That's the 2 parts to what I do. Now, I think everybody understands the benefits of productivity and quality is an element of our strategy.
The productivity part is pretty obvious. It can drive better margins or maintain margins while we invest in growth. The quality part I want to comment on as well, in terms of how that really supports our growth objectives. When I said I see a few benefits. One, Jim and Pat talked about customer retention. Our customer retention tends to be low to mid-90s. When we've analyzed it, we think about a quarter of the lost business, I'm sorry, could have been avoided if we could provide consistent high-quality service to our clients. That's 1 way that improved quality and better service can help our growth objectives.
The second is a bit more, I would say, in the future. Our belief is that if we can provide world-class service across the entire customer experience, that can be a competitive differentiator for us. When you combine it with industry expertise, market access, along with that better service, that world-class service, it can be a competitive differentiator and help us win more business. Most of the time, we're competing with small local players who just can't match that combination. That's the advantage of quality as well. What I'm going to do is, before I talk about what we're working on now, I also want to go back to some of the things we've worked on, because as you'll see, those are platforms that we're leveraging in the work that we're doing today.
I'm going to talk about three recent initiatives from our, let's say, relatively recent past, and then I'll talk about what we're working on right now. The first, and something that's very close to my heart, is the establishment of the Gallagher Service Center. This is something we started in 2005. We started in a very small way. We hired five people to do just one activity. It was checking policies because we were having lots of errors and omissions costs. We were doing it just for one branch, Itasca, and in one business, which was our U.S. P&C retail brokerage business. That's how small we started. As that was successful, we slowly expanded. We tried to cover other offices. We just took that one activity and started doing it for more offices.
Eventually, we took other activities for our retail brokerage business, and eventually, we've now expanded to other businesses as well. Where we are today, we have 2,500 people, starting with the five, in our service center in India, and they touch pretty much every aspect of our business, and I think make it better. You heard some examples of it, but let me give you some more concrete examples of the type of work we do and how that benefits the company. For Joel's business, the wholesale brokerage piece in the U.S., the P&C brokerage, we issue about 100,000 policies. As Joel mentioned today, those policies get issued in the same way and with a level of quality that just wasn't possible when they were getting issued out of 30 branches.
For Jim Gault's business, the U.S. P&C brokerage business, we started with policy checking, and today we check about a quarter of a million policies out of our service center in India. What's been the impact? If you look at the last 10 years since we started this, and today every policy for the U.S. gets checked in India, our E&O costs have come down by half, and that's because of the improved accuracy of the checking that we're doing using our teams in India. Another example for Scott's business is we are paying roughly half a million bills that the adjusters used to pay. What that means is that the adjusters have more time to resolve claims and make sure that an injured worker can get back on their feet and then back to work. I had talked about certificates.
The other example of work we do is we issue about 2 million certificates of insurance out of India. That's a critical document. It has to be accurate, and our levels of accuracy out of our Service Center are phenomenal. If you look at a typical small agency, and we buy lots of these, so we have an idea of what they do, you might get something in the range of 90% of them being right, but 10% of them will have something or the other that's not quite right. 10 out of 100. What do we do? We make a mistake 1 in 1,000 times, and we know that because, as Pat said, we measure it. So that's the level of quality we've been able to provide.
What's interesting about that particular service is when we were issuing certificates out of our branches, well, most of our branches work normal operating hours, so that would be 8:00 A.M. to 5:00 P.M., 9:00 A.M. to 6:00 P.M. So if you wanted a certificate during that window, you'd get it. Well, with our Service Center, it operates pretty much 24 by seven. So today, a client can essentially give a request day or night, and within an hour, they'll have a certificate back in their desk. So better quality, improved service as well, and of course, it's very cost-efficient to do it that way. So those are some of the examples of the kind of work we're doing.
We also do some work that we started recently, which is more directly connected to growth, which is, we essentially for Jim Durkin's business in the Employee Benefits and Brokerage, we basically enrich leads that go into Salesforce so that our producers have more information as they're calling on prospects. It makes them hopefully more productive, less time behind the desk, more time in front of prospects and clients. There's also a lot of back-office work we do, accounting, reconciliations, payment of bills, and so on and so on, which I won't get into. But what I hope you'll take away from this is that our Gallagher Service Center at this point today has impacted quality, productivity, efficiency across many activities across most of our businesses. There's still room to grow, and I'll talk about that next. So that's one important initiative from the past.
A second is something that we call Model Office. This is something we started in 2012. We did this for our U.S. brokerage business, the one that Jim Gault runs. And this was essentially an end-to-end re-engineering of how we operated in a branch and how we service clients. With the idea of how do we get more efficient, provide better quality and better service. And, oh, by the way, also in a way that improves employee engagement and employee satisfaction. We basically spent the better part of a year just analyzing everything we did, who was doing what, when, using what kind of tools, and so on. Once we had that understanding, we essentially re-architected how we wanted things to work, came up with a blueprint, outlined what the changes were, and then have been implementing it since. What were some of the changes we made?
I'll just give you some examples. One was, with Jim again, Jim Gault talked about, was segmenting our business and pulling out a lot of our small accounts from 100 or so branches and putting them into a few hubs, as we call them. That, we believe, would allow us to operate the small business better, but also allow our branches to focus on our bread and butter, which is middle market. Another change we made is creating a national service organization with a standard process for how things got done. This was something we didn't have before. Our teams were organized by branch and by region. For the first time, we had a national service organization and standardized processes.
A third example of a change that came out of our Model Office blueprint was developing and implementing better workflow systems that could allow us to move, manage, and monitor work much better than we were doing to that point. Those were some of the changes. There were many others. It's taken us, I would say the implementation of that Model Office, we also call it CSO initiative, in our U.S. P&C brokerage, that's been a multi-year journey. We're probably about 80% done, but we've seen a lot of benefits. I suppose a few that follow us, you would have seen this in Jim's business. What are the impacts that it has had? One, if you look at the cost of our service layer relative to top line in that business, it's shrunk over the last four years.
If you look at revenue per support person or service person, it's gone up over the last four years. As we measure our employee satisfaction and engagement scores, those have gone up as well in that business. It's been very dramatic, and again, I'll talk about what we'll do with that going forward. The third past initiative I wanted to touch upon is in the IT front. There, what we've managed to do is two things. One is basically convergence. In most of our businesses, we had different branches running different systems. What we managed to do, and again, you heard Tom and Jim talk about this, is today we've got a situation where for most of our big businesses, we're operating on a single core agency management system.
System convergence in our businesses in the U.S., in the U.K., Canada, and we're about to do that in Australia as well. What that does is it reduces cost, reduces complexity, and of course, we can harness our scale. Today in the U.S., for example, we can have a team in our Iowa branch help out our Denver branch during a busy renewal season because they're on the same system, they work, and they have the same processes. That's a big benefit in doing that. The other piece we've done on the IT front is bring on board more value-added IT tools that can now be bolted on to our agency systems, our core systems. One example of that in our U.S. P&C brokerage operation that came out of Model Office was our workflow system. This is something that we designed, developed, have implemented.
It sits on top of Epic, which is our agency system developed by a third party. What it allows us to do is move, manage, and monitor work that we just couldn't do before. We can measure productivity, we can measure quality, timeliness using that system also in a way that we couldn't do before. That's been a third area of focus for us. Those are some initiatives from the past that have, I think, had substantial impact, the service center, the Model Office exercise, and IT convergence and tools. Let me shift gears and talk about what we're working on currently. As you'll see, they're linked to the things that we've done in the past. The first, which again, I think Pat and Tom referred to, is further leveraging the Gallagher Service Center, the GSC, in some of our recent large acquisitions.
We spent the better part of 10 years developing a full suite of services out of the Gallagher Service Center that played very well into our retail brokerage P&C operations. Most of that has been deployed in the U.S. With a little bit of adaptation, with a little bit of fine-tuning, we think we can deploy those and leverage those in our large acquisitions in the retail space that we've done in the U.K., and that's our first priority. We've already started that. Then in Canada and in Australia as well. Some of the benefits we've seen in the U.S., we think in a much shorter period of time, get those benefits in our other divisions as well. The second thing that we're working on. That's one of our current initiatives that you'll see in the course of 2017 and onwards.
The second is expanding what we did in the U.S. P&C side, the Model Office initiative, into some of our other businesses, taking that and employing that concept in our other businesses. We have two places we're doing that as we speak. Joel spoke about his wholesale P&C brokerage operation, where we've undertaken a similar exercise, essentially dissected the operation, looked at who's doing what, and come up with a blueprint of how we think things should get done. That involves changing what an underwriter does, what a broker does, what an assistant does, and where some of that work gets done as well. It's a fairly comprehensive set of changes. We've tested this in a couple of branches. It's working well, we'll roll it out over the rest over the course of 2017 and 2018.
The other place we're doing this sort of Model Office exercise is actually in our U.K. retail brokerage operation. I talked about leveraging our Service Center there, but that's not the only thing we can do to make it better. Same thing again, tearing apart the business, looking at how it does work and how it could work. Again, to dimension it, that's a business that has over 2,500 people or roughly 2,500 people, about 70 locations all across the U.K., and serves a variety of clients from a plumber to a department store. We again, there, have done most of our analysis and blueprinting, started in the early stages of implementation, and expect to continue that and drive that home 2017 onwards. Both of these initiatives in our wholesale brokerage business as well as in U.K., the Model Office that I talked about, these are dramatic changes.
Like in the U.S., I expect this will be a multi-year journey, maybe not 5 years like it took us in the U.S., but nevertheless it will take some time, but they will drive substantial results in terms of margin, quality, and level of service. The third current initiative that we're working on that I want to touch upon is what we're doing in the area of small business. Small business is a relatively modest part of our revenues. If you look at it, depending on different businesses, it constitutes anywhere from about 6% to, at the high end, about 20% of our total revenues in our different businesses and divisions. But it's a large portion of our customer count, as you might imagine.
Jim mentioned that in the U.S., I think this is true in other geographies, we think there's a chance to take that business, which is relatively small. It's small for us, and relatively, we have a small share of that business, and grow it. If we're going to grow it, we also want to make sure that we can operate it in a highly efficient manner and provide great service as well. We've got a couple of things we're doing on small business in that better service and efficiency that would complement growth. I'll talk about two things in particular that we're doing. One is in the U.S. What we did as part of our brokerage business in the U.S. here is we isolated that business a few years ago as part of our model operations exercise.
It's running in about 12, 13 places rather than 100 branches. What we're in the process of doing is essentially further streamlining how we operate that business, from renewals, endorsements, certificates, and so on. We're also taking what we've done for small business in the U.S. and then applying that to some other parts of our business. We're applying that same learning in the U.K. as we do some of our changes there. We're planning to apply it in Australia and Canada. In fact, even in Jim Durkin's employee brokerage business, we're employing some of those same concepts to make our small business more efficient. That's what we're doing on small. Between leveraging the Service Center, replicating our Model Office initiative, driving improvements in small business, you'll see another round of improvements, both in terms of productivity, quality, and service.
I think while we've made great strides, there's certainly more we can do. Let me quickly comment on one other thing, which is how this element of the strategy, which is productivity and quality, link with some of the others. I've already talked about how it can link to growth, let me also talk about how it links to our M&A and to our culture. On the M&A front, one of the things that we can do today that we couldn't do a few years ago is that when we buy what is typically small brokerage operations, in addition to giving them industry expertise, in addition to giving them market access, we can today bring tools in terms of IT.
We can bring tools and capabilities such as our Service Center that basically allow them to operate more efficiently, serve their clients better, and free up their people to go out and sell more. I've heard this personally from many of our merger partners about how that's been something they hadn't expected, and it's added real value to their business. It supports our M&A objective that way. What we do on what I work on in terms of productivity and quality, I would say, is both consistent with and reinforces our culture as well. The Gallagher Way, if you look at The Gallagher Way, tenet three talks about we push for professional excellence. Well, operational excellence is part of the professional excellence that we push for. It's built into The Gallagher Way.
Tenet number 4 talks about we can all improve and learn from one another. We focus a lot on continuous improvement in our productivity and quality efforts. It's very consistent. I'm also really pleased and proud to say that when we set up the Gallagher Service Center, starting with five and today 2,500 people, we embedded The Gallagher Way into that operation and into our people from day one. What I have found is that those tenets and the culture resonate as deeply in Bangalore and Pune as it does in Itasca, London, Melbourne, or Toronto. We truly have one culture, and we're proud of it. That's all the remarks I have. I'd be happy to take any questions.
Thank you for your presentation. I just had a big picture question. I think we've been reading in the papers and other places about some issues in the economy in India regarding cash, et cetera, and I'm just curious if there's any macro issues that are affecting your operations there, or are these irrelevant, relevant to, or related to what's going on with your operations in India? Can you speak to this broadly and specifically?
Sure. Are you talking about the recent demonetization? My answer to you would be almost zero impact on our operations in India. Zero impact on it. We pay our staff. We don't pay them in cash. They have bank accounts. They have credit cards. They're not affected. The people that are really affected by this are people that were primarily dealing in cash, and these would be small businessmen, farmers, traders, and so on. We're not impacted. The economy might contract a little bit, which is good for us because that means there'll be less hiring, that means there's less attrition. We like that. Did I answer your question?
How are you measured and paid? I'm not looking for specific numbers, but you've mentioned a number of goals, and achievements that you've had, service rate, error rate, customer satisfaction, et cetera. How much does your comp in your organization driven by those specific numbers or is it a qualitative evaluation?
It's a combination. I think as all of us at the senior levels, we have goals we set out at the start of the year, those tie into what our overall corporate goals and objectives are. Each of us has a part to play in it. Like many things at the senior level, these are things that I can drive, but I have to work with my colleagues to accomplish. Our process for me is very similar to everybody else, which is it's a set of goals. Some of those are quantitative, and some of those are qualitative. We look at where we are periodically, and then we assess at the end of the year.
What are some of the important ones? Give us an example. Error rate, customer satisfaction.
Yeah. An example of that would be just increasing the utilization of our Gallagher Service Center across our divisions. One way to measure that is how many people do we have relative to the size of the division? How many people do we have in our Gallagher Service Center as a percentage of the total? Is that percentage growing? Now, the businesses wouldn't put that business in the Gallagher Service Center if they didn't think it would add value, right? It's my job to convince them that it will be right for them and give them the benefits. That's an example of a very specific metric, which is just increasing the penetration of electronic sort of staff in area. We have other measures as well. We have internal quality, which is some of the things that I spoke about.
The other thing we do is we also measure satisfaction of our Service Center by our employees. We poll our employees in the U.S., U.K., and so on about their satisfaction with the services. That's another metric, which is how satisfied are our people, and how does that compare to last year and the year before.
Vishal, as you roll out these Model Offices or Model Office concepts around the world, is there initially some added cost because you have to run duplicate systems, and then after that, the costs go down, or is it fairly quick and seamless?
Yeah. Great question. I would tell you that was absolutely the case the first time we did it. We've just now gotten better at doing it. We understand we have to kind of run in parallel for a while, but we're able to shrink that much more. The other thing we do is we don't take on when we kind of designed it, we essentially try and do a pay as you go. Rather than trying to take this and put it across 50 places or 100 at one time, what we'll do is we'll get three or four up and running. That's a modest investment. We typically will go into large ones and get them running. By the time those start paying back, you can then plow that investment back into the next.
That stretches your time frame a bit, but it then pays for itself as well. As I said, we've gotten better as well. The cost of the systems and IT cost isn't as much. It's more around people, change management, project management. Those are the things that typically cost.
I had a couple questions. Any tasks or operations that have been pulled out of the service center in the last couple of years? Separate and apart, you mentioned policy issuance and certificate issuance and then policy checking. Is that policy checking, is that sort of comprehensive? Is it limited to a certain number of data fields?
Sure.
Thanks.
To your first question, we today do, I have lost count, but I would say we do about 200 different activities across all the divisions and geographies we operate in. My number's probably low. It may be a little bit more than that. I can tell you there was one thing that was pulled back. Our success rate, our hit rate is pretty high. I think there's another 100 things we will pull in, and I hope I won't have any of those go back. Extremely high success rate. The one thing we pulled back was something where we experimented with essentially contacting customers for payments. We did this on a pilot basis. We were doing this in the U.K.
For a variety of reasons, we said, well, accent and this, that, and the other, we preferred it to maintain customer contact in our home regions and offices rather than have it done out of India. Your second point about policy checking, it's pretty comprehensive. We check the entire policy. We're checking, obviously, all the important things on it that could cause, we go into the language as well, and check that as well. We have a very qualified team in India to do that.
Thank you. Just wonder how much investment you have made for these sort of the productivity quality improvements, and how do you measure your return on that investment? Going forward, do you continue to make those investment? I just wonder to a certain point, the investment, incremental investment, will be slower that allow you to have some leverage on the margin side.
Right. Our investment was really in the early years. As we were learning, setting up, and we ran a lot of things in duplicate because we weren't quite sure of how it would work. It's not a capital-intensive business, right? We lease spaces. The IT investment is pretty simple. It's desktops and laptops, and then you just connect with a big pipe to systems back in the U.S. It's not a capital intensive. You're investing really in people and capabilities. What we did is, as I said, we started small. We started with five people. At the end of, I think, the first year, we had about 50 people. At the end of two years, we had 100. The investment was in people, and it was gradual and over time. As I said, fixed investment is pretty low.
In terms of return on the investment, where you see that is, and I gave a couple of examples. I would say three places you can see that. In the places where we have had probably the most penetration, and I'll take the U.S. property casualty retail brokerage business. If you look at it over the last 10 years, and then you can break that over the chunks as well, you'd see, first of all, our margins, I think 19% in 2005, and we're at what? 27% now. This is not the only thing, but it's a large contributor to that. That would tell you that's one place you've seen it.
The second, if you break down, as I was saying, our servicing costs, you take producing costs out, you take IT and all of it out and say, "What's the cost of servicing?" That, as a percentage of our revenue, has come down as well from, I would say about 16% of revenue to maybe about 12%. That's an example of second place you see it. The third is industry rankings. Today, we came second, and we don't like it. We came first last year. Part of what we're getting ranked on is the quality of the service we provide. Those are places that you're seeing it. In terms of leverage today, I would say we've invested. For us, in terms of building the capabilities, having a team, we've got infrastructure in terms of four offices across all of India and so on.
For us now to expand and put services into the U.K., Australia, and so on, those will be even higher return on investment because it's the incremental cost of hiring people. We can bring them and make them productive very quickly. We pretty much know what kind of services we can offer. It's a question of just getting our other branches comfortable enough in these other areas that service can be provided, and we can eliminate the work out of those areas. Does that answer your question?
Thank you very much, Vishal. I appreciate it. Next on the agenda, you'll note that Doug Howell will be coming up. We're back now. I believe everybody has gotten their sandwich here, and if you're listening on the webcast, I hope you have, too. Next up, we have Doug Howell. You will have him for the next 45 or 50 minutes or so. Having said that, I'll turn the floor over to you, Doug.
Thanks, everyone, and good morning. Thanks for letting me spend a little time with you. I hope that as you start to become a little more familiar with our IR days that we're putting on, you're starting to notice some of the development of themes that we're talking about. When you think about the four things that we get up every day and think about, organic growth, M&A growth, productivity and quality, and culture. Last meeting, you had the opportunity to hear from Tom Trapp, what I refer to as our chief culture officer, but we're all culture officers. Today, you had Vishal Jain on the quality and productivity.
Vishal and I have been together since 2005, and I think the remarkable work that he's done on building what I consider to be a world-class permanent structure, and really has changed our DNA inside is really a compliment to Vishal and the hard work that he's done. He's the only guy I know that will fly around the world for 24 hours to have a two-hour meeting. I got to give him credit. A couple other staff that he didn't mention are the five original folks that we had come over that we started this. Two of them still work with us. Last time, I think, in an IR day, I had just had dinner with one of the gentlemen who was a very young man, right out of college, joins us now.
He's in his early 30s, his wife was over, and their daughter, and we had a terrific time just talking about the journey that we've had over the last, really, 12 years together, or actually 13 years now together, and it's really remarkable. Having spent a lot of time in our offshore centers over the last decade, I want to pay a compliment to Vishal and the rest of it. Financially, it's also very important for us. The gearing that we get on that is terrific. The fact that they're our own people, where we can develop intellectual capacity there and innovative knowledge there that we don't share with the outside world. It's not something you just can pop up overnight and do what we're doing to get people. I think that we have more CPCUs in testing in India right now than we do worldwide combined.
The level of intelligence, competence, and we're really building an insurance class of professionals in India. Vishal, thank you very much. Your first time in front of the folks, and I hope it was helpful for you. What do we want to talk about? As I usually do, is I open it up to questions early on. I have some prepared remarks that we can get to, a lot of times, we take those in questions. Anybody interested in taxes? Anybody interested in clean energy, margins, or growth? Any of those questions, we can take on. Maybe we'll just jump in to questions right away here.
Thanks, Doug. James from Citi. First question, taxes. The corporate segment, I'm looking at the commentary from today here. This is page three, if you look at the tax benefit expense down at the bottom, the adjusted number is 227 year to date. Any idea what that would be in a 20% federal tax world?
All right. Actually, good question. Let's go to page six of what you have, in the CFO commentary that we posted, we've added a page this time, and that's page six. What I've done is I've given a pro forma as-of look for the first nine months of 2016 as if we had a 20% federal income tax rate and zero AMT rate, because they really kind of work in concert. If you assume those assumptions, what it's saying on this page is that our brokerage segment adjusted EPS would go from 177 up to 201. Risk management would go from 24 to 29. Both of those effective tax rates would go down to about 25%, because we've got state load in there of about 5%, which will actually go up to six because you lose some of the deductibility.
You've got federal taxes that are in there also, that might in some jurisdictions, I believe Canada is at 30%, so that might be a little bit. It'd be down around 25%. The corporate EPS goes down largely because of the clean energy, we'll get in and talk about that. It goes down. Overall, we're going to go up somewhere around 8% in total EPS, but more like a growth of somewhere around 20% in the core businesses on that. Cash taxes paid, we paid $52 million in the first nine months, would be at about $30 million, for the nine months. You can kind of extrapolate that to in 2016, we would've paid $30 million less in global taxes. Next year, the number we would think would be about $50 million less in annual taxes paid as a result.
When you throw everything in, mix it all up, we go to 20%. AMT will save us about $50 million of cash taxes paid in 2017. Of course, as we grow domestically, that would go up in the future. The savings are there in that type of number. Now, go back and focus on your specific question, James. Does that answer your question?
Yes.
Okay, great. How to use this is to look at that. I want to talk a little bit about clean energy as a follow-up on that. At the bottom of the table, you can see the corporate segment. The reason why the corporate segment swings from a $0.08 gain to a $0.08 loss, interest deduction, it doesn't have as much value. Now somebody will say, "What happens if the interest deduction goes away entirely?" Well, we'll just use our tax credits more. We have an abundance of tax credits. If you recall, we have about $430 million of tax credits sitting on our balance sheet. If the interest deduction goes away, we'll just use those tax credits more.
In the U.S., based on our generation of what we're looking at now and what we've got on the balance sheet, we believe that we'd pay zero U.S. income taxes well into 2025 and 2026. Savings is one thing, but just in general, we think we'd be down to around zero income taxes paid for the next decade. With that, maybe another question.
One other question is, we think about just changes overall to the regulation in the U.S., and obviously everything kind of seems to be speculated on the table. How do you guys think about just changes to the clean energy legislation in general? You guys are able to take these credits into 2019 and 2021. Do you guys go through kind of a worst-case scenario? Is that the credits that we thought we could get, we're no longer able to get? I know you've told this in the past, you think you'll get about $1 billion of cash as of 2021. What if for some reason there's a change there? How does that kind of play through your mind as you just kind of think about tax structures?
Great question. What happens to clean energy if there's changes? First and foremost, I believe that the environment right now is more friendly to coal than it was pre-election, right? With a Republican Congress, a Republican president. There's coal interests in about 33 states, so that's 66 votes in the Senate. The House will never be all that excited about coal. It's just not going to be the way it works. I think the threats to it are less today than they were if there would've been a Democratic candidate would've taken the last one. I see that as a lesser risk. When it comes to tax reform, if they decided to eliminate the tax benefits for clean energy, I think that that would be a major problem for solar, for wind, for hydro, and for coal. It's all the same law.
The credits that are generated by Section 45, where we get it, also impact those industries also. I don't believe that would be something that would be on the striking block. It could be. Second of all, there's already a sunset in this. If you think about how tax laws work, they really are looking out as they score a bill for the long-term changes. If there's already a sunset in something, typically they don't change that. That's the environment. Now, what could that mean? If they came in and said there are no more tax benefits for clean energy across the board, including coal, I believe that we'll have a balance sheet somewhere around $500 million, maybe $550 by the end of this year. I don't believe they would retrospectively nullify those credits.
They may say future generation of credits is no longer permitted. I think that we still would have a glide path well into 2020, 2021, maybe even 2022 of not paying a substantial amount of U.S. income tax. You've got to parse that question to different things. Are they going to take it away going forward? I still think that's tough to do. I think there's a lot of dependency, and I don't think that'll make it through just because of the nature of the law. If they did cut it off, we still would pay very few cash taxes paid for the next five years or so.
Just one other quick question. As we look at the analysis on page six, this assumes a corporate tax rate of 20% in the U.S. What if there was a 25% tax rate as you play with different scenarios? I mean, how much of your income comes from the U.S., so we can kind of think about replicating this type of scenario if the rate comes different than 20%?
I think it's almost linear. It's not exactly linear, but I think it's pretty close to linear. One other aspect on that is that if you believe that everything survives as is, we could be in a position of having an abundance of credits so that we may sell off some of our plants to other investors that may want to be in the clean energy arena. If they want to buy our plants from us, we could sell them. That would pull cash flows earlier. It might have a negative impact on GAAP earnings if we were to do that, but it would improve cash earnings per share by selling those off earlier.
Remember, there is a difference between GAAP and cash. I've always said, "Don't rely on the GAAP earnings when it comes to clean energy." You really have to look at the difference in cash flows that we're paying. Right now we're paying less taxes of about $80 million a year relative to a 35% rate. That number would go to about $130 million less in cash taxes paid in a 20% rate going forward.
Hey, Doug. I apologize if I missed earlier comments on this topic that I'm about to ask on. I was not in the room for your opening comments. Change in administration. Any implications for the outstanding litigation or inspection by the IRS into the small captives? I think it's your business called Artex, right?
Right.
Yeah. I think that's an ongoing investigation. Is there any follow-through on that as a result of the change?
Yeah. Let me just explain what happens. We have a captive sales group that sells a legislatively allowed captive structure to small business owners that allow them to set up a captive for insuring their own risks. That's something that we do. I think that we sell 40 or 50 of them a year, something like that now, or maybe it's closer to 100. I don't know exactly what the number is. The implication of the new administration, I would believe, would actually help us in that situation. I believe that there is pressure by the IRS to kind of throw the baby out with the bathwater on it. These are really well-done structures. They're legislatively allowed, and I believe that the entire industry might be painted with a brush for a couple folks that didn't do things exactly the right way.
I believe it should be more friendly to us with the new administration.
I mean, we're getting well ahead of ourselves here.
It's not really a class action lawsuit. It's the IRS-
It's IRS. It's the IRS
that's looking at the structures of these, just like they look at the structure of everything. It's a difference. These aren't loopholes. Remember, the IRS has a real bad look at loopholes. Tax credits and captives are not loopholes. They're legislatively allowed programs. The IRS sometimes doesn't like what Congress does, so they'll have a chilling effect by putting some static out in the field. We've always prevailed in those in the past.
Right. Just as a follow-up, again, I don't want to get out too ahead of the ski tips here. If there's corporate tax reform in the U.S., the value of those services might decline. Is that right? They might not be needed going forward. Is that a relevant conversation to be having at this point?
Well, listen, I think that you got to look at it this way. For most of the folks that are doing the 831s, they're probably single proprietor organizations. A tax rate decrease from 39.6% on the top end, if you assume that's where everybody's playing, down to 33%, I don't think it's going to chill the market for tax planning strategies. Also risk shifting and mitigation. If you've got folks that have really good risk, they should be putting that into a captive. They should be affording themselves the tax aspects that go along with it. They should also self-insure on it. Then we pay the claims on it, too.
Thank you.
Doug, a couple of questions. First, in the past, you've sort of suggested that if you can't grow organically around 3%, it's tough to improve margins. Given everything that Vishal is working on, arguably successfully, is that threshold a little bit lower now?
Good question. 3%, where's it at? What I really said in my comments, if we had a prolonged period of constant 3% organic growth, I think there is margin expansion in there, right? One quarter at 3%, maybe not. A couple at 2%, if there are programs in place that are rolling in, we might see a little bit. Overall, I think there's margin expansion at 3%. If you just stamp it out every quarter for the next 16 quarters, I think you'd see margin expansion would naturally happen. On the other hand, though, is that you've got to realize that in some of the businesses you've heard from today, where they're at the upper end of margins, where they think they can provide great service, we really want to invest in production talent.
We have a really terrific opportunity right now with the aging of the insurance workforce. By some statistics, you look at it, there's going to be an extra $1.7 trillion of additional premiums are going to be created over the next 10 to 12 years in the world, right? That's a Swiss Re report that I think was in the Chubb presentation that Evan used a few weeks ago. Second of all, when you look at the number of retirees that are happening in the business, there's five going out of the insurance industry, I think, for every one that's coming in. I see the slope on that increasing over the next 10 years. For us, we want to bring in-- I can't build any more 30-year producers out of college unless they start today. We've got 400 kids in the internship program.
I think that we want to ramp that up even more globally. The answer to your question, Jay, is yeah, there is margin improvement at a prolonged 3% rate. Could see it at a little bit lower than that. I think in some of our business, I really would like them to push for organic. You heard Pat say that he's proud of what we've done, but I think we've got new opportunities there, too. We still have margin improvement opportunities in places that have not used to the fullest extent they can the services that Vishal offers around the world. Those places like Australia, Canada, retail U.K., those are great places that we can still use that to help with those margin improvement initiatives. Tom said it right.
It's a couple-year journey in order to get from the low 20s to mid 20s, but I think that'll be a big part of Vishal's work over the next two years.
The other question, I think it's a short answer. Obviously, Trump coming in, he's promised to reduce regulation. Are there any federal regulations that you have to contend with now that if they went away or were reduced, would be a positive for AJ Gallagher?
In the U.S., most of the insurance regulation is state by state, I don't see federal changes having a big impact on regulation. Now, also, this is going to sound strange coming from me, there are some regulations that I actually think have done a terrific job in our space in the insurance industry. We didn't have a problem in 2008, 2009, and 2010 of insolvencies of insurance companies because the state regulation, the solvency standards are. Market conduct standards, I actually am a proponent of that because we're focused on running a quality, highly professional organization, and I believe that regulation causes the fly-by-nights to get pushed out of the business. We're seeing that particularly in the U.K. with the intense level of regulation that's coming out of the, what used to be referred to as the FCA.
That's actually causing producers. They can't just put a shingle out and say that they're in business. I'm actually a proponent of regulation in certain cases, as long as it's reasonable. I don't see this having a big impact on us, Jay.
Hey, Doug. One more question. A follow-up on the prior question. The 3% hurdle rate, that's in a 1% or 2% inflation world. What if inflation rebases higher under the new administration? Is that 3% higher? How do you think about inflation impact on the business?
I think that's a great question. What's the impact of inflation? I think it might've been Chuck that asked the question about what he's seen in the war for talent earlier today with Jim Gault. Listen, I think there is a war for talent. I think there's labor inflation on the horizon. The advantage of now being able to have a 2,500 person base offshore, you don't see the inflation. We actually have the ability to knock the tops off of the inflation issue by pushing more work. Same hands on the oars, just in different countries, I think that's an advantage. If you look at our total cost all in in offshore, we're somewhere in that compensation range of $3,000 to $5,000 per person. We can bear some inflation there. Inflation has a 1/20th impact.
Inflation in India is 1/20th of what would be equivalent in any English-speaking country around the world. If you have a 5% wage increase at $75,000 a year, that's 20 times what it is of a 5% inflation on a $3,000 to $5,000 world. I think there is inflation there. I think the rates have to go up because of replacement costs. That typically fuels P&C pricing. Inflation is something you've got to price in. I think that would actually help in terms of it. I think there could be a matching on that. When rates go up, also, we don't make any money on the float of our. If you go back in my early days with Gallagher, we were making 6% on our short-term money. Those rates can go up. We get zero on that now.
It helps us on our float, and I think our float on our balance sheet's about $2 billion right now, if I remember right.
Thanks. A question on the tax impact on potential on the acquisition opportunities. Do you think the repeal of estate tax and lower corporate tax, how that change the seller's behavior? Will it be more or less owners who are willing to sell? From your perspective, are you going to pay more for it because the cash flow will probably be higher than it was before?
All right. Great questions on there, let me see if I can take it. The real question, what's going to happen with the M&A pipeline, basically, as a result of that? There's a couple things. First of all, the M&A pipeline right now, we're going to be able to finish out the year, I believe, without using any shares in acquisitions, so we'll be up to 18 months of that. Let me hit that point. That's part of my script. The other thing that we're going to be able to do is, when I look at the pipeline, I think you could see some of the closings that might've been targeted for late December get pushed into January under the belief there could be rate reform. I really don't look at it as a December 31st cutoff. That's just an arbitrary date.
The fact is, our M&A activity is strong. We've got $100 million of term sheets signed, and ready to close of revenue. We've got $100 million that have been prepared and sent out, just not returned. We've got another $100 million in the draft. We have $300 million of deals, and that is about 50 deals across there, so you're looking at an average of somewhere, $3 million-$5 million, $6 million of revenue per shop. Our deal size is small. There's plenty of opportunity. What are we seeing in multiples? Not seeing a big impact of tax rumor yet, possibility of change. We're not seeing a change in valuation. The real question comes down to, what are we going to end up paying for those? That will work out with time, but it should be relatively the same.
Right now, we believe we're getting about a three-turn setback. We're paying on average 7 to 7.5x, and if we're trading at 10.5x, the issue would be is that if we don't trade at a higher multiple as a result of lesser taxes paid, then I don't think we can pay more for the underlying deals. The competition, if interest rate deduction goes away, the leverage in deals will have less value, and maybe we won't have quite as much pressure from the PE firms.
Separate question on the margin side. The guidance for 2017 risk management, 17.2%, is similar to your 2016 number. I just wonder why there's no additional improvements in that segment.
The question is, why are we giving an early outlook? First of all, as soon as I leave here, I go into three days of budget meetings. This is based on how I feel right now, and we'll see. In the risk management segment, if you recall, we're moving back into positive organic territory. I would see low single digits here in the fourth quarter and maybe the first quarter, and then some more ramp-up as we get into the middle of the year next year based on the way the pipeline, Scott and I were working on that yesterday a little bit. There could be some margin improvement there, but I think right now, if they can bring it in at 17.2% for next year, similar to this year, remember we stepped it up a little bit.
Maybe it'll be 17.5%. I wouldn't see it pushing 18% or 19% by any means next year. It's as good as guess as any right now before the budget meeting.
Hi, Quentin McMillan, KBW. Thanks, Doug. I just want to follow up on the M&A question. On the third quarter call, you had mentioned $90 million of the pipeline that you said had basically term sheets that were signed. That was kind of an expectation it could fall in the fourth quarter or it could be very near term, and then another $140 million, and you're now talking about $300 million of all in pipeline. Can you just tell us, because I know on page five this says this is updated as of December 12th, but I can't quite reconcile how much of that $90 million has already come, because you've had a lot of recent announcements, or sort of where are we?
I think we've announced three or four thus far in the last. There is a big push here in December.
Okay
That will happen between now and the end of the year.
The expectation would be that we may see increased activity into the end of the year from here on.
Correct. I think the issue would be is, make sure you look at the rollover revenues table. If you go to page five of the CFO commentary, we give you our best guess of rollover revenues from deals done in the past that will hit in the fourth quarter. Just make sure you take a look at your models and use those numbers. We won't have that much roll-in revenue from new M&A in the fourth quarter because a lot of that's skewed more towards the end of the year now. Just as a modeling point for those that are building the models.
Just one follow-up question. In terms of the M&A pipeline for 2017, you guys had filed a recent shelf, I just want to know the basic thought process going into 2017, if you still believe that the cash flow is going to fund with some debt additions, or there could be some potential for issuance in 2017.
Great question. It was one of the things I wanted to hit today. We did file a shelf. That was something we do about every two years. I think that we filed for 8 million to sell, I think we've got an 8 million share buyback in the shelf. We're broad right now on our shelf registration. The intention of those shares would be to use them in tax-free exchanges, then we turn around and buy the shares in the marketplace, not necessarily matched up. We don't match it up by any means, but that would give us the flexibility to do that. Why 8 million? It's a calculation that we did, we said, all right, maybe over the next two to three years. Typically, those shelves last two to three years. I think we used 2 million shares this year in tax-free exchanges.
If you go out three years, it's 6 million, we add a little topper on that. Our intention is we believe that our cash flows are substantially strong. We met our acquisition pipeline this year with our existing free cash flow and debt. I believe that next year, our cash flow should be substantially stronger, not only from tax reform, but just the fact that we have less integration. That's largely done. We have less CapEx, that spending, because remember, we built a home office building that used some cash. Our cash flows with some debt and maybe a little stock and tax-free exchanges, we could be doing $800 million-$1 billion worth of deals next year on our cash flow.
I don't expect to use stock in M&A next year. If we did, we would buy back in the market as much as we can to control that stock going out. Similar to this year, but just more capacity.
A little bit of a follow-up question just based on all you just said on acquisitions. If we get to the end of, I guess, 2017, there's some question marks. How does tax reform play out? What are multiples on deals? These deals that you've mentioned don't materialize, and you can't use your cash, and you'll get a little bit higher cash if there is some tax reform, which you pointed out, would you then, that would be the timeframe, I guess, end of 2017, where you guys would then consider buying back stock, just if there aren't enough deals?
Yes. Just so we're clear, if we don't have M&A capacity, we are not going to sit on excess cash waiting for a rainy day. We will buy stock in the marketplace. If that means later we have a surge in M&A, we might have to reissue those shares again. We're not going to hoard cash for the future. The fact is, if we have excess cash, we will repurchase shares.
Okay. In terms of foreign exchange for 2017, I see on your sheet on page two, it points to very little impact. I guess that's probably less than $0.01 since this year was quantified at $0.01-$0.02. The revenue impact is about $50 million. Is that just due to the mismatch stemming from your U.K. operations?
Correct. A substantial amount of the FX impact is mitigated by the fact that we have dollar revenues and pound expenses in the U.K. And also the amortization on the book basis reduces the impact on EPS also. The thing about FX, just remember with Gallagher, the advantage that we have with FX exchanges is our buying power is in the local currency basis. As we look at M&A opportunities, Australia, New Zealand, Canada, and the U.K., we have use for our cash over there that is not translated. It's that local currency values. For GAAP reporting, it's as if we bring it back in most of the cases. In terms of what we actually have to buy, we have more buying power internationally because those are at local currency rates, so.
Just one last question. In terms of the Q4 organic, in some earlier comments, you guys mentioned that December was really strong last year, about 5%. That does, I guess, provide a little bit of a tougher comp this Q4. How do you see, I guess, how did the first two months, did October and November kind of play out in reference to maybe it all shakes out that we shouldn't really pay attention to the tougher December from last year?
October and November played out better than last year's November, and October. We'll see how December comes in. It really is a matter of how well do we do in December. Yes, there are some tougher comps, but I think the team seems to be ginned up for a good December. We'll see where that all lands. I'm not being coy about it. We are a sales organization. That's why let's not get too worked up about one quarter that's great and one quarter that's a little bit lower. If you go back, we're going to be basically in the mid threes for the year. Sure, we had one quarter that's 4.8%, another one that was 2.5% or whatever it was, but we're kind of around that midpoint of the range.
Doug, was just curious about, a bit back to the inflation question, but just interest rates in general. Trying to get an idea of your interest rate sensitivity given fiduciary, given debt, given others. If there's, this week, a mark on the Fed rise, and then we go through 2017 and there's additional. If there's another 100 basis points or 150 basis points of rate rise through 2017, what's the net effect to you guys, the interest rate sensitivity for Gallagher from that kind of move?
Right. There's two ways to think about it, is I think the interest rate sensitivity on the investment earning side, I haven't really put pencil to paper on that, but we typically, our interest earnings will trade off whatever the risk-free return is with very little spread, right? Because our borrowing is a risk-free, the long bond plus a credit spread. There are a lot of arguments that I would make that demand for bonds could actually go up if a personal income tax rate goes down. Maybe people will want more fixed income. Maybe they're willing to take that because they less pay tax. Let's say demand on corporate bonds is the same. Supply may drop.
If interest deductibility doesn't happen, you could have supply drop, and so therefore, if you've got demand the same and supply drops, you could actually have a compression of credit spreads, right? You all spend a lot more time thinking about that day in and day than I do. I could pose the theory that we might have an inflation in the treasury, right, and in LIBOR, but you might actually have a compression in spreads. It would also make sense that if corporations are having to pay less income tax, right, that means that they're more credit worthy, right? The spreads could come down, and also they may just not need to borrow as much. You got demand the same, corporations not borrowing as much because of the interest deductibility or their cash flows are better.
Maybe they don't borrow as much, but you got demand the same. I would say there could be compression in spreads there that might mitigate that. I would say our borrowing cost might actually not go up that much. Again, that's just one thought at this point.
Great. Thanks very much for providing the tax sensitivity on page six. I just had a follow-up. You pointed out that a partial offset would be a lower benefit from the clean energy. Can you just elaborate on how you're coming up with those numbers? It's not quite clear to me.
All right. Fine. Let's talk about how clean energy creates GAAP earnings. Right? Start with this. Every time we burn a ton of coal, we create $6. I'm just going to make up a round numbers. We make $6 of credits, and those credits are credits. They're a deferred tax asset, but basically, you send $6 less to the government. To produce that, let's say it costs us $2.50 to produce that $6 of credit, right? You tax-affect the $2.50 at 60%, you're at $1.50, right? The profit is $6.50, less $1.50 after tax at a 40% rate. All right? Everybody got that? $6.50 of credit, it costs us $1.50 after tax. Now, because remember I took $2.50 times 60%. Let's say that we take that $2.50 of cost, and you tax affect that at a 20% federal and a 5% state.
Instead of 40% in total, 35% and 5%, now we're tax affecting at 25%. Your $2.50 cost to produce is really $1.90, right? We went from $1.50 to $1.90. We lost $0.40 of value on that tax benefit because we're benefiting the cost. Instead of taking $6.50 less $1.50, now we take $6.50 minus $1.90, we're still making $4.50 instead of $4.80 or $5, something like that. That's the math in there. When you go through it, I did it for you. I don't expect you to follow along right now, we can work through it. The difference, clean energy technically isn't as dollar profitable, it's still almost infinite since we have no cost in order to develop. It's not like our returns are being diminished dramatically from doing that.
GAAP earnings won't be quite as much. We won't use them as fast. Maybe it's one of those things that we should sell off some of the plants to pull the cash flows closer. Here's one of the reasons why I'm not all that anxious in jumping in and doing that immediately. What happens if interest deduction goes away? What happens to our cash taxes paid? Zero. Nothing's going to change because if we lose the interest deductibility, we'll just use more credits, right? What happens if base erosion, where moving money around the world goes away and everything has to be taxed in the U.S.? We can use more of our credits, still pay zero U.S. taxes. I'm not anxious to sell off plants at this point because I think there's so much uncertainty.
Let's have another six months of certainty develop before we try to do that. If we get to a point where we have an abundance of credits, maybe then we don't need as many, and what we do is we turn credits that we could use in 2025 into cash in 2017, 2018, and 2019. It might be worth that trade-off. We're thinking about that every day. Right now, I don't want to give away the gold until we understand exactly how everything's going to work. That's a long answer to the question, I need another six months to see how this all plays out.
Two questions. The first one, there's a lot of uncertainty about the corporate line going into 2017 and all the things we've been talking about on tax reform. If we keep the current state, anything we should be thinking about in terms of clean energy for 2017 and other interests? Is there anything?
Yeah. If you go to, and I should have started, if you go to page four, I believe, into footnote number 1 on page four, in there, we've added a comment that says, "We believe 2017 net earnings from our clean energy investments may exceed 2016 net earnings by 10%-15%. That's assuming no changes in U.S. federal corporate income tax rates." That's the answer to your question there, Bob, is that-
My eyesight didn't pick up that footnote.
That's okay.
Thank you.
That's all right. No, I think it's important for the listeners, too, as you navigate through the CFO commentary. We put that in there. We do believe. We are having tremendous results. Actually, that's actually after we taper back a little bit on how much coal is going to contribute to the energy grid next year. We actually have some assumptions coming back on that, but we have plants coming on. We're almost to terminal value on that, though. We have one more plant that isn't scheduled for restarting in a different location at this point. I wouldn't look past that number too much into 2018. Now, the next natural question you might have that I'm working on, what will happen to the GAAP earnings if taxes go down to 20%? I think we can get pretty close to holding GAAP earnings in 2017, consistent with 2016.
For clean energy or so?
For clean energy. If we make GAAP tax earnings, the midpoint of the range is $114 million, which is delivering on our commitment of about a 15% step-up from last year. I think that we can hold that number pretty close on a GAAP basis if rates drop to 20%.
Thanks. I just want to make sure I'm understanding the guidance Pat was giving on brokerage organic for Q4, Q1. It sounded like you said it was close to Q3 as opposed to the faster growth quarters. Did I understand that correctly?
I think there's two things he said, is that in his estimation, 2017 feels a lot like 2016 on kind of an annual basis. If we're running along at what, 3.6% for the year or something like that, he says it feels a lot like that. Some of that will depend on what happens here in the fourth quarter. Coincidentally, I think we posted about 3.5% in the third quarter too. There's three numbers that are floating out there. 2016 in total so far is about 3.6%. The third quarter was somewhere in the mid threes. We could have some volatility by quarter, but overall, 2017, he feels similar to 2016. That's what he said.
He didn't give Q4?
No, he did not give Q4 or Q1. I think I did when Elyse asked the question of how does it feel in the fourth quarter. We've got a big couple of weeks now. We'll see how we do. Let me go through a couple other things here that I wanted to make sure that we touch on today. How are we doing on time? We got another 15 minutes. All right. We talked about the shelf, making sure that you don't read anything into the shelf. It's $8 million as issue, $8 million as a buyback. That doesn't mean we've changed our sentiment on using shares in acquisition. That will be the last thing that we use, or we mitigate when we use it to coming out. Let's talk about the change in the tax code.
The thing to remember on that, either way, we, no matter how you slice and dice it, we pay less income taxes. All right? That's good. Deal pipeline, I really see a lot of. Let's make sure we hit why. There still is a scramble for capabilities and resources that's out there. The smaller producers are understanding that being a part of us is very important. When Joel Cavaness was talking about his network of 15,000 independent agents and brokers that are there trading with through RPS on certain lines of business, remember how RPS started. It started from scratch, and it got strong in certain capabilities, and it got strong in certain jurisdictions. Now, as you bring that together, it's really an awareness building that of other products and services that RPS can bring together.
That agency force out there can come to us for expertise and capabilities. Then eventually, when they're ready to sell, that's a great pipeline into our retail business brokerage environment. I see the deal pipeline is very good. Integration. We really haven't talked about integration very much. I want to make sure that on the corporate sheet, we say that in 2017, the financial impact of integration is very little. All right? Now, somebody just say, Somebody asked me a question, what does very little mean? Elyse asked that in terms of FX. Very little on FX means about what it was last year, right, or what it was here in 2016. $0.01 or $0.02. Integration, we might have $0.01 a quarter or something like that that flows through, but by and large, we're done.
I was in London just two weeks ago, three weeks ago. Spent a lot of time there. The integration is largely done. We have one system that might drag a little bit into 2017 that cost us $0.01 a quarter. By and large, it's done. That's something there that I'm very proud of the team and how far they've gone. That's down from $0.18 a share so far, I think this year, $0.40 a share last year. We've really done a great job of getting those businesses integrated. We talk about capacity for M&A, $800 million to $1 billion, I think, next year. Oh, there's one thing that's floating around the industry. How many are you aware that there's a new revenue recognition standard coming? Let the record know that Bob's a big fan for changes in revenue recognition.
I get excited.
Well, you might be close enough, Bob. It is an issue. Revenue recognition is going to cause your lives to be difficult going forward, as we are going to go to deferral of costs on certain things, and we are going to have a deferral of revenues and others. For those of you that follow the insurance carrier space, we might end up with something like a DAC, and we might end with an unearned premium reserve that recognizes over time. It is basically you recognize revenues based on level of effort, pre and post-sale. It is going to do nothing more than frustrate you like us. I will be honest, it is expensive. It is probably running us $1 million or $1.5 million a quarter for us to implement this new rev rec standard that is coming out. It is not just the brokerage space.
I think carriers are immune to this because they have. I do not think there is a change to that that I am aware of, but certainly all commercial enterprises, any sales enterprise, it is going to upset the apple cart, and you are going to be frustrated for the next 18 months of your life. We will do our best to restate history so that you can get a comparative look at it. The question was, what is the time frame on implementation? Our first quarter of 2018 accounts will have to be prepared using the new revenue recognition standard. Disclosures will start going in the quarterlies. I think Microsoft put out something, I was reading it on the plane, which was a lot of fun, about the revenue recognition standards that are changing. It is something for you to be aware of.
We may end up having to report organic more like changes in written premiums versus GAAP earnings. Right now, organic is pretty close to GAAP earnings. That we use the same measurement system. We just exclude the first year of acquisitions. That is in sort of trying to get the same store sale. We might end up having to do a written commission disclosure versus a GAAP revenue recognition. You will be frustrated, and so will I, by extension. I think those were the comments that I wanted to make today. Other questions, clarifications? Thanks for coming and joining us. I think it is a great opportunity to get ahead. We are very excited about it. I think the next vignette we might do in the spring is something around organic growth and M&A, just a little bit to hit that plank.
If there is other things you would like to hear, make sure you feed it back to Ray and Marsha on that, and we will try to bring some themes into these IR days that cut across the units, not just necessarily verticals. Thanks for everybody for coming and being on the call today.
Thank you, everybody, and happy holidays. If you are on the webcast, that ends our session. You may disconnect your line now. Thank you.