Welcome everyone to our third quarter investor meeting, including those of you that are attending here at our headquarters, and those of you who are listening in on the webcast. We have a great lineup of speakers today, and the format will be similar to the past, with each speaker providing about 15-20 minutes of prepared remarks. Then we'll open up to Q&A for those of you who are here in Rolling Meadows. Note that we'll be using overhead microphones during the Q&A, so for the benefit of those on the webcast, please speak up when you're asking questions. Additionally, we just handed out our updated CFO commentary document, and we posted the same document to our website at www.ajg.com/september15materials. An 8-K regarding this information will be filed shortly. Before we get started, I'd like to make a quick legal comment.
Today's discussion may include references to non-GAAP measures and forward-looking statements. You can look at the investor relations portion of our website for additional information relating to our non-GAAP results, including definitions, purposes, and GAAP reconciliations. Additionally, our forward-looking statements are subject to risks and uncertainties, including those described in the Risk Factors section of our 10-K. With that out of the way, I'm going to hand it over to J. Patrick Gallagher Jr., our Chairman, President, and CEO. Pat?
Thank you very much, Ray. Welcome everybody. Welcome to our new headquarters and a beautiful September day as we all get ready for a change in the season. Thanks to those of you who made the trip out to our headquarters. We appreciate having people in the room. Thanks to you that are on the webcast as well. Our format today, I think when I look around, I see a lot of familiar faces, so I think you're pretty familiar with what we do. I'll spend a little bit of time just on some introductory comments. We'll go to questions. Then we've got a great lineup, I think, of people that can tell you not only about our business but about the industry itself. I can't start this morning without first starting on the hurricanes Harvey and Irma.
First of all, we have an awful lot of colleagues in Texas and in the Southeast. Those colleagues were impacted seriously by the storms. I'm really proud of our team in terms of our crisis management efforts and in terms of taking care of our colleagues. The good news is we know everybody's accounted for, nobody's hurt. Bad news is we do have some people that have had some disruption with their homes, what have you. I'm also really proud of how our folks have handled our customers' situations. Our communication team did just an excellent job. We got pre-storm communications out to our clients, how to get prepared, what happens if you've got a loss, how do you file the loss. We got kudos for being in touch with them before anything was really happened.
We certainly don't, at this point, have an assessment as to either the amount of damage or the number of claims. We've already got over 1,000 claims just from Hurricane Irma alone, and most people haven't even been able to get back in their homes. I spend time with friends and what have you, as I know all of you do. They really, I don't think, have much of an appreciation for the insurance industry until things like this happen. All of a sudden, they realize what a big and important role we play as an industry in people's lives. I think you all know that we're very dedicated to our internship process. We had 300 kids in internship this summer in the U.S.
If you looked globally, it was probably closer to 450, introducing young people to what I always talk about as being the greatest business on the planet. When I talk to these young people about why I think this business is the greatest business, I talk about the fact that it's creative, it's competitive, it's compelling, it's necessary, it's huge. At the end of that, I always add the fact that what you get at the end of the insurance process is an industry that puts people's lives back together. You're going to see that in Texas, you're going to see that in Florida, it's something I'm incredibly proud of. We've got story after story of our folks working 24/7.
We've got a person whose house was completely flooded out in Houston who spent the time to make sure she got to the office to get a claimant a check because the claimant really needed the money. We have story after story of that sort of thing going on. We were able, the crisis management team, as I said, did an unbelievable job. We backed up every office. We closed all our floor offices. No phones went unanswered. All the work got moved to respective offices. That's still going on. We're taking claims on now even with three offices still closed, and people are just responding to our clients in a way that's fantastic. Hearts go out to those that have had bad losses. The good news is our people are safe.
This morning, no shock to any of you in the room, we're going to go through exactly what we go through almost every single time you see us. We're after four things. We want to do everything we can to grow organically. We spend a huge amount of efforts, and I'll talk about these, on organic growth. It's no surprise to me that usually every quarter when we report, we are the number one or number two in reporting entities in the brokerage space in new business and organic growth. Secondly, mergers and acquisitions. Since 2002, we've done over 400 acquisitions. We'll do 50 or 60 of these a year. Average revenue of these acquisitions is right around $4 million-$5 million. People will oftentimes ask me a couple questions.
They'll say, "How can you do this many acquisitions and change these people's culture?" The fact is we don't change culture. Our due diligence is 99% on culture, and there has to be a good fit, or we're not going to do the deal. That means that the cultures are similar. That pipeline is extensive, and I'll come back to that as well. Third thing that we're trying to do every day is become more productive, increase our margins, and have a higher level of quality. We've increased our margins about 400 basis points over the last five years. Most of that is attributable to the work that we do in our offshore centers of excellence, primarily in India, but now also in the Philippines and in Las Vegas. These people do great work in helping us process a whole host of things.
This is not just IT, this is not just back room. There's a whole host of things that they do for us that make us more productive every day. I'll come back to that. The last thing, the fourth pillar of our strategy, which you've all heard me say 100 times, was to maintain a unique culture. I'm really pleased those of you that could make it to our headquarters today, because I think you can get a feel for the culture as you're just in our building. You just literally go downstairs, you get a cup of coffee, you'll see people collaborating, you'll see people laughing, you'll see people having a good time. We enjoy working together. This is a culture that is very, very, very unique. The older I get, and as I look around the room, I realize that is exactly what's happening.
The older I get, interestingly enough, the more important I see this whole aspect of culture being. I've had people in your business, in particular, in the investment side, ask me, "Why is this not BS? What's the difference? You're there to make money. You got a job. You come to work. You're glad to have a job. You feed your family. You go home. That's where you spend your wake time." What they don't realize is what it's like to have a 35-year career with people that you've worked with that are your best friends, and that they don't realize what it's like to have your friends and your kids and your kids' friends come into the business in this great business. Don't get me wrong, this is not an easy place to work. This is a competitive environment. We're a competitive company.
You either pull your own weight or you're gone. It's just that simple. When you've had that opportunity and you realize what it's like to have spent a career with some of your best friends and building a business. When I came into the business in 1974, third time, we had 125 people, we did $6 million in revenue. Today, we're approaching $5 billion in revenue. We've got about 26,000 employees. Our market cap is just over $10 billion. When we came public in 1984, our market cap at the end of that year was $79 million. I got to go to the party when we went on the New York Stock Exchange in 1987. It's been a really great journey. Let me go back and touch on those four things really quickly, and then I'll open up to questions and answers. Organic growth.
You start organic growth by not losing your customers. We have verticals, we all have niches, but we believe we're stronger than anybody in the market in those 32 areas like real estate, religious and not-for-profit, public sector, construction, et cetera. In those areas, the company works together on a global basis in a way that I think is really unique in the business. That makes us very, very strong. We also know that 90% of the time, because we're on salesforce.com, we're getting better and better at getting data and being able to analyze and use data. We know that 90% of the time when we go out to compete, we compete with somebody smaller than we are. That's interesting because I would suspect my own bravado is that I think we should probably win 90% of the time. We don't.
We still win about 35% of the time, which is not too dissimilar to what we did when I first started. When I think about that, I think, "Well, I wonder why that is." I know that our people have got great relationships with the insurance companies. In those verticals in particular, we're stronger than anybody, and it's because it's very difficult to break that existing relationship. Now we have a transition coming in across the country as baby boomers are retiring, and those relationships are beginning to not be necessarily as strong in the next generation. I think we've got an opportunity by proving the capabilities that we have that go beyond just the relationship to spike our organic growth.
That's what we're preaching to ourselves all the time, is we've got to be number 1 in organic growth every single quarter because we're a big sales and marketing effort. I view myself as support for the sales effort. Just yesterday, I cut a video for an opportunity that we have in the Southeast that basically goes, "Thank you for the opportunity. We really want to prove that we would be the best broker for you." All of us view ourselves as support for the sales effort and the maintaining our business. Organic starts with holding onto your accounts and getting new ones. Mergers and acquisitions. Our pipeline is incredible. I have not audited this, Bobby Reagan, who's a very successful and very smart consultant to the agency world, had a conference in May. I was part of a panel discussion.
His statistics are that there's 39,000 agents and brokers in America, not people, firms. He believes that for every firm that's been purchased over the last decade, another one has started. That that 39,000 is not going down with consolidation. That's just in the United States. The opportunity for us to find firms that we'll tuck in is unbelievable. Get this, in July, Business Insurance put out their top 100 United States agents and brokers. To be number 100, you did $26 million in revenue. There's 38,900 agencies, brokerages in the United States, less than $26 million. Our pipeline for opportunity to tuck in, we're getting these deals done at a very fair price. I'll tell you why. When you've got a $5 million agency, I can tell you that, no, we're not going to pay 15 times, but here's the deal.
Come aboard and grow, and you can make that money. First of all, we're happy to pay you as you develop your business and grow it. My poster child is an acquisition that we did in Des Moines, Iowa over a decade ago. The gentleman that sold to us had a very nice book of business. We gave him the capability to put on some very large commercial accounts that he could have never touched. When we did the deal, we gave him cash and stock. The cash got his kids through college. The capabilities tripled his book of business, so his base income has tripled, and his stock has tripled. When I'm talking to someone that's got a $5 million book that's thinking about, do I go to a PE firm? Do I go with Gallagher? With Gallagher, a lot of things change.
A PE firm or some of our competitors in the acquisition arena don't really ask me to change even my name. Which way am I going to go? Call the guy in Iowa and see what it's like a decade later. Mergers and acquisitions for us, I think easily for the next generation will be very key. Key to us, as I said, is the culture and the fact that the entrepreneur stays. We do not buy people, synergize out all the costs and say, "Thanks very much, we'll just take your book of business and suck it up." What we do is say, 'Now, you've got a capability level that you never had before.
Let's go get those biggest accounts in your town.' In terms of productivity and quality, probably my greatest learnings over the last decade have come from the work that I've done with our Global Chief Service Officer, Vishal Jain, and his team of people out of our India service centers. I've learned just an incredible amount. Every process can be broken down into its components. Every process can be continually improved. You never get to a point where you say, "We issue certificates of insurance just right." You constantly look at how do we issue them, how can we do them faster, how can we do them with more accuracy, and you measure. We know that we issue millions of certificates a year out of India at an accuracy rate of 99.9%, and we test that every day. We can issue them in 19 minutes.
I was sitting in a meeting, we were talking about our India service center, and one of our guys said, "This is cool." Listen to this. A client had emailed one of our service people asking for a certificate. She sent that request to India. India executed the certificate in about 15 minutes, and the client wrote back, "That's the best service I've ever had in this business. Thank you." That's unbelievable. That's a differentiator. We can measure all the services that we're providing out of India to know the level of quality, and that's when I go to a conference like the Reagan Conference, which is a room full of agents and brokers, and can say to them, "How many of you in the room can actually tell me the level of accuracy you have in the certificates you issue?
By the way, if any of you put your hand up and say yes, I'm calling you on it. I don't buy it. I don't think you measure it. None of them do. I think when you're talking to a contracting risk in particular, you say, "Hey, how important are certificates to you? How many times you get thrown off the job? How many times you're not allowed on a job because something went amiss there?" It's very important. Lastly, the culture, I've talked about that. I just think that it's fascinating to me. You're all familiar with the Gallagher Way. I had a chance to meet the gentleman that was in charge of the Gallup Poll. He was telling us at a CEO breakfast that they were trying to come up with a way to poll the human race.
Very difficult, because doing that, you have to ask the question. If you have to ask the same question, language by language, culture by culture, it's difficult to do that. For me, when I think back on that breakfast and I travel the world seeing our offices, it's fascinating to find the Gallagher Way up on the wall every office I go to. It doesn't matter if you're in Singapore, it doesn't matter if you're in Toronto, it doesn't matter if you're in Birmingham, England. That document resonates with our people. That's telling me that's what we want to be. That's where we are, and that's what we want to be. I will tell you that folks told me you couldn't keep a culture like this when you get to 1,000 people.
You won't be able to keep it at 10,000, and it hangs together globally at 26,000 people, and it will when we hit 50,000 people. I'm proud of our results. I think we've done a great job building the company. I know many of you have been part of that growth over the years, and we thank you for that support and that following. We think that we have just a clear road ahead of us to continue to really build this enterprise. With that, I'll throw it open to questions. I've got to make sure I stay on time here. I can get wordy. When am I done? Okay, good. I'm done at 8:30, so we got about 10 minutes. Paul.
I'm curious about your comment about who's replacing these new agency groups and the process of due diligence and your view on that.
Paul's question, so I can do it for the webcast, is he's interested in my opinion, who's replacing these agencies that are getting bought out, basically. Who's coming into the market? One of the things about insurance, one of the great things about insurance brokerage, is my analogy is a little bit like soccer. What you need is a ball and a pair of shorts, you're in the game, right? If you've got a license, you can hang a shingle. Here's an interesting fact. Over that 400 acquisitions we've done since 2002, not two of them were exactly the same. Even though it's $5 million here, $4 million there, you would think that you'd come across what would be cookie cutter, right? I mean, we're all kind of doing the same thing.
They're working with The Travelers, they're working with The Hartford, they're working with CNA, they're working with Chubb. All the same markets we do business with. Every single one of them has a little bit of a creative edge that they found in the marketplace. They found their own way to do something a little different. That, to me, is fascinating. What's happening is people who are creative, and this is not all about insurtech either. People who are creative that get frustrated sometimes in larger organizations will start their own. Not unlike the restaurant business, a lot of them fail. It looks like a real easy business, right? I can't tell you the number of people who said, "How hard is this? I'll pick up the phone, I'll call and get an appointment. Of course, the guy is going to let me quote.
They always let me quote. At least a third of the time, I'll have the cheapest quote, so that person will buy." I'll see that person a year or two later and they'll go, "Holy crap. I got the crap beat out of me." This is not an easy business. They don't all succeed, but it's people that have a creative idea that hang a shingle at their own shop. I will tell you, and this is one of the things I'm proud of, our people doing acquisitions realize that these people at $4 million, $3 million, $5 million, they're selling their baby. They started this thing at the dining room table with their wife or their husband's support. They have maxed out their credit cards. They've lived on the edge. They typically have young kids, and they've started to get traction and get success.
Now, 20 years later, we're buying them. Our lawyers are empathetic to that, and our finance folks are empathetic to that, and our HR folks. I call every one of these people that sell to us. I try to get to every principal. I've never once heard somebody say, "Everything was great until I met the lawyers. Everything was fine until I got stuck with Doug and the pricing people." That's not what they say ever. They always say, "You know what? You got the greatest people on the planet. They helped us." Elise, you had a question.
Yeah. I guess it was just for the past six months or so, you've been pretty positive on this year in terms of organic growth. We saw a pretty strong first half of the year. Has anything changed since the quarter in your mind? Still just as positive and
Yeah, The question is, am I still positive on the year? Yeah. I've said all along this year that 2017 feels like 2016, maybe just even a touch better. I think our pipeline for new business is strong. I think our organic growth seems to be right in the same ballpark. I like what I see going on.
What about in Australia, since you guys reported some of the other large brokers there kind of pointing to a hard market, what are you seeing there this year just in terms of prospects also when we think about growth for 2018?
You might remember that Australia was one of those places that in 2014, we did our three or four large deals, you'll recall. In those deals, I think people were kind of suspect, and we said at the time the one place that we needed to work on margin and growth was Australia. When we bought Australia, it was going backwards quarterly around probably 5%, 6%. The market is harder in Australia and New Zealand now, and we are in really nicely positive organic territory, and our margin is improving. I'm very, very happy with the Australian business. We have a woman that's running that business for us now that is top-notch. We didn't really have a sales culture in Australia when we bought the business in 2014. It was kind of a what's going to happen today culture.
Today, we're out after new business, telling people our story, proud of the Gallagher brand. She's doing a great job of driving organic growth.
When the market's really hard in Australia, how high can the organic growth go, you think?
Well, I don't know the answer to that question. I wouldn't say Australia's market is really hard. You have to remember, my history now, 40 years, a hard market is a hard market. 1974, 1984, 2001, you can't find insurance for your clients. You're sitting down with clients saying, "Look, I'm sorry, but you're going to have to retain the first $1 million, or we're not going to be able to buy any cover." You're seeing prices jump 40%, 30%, 50% if there's coverage. A hard market defined by something like rates going up 7%-10%, it's an adjustment, and that's really what we're seeing. Bob?
You're great on macro forecasts.
I am? I never did.
You make a lot of them.
I've never made a prediction that came true. Other than our stock price, Bob.
No.
Which I've noticed you've not always been bullish on.
Well, I have. You got to look at the long picture. Over 30 years, I've been quite positive more than I haven't. The economy, you said it's trending forward, job growth, a little hopeful on tax cuts, which less hopeful. Harvey or Irma changed the picture at all in your mind in either the economy or the market?
The economy, I will definitely say that both of them will be a positive, unfortunately. You can hear the trucks going south right now. The construction industry is going to have a boom. All the supply industries are going to have a boom. I think that will ripple through the economy. Repairing infrastructure will have a positive impact on our contracting risk. From an economic standpoint, the federal government getting involved, the insurance companies paying their losses will be a positive for the economy and for employment, especially in those regions. A lot of people will head that way. As far as the event and what it will do to rates, it's too early to tell because I think that the spread on what you're hearing the loss to be, and we're not a modeling company. We work with the modeling companies, but the spread is huge.
You'll all have probably a better idea as to whether this is just an earnings event or whether it turns out to be a capital event. What I'm interested to know, Bob, and I'd actually like your opinion, I want to see what this does to the ILS market. I think this insurance-linked securities market and cat bonds have exploded over the last decade with no storms. It's a pretty easy return, right? Heck, I got into cat bonds. It's a non-equated security, blah, blah, blah. Well, now you got to pay some losses. A, I want to watch them pay, and B, I want to see what happens. Now, in the past, as you know, what happens when there's any kind of dearth of capital? Capital pours in, right? We'll see. I think it's going to be fun.
It'll be interesting to see what happens to the ILS market as these losses finally have to get paid.
I think it would've been a more Thank God Irma wasn't as bad as everyone thought, that question would've been a lot more valid.
Yeah.
We would've tested it a lot harder if the logical Friday conclusion had played out like we thought it was.
It's all about me, Bob. I've got two apartments on Collins Avenue in Miami Beach. I'm really kind of glad it went the other way.
Right. No, we all are for society.
Right.
There was a thought that we could come into our office on Monday and have a lot of terrific investment opportunities, and there would be a pain. I think just my soft feeling is this may validate the ILS market. We'll see them pay out their losses and function.
Reload.
Reload and capital markets, pension funds will just jump right back in. An Irma scenario that would've been severe would've definitely tested your thesis better.
Yeah. We'll see. Josh?
Pat, you might punt this question to Jim or Scott, Irma and Harvey related, I don't know a lot about the NFIP commercial market, I don't know a lot about deductibles in Florida, whatnot, for commercial property. All these claims you see coming in, are they piercing the retentions that the buyers of the insurance had purchased?
Yeah.
To what extent are you competing with the NFIP for coverage for small commercial businesses?
Great question, Josh. I don't know the answer to that question yet. We're so early days. Scott will give you some probably statistics around what Gallagher Bassett's seeing from our property clients in Florida, but it's still way too early. A 1,000 claims out of Florida, I'm going to guess we'll have 10,000. We're early days. In terms of how we compete with NFIP, well, obviously, we use NFIP, one of the things that I'm hoping to get to, because we're getting better and better electronically, is making sure things like flood insurance, cyber insurance, and what have you, are put front and center in front of our clients long before these events happen.
With Hurricane Harvey, what we're going to find, and this is very typical, is if you're not in a flood plain and your bank doesn't make you buy the insurance, most people don't buy flood insurance. Most people in California don't buy quake. I'm like, "Well," I talk to my California friends, colleagues all the time, "You don't buy" "The deductibles are too high and it's too expensive. I'm not going to bother." Well, okay. I don't know the answer to where this is all going to fall out just yet. Next question.
It sounds like the organic picture in Australia and New Zealand is pretty significantly improved.
It's good, yeah.
Is there an opportunity to improve the organic picture in the U.S. as well, if so, could the combination of a stronger kind of international organic picture and maybe the same to improving U.S. organic picture lead to kind of an acceleration in organic headed into next year?
Let's put it this way. Luckily, Ray said that there would be forward-looking statements that maybe would not happen when he started the meeting. I think there's tremendous opportunity. I look at it as a vector of forces. First of all, we're competing 90% of the time with people smaller than us. Secondly, our verticals are stronger in 30 areas than anybody in the market, and I believe that's true against Marsh and Willis. I only compete against them 10% of the time anyway. They're very good firms, and we win some, we lose some. That's fine. It's the 90% of the times I'm competing that I think we should be winning.
Secondly, we're getting better at data mining and know that when it comes to an account, we typically provide about three lines of cover, where most accounts are buying anywhere upwards of 12 lines of cover if you include the benefits. We have a warm relationship with people that are buying insurance from other folks that we're not selling. We call that right space. What we're saying to ourselves is, "Why would we go make a bunch of cold calls to go find people that will buy three lines from us, instead of going to customers that are already happy with the three they're buying and say, 'Why don't we do the other nine?'" That's one effort that's afoot. To answer your question is I'm constantly, and here, I'll share with you.
One of the things we're constantly doing is taking business units and putting them up in front of the group and saying, "Hey, how come Chicago downtown has an 11% organic growth rate? How come Milwaukee, which is not a huge community by any means, has a 7% or 8% organic growth rate? How come over here, you're flat to zero? What are you doing as a leader that models these folks?" We're constantly doing that. The direct answer to your question is, yeah, I hope that there are things we can keep doing to continue to improve our organic picture. My thing is, can you just imagine if, in fact, we found some strategy that was a breakout in organic growth? Your community would pay real attention to that. My time is up.
Yep.
Thank you everybody for being here. We really appreciate your time. Those on the webcast, thank you very much. I hope you have a great morning.
Thanks.
Appreciate it. Bye.
Thanks, Pat. Next up is going to be Jim Gault, and he's going to be talking about our domestic retail P&C brokerage operation.
Good morning, everybody. I'm going to start with an apology. I don't know, there's something going down my throat today, so I'll be clearing my throat a lot, so please bear with me. Also, what I'll try to do is bring a little bit more depth to some of the things Pat mentioned in terms of what our strategies are and some of the tactical things we're doing. Let me start with just an overall view of what is now called Gallagher Global Brokerage, which is the piece property casualty business worldwide. Earlier this year, we announced a reorganization, which is really nothing more than a well-planned succession plan. My team had been in place for about 15 years, and the average age when we got in charge in 2001, 2002, was probably about 48 years old.
You can imagine, after 16, 17 years, the average age went up. We put a succession plan in place about four or five years ago, where we identified the next generation that we thought was going to really help us take it to the next level on a succession basis. We put them in an executive vice president role. We gave them a lot more responsibility in the regions that we had. We literally took our five regions and split them in half. Every one of them responded to that challenge over the three or four years that they were in that role. January 1 of this year, we announced that we were going to go one single name globally because it was a little bit confusing.
We called it brokerage services, which is kind of the U.S. and international, but it was all brokerage services. We have to have one name because we're one operation. We're trying to share the same opportunities and business together. We changed it to Gallagher Global Brokerage, and I moved to the role of chairman, and Tom Gallagher moved to the role of CEO and president of Gallagher Global Brokerage. At the same time, Mike Pesch, who was an intern in the early 1990s, was the regional manager of the Midwest region for the last several years, moved up to CEO of the U.S. I'm going to take Mike's role. He's not here today. Tom will cover the international side of Gallagher Global Brokerage. Last year in the U.S., GGB USA did about $1.2 billion in revenues from about 125 locations.
We currently now have 10 regions, nine of which are geographic-based, and one is our small accounts and affinity operation, which, by the way, is our best organic growing region by far. That business has just taken off for us. We place about $8 billion a year in premiums with our insurance carriers. To give a little bit more flavor to some of Pat's comments, I've used this analogy before. Think of the insurance buying public or the commercial side as a triangle. At the top of the triangle, you've got the Fortune 100, the biggest, most sophisticated clients that have lots of exposures worldwide. At the bottom of the triangle, way down here, you've got the nail salons and card shops and the one-offs, the ma and pops, and the sole proprietors, right? They all have a commercial insurance need, right?
We play in all the-- if you were to segment it in the top of the pyramid and then near the bottom, we play in all of those three areas. The preponderance of our business is in the middle market, in that middle slice. We do have accounts, some in very large parts of Fortune 500 at the top of the pyramid. We've got lots and lots of small accounts as well. That's just the nature of our business. We've learned to embrace that business. For years, we tried to get rid of it, but we found that it's like flypaper. You can't get rid of it. It just comes back again. Instead, we reorganized in a way to see if we can handle that much more efficiently.
I mentioned that we have a national region, which I won't get into, but we're handling the small business completely differently than we used to. In that middle market is really where we make our bread and butter, and we play every day. We finally, and I give credit to the new leadership team, which, by the way, their average age is probably 44, has finally agreed on a value proposition. We've had one for many, many years. They've actually branded it, and they've got a sales app now that all of the production force nationwide can tap into and get recent information. Basically, it's the six key things we do to help our clients manage the cost of risk. It's about having good connections and good placement of premiums.
It's about being able to come up with multiple structures that best fit the risk appetite of the buyer. We will help them identify gaps where they have needs for coverage, whether they want to purchase it or not. We'll also help them identify uninsurable things that they have some exposure to, that they need to figure out ways to mitigate those exposures. We'll give them loss and claim support. Finally, many of our clients will assume liability for a third party, and so we help them manage that through contractual liability commitments and other things. We call that CORE360. Anytime you hear, and in the future you'll hear CORE360, that's what it is. There's many things we do in each one of those six components of CORE360.
We get paid, and again, this is my preamble, so I'm rambling, and I'll get into the four pillars that Pat talked about in a minute. We get paid four ways. We place insurance, and we'll get a commission. We may place insurance without any commission and get a fee, or sometimes, in some cases, we might get a partial commission and a fee. Basically, commission, fee, we get supplemental commissions, which is a % of premium placed in certain lines of coverage, and then we get paid on a contingent basis. Every single dollar is disclosed to our clients. We're completely transparent. Not just on the retail basis, we will disclose all the way down the line.
If we're using RPS, our wholesaler, or our London office, or some other facility within Gallagher, we go all the way down the line, and our clients agree to what that compensation should be. Pat mentioned the 90-10. We're competing 90% of the time against brokers who are smaller than us. I completely agree with every comment he made. He's the boss. Because we should win a lot more than we do, because if you think about it, with our size and depth and strength, and we're competing against a local broker down the street, you would think with all the resources we have, we should win every single time. We don't. Pat's right. It's hard to break that relationship. Sometimes, in my view, we don't necessarily qualify our prospects well enough to see that. You ask a simple question, "Who's your broker?" Right?
Sometimes you find out when you don't get the order, and you do a really good job. If you don't ask the right question, you find out the broker is the buyer's brother-in-law. Well, if I'd known that, maybe I shouldn't have competed in the first place. It's things like that in terms of qualification that I think we need to get a little bit better at, and I think that our hit ratio will increase. Our vision is to be the high-quality, high-growth broker, and we're doing everything we possibly can to do that. Here's the four things. When Pat talks about organic growth, acquired growth, quality and productivity, and culture, let me give a little bit extra deeper flavor on some of the things we do in the U.S. to drive those things. Many of you have heard some of these things before.
First of all, about three years ago, four years ago, we wrote a playbook for our branch leadership. We've been asking to do a lot of things, and we've gone through a lot of changes. During, if you may, my regime, we went from a very decentralized model to a very centralized model, and some of which you'll pick up on as I go through the rest of my comments, where we try to give our leadership a focus on, "Here's what we want you to do every day." Right? We had changed the way with which we approach things throughout the entire division. We want you to spend 75% of your time driving the top line, and that means selling new business, keeping your clients, looking for acquisitions, and trying to find good production talent.
We think because of some of the things we've done in the back room to bring support to the branches and other things we've done to support their production efforts, that they should be able to spend 75% of their time doing that. Some of the things we do to support them in that driving the new business and retention is the niche practice groups. Pat talked about that. Those are organized groups that our people can tap into to get the expertise they need, whether it be an industry group, whether it be healthcare, construction, real estate, public entity, transportation, et cetera, or coverage groups, casualty, property, executive lines, specific coverage needs. We launched, a couple of years ago, what we call Smart Market. Smart Market is our ability to connect with certain insurance carriers for a fee to align our renewal business with their risk appetite.
It's great for the clients because many of our producers don't recognize the fact that we have carriers that like the type of business they're in, and they would have never thought of offering them an opportunity. We also include in that our new business. What's interesting is when we started the discussions with the eight or nine or so carriers that we do this with, the renewal business, because we controlled it, was obviously the real thing that they wanted to get into. When we bolted on the new business, what we found is, currently, we're writing more new business through this model than we are in the renewal side. Both are doing well, it's really surprising to see that our producers now are connecting on new business better than they would've had we not had this relationship with these eight or nine carriers.
We've got great products. We've got some special products in management liability, umbrella liability, boiler and machinery. Some special products with a limited number of carriers that we make available to our production staff and clients that have better forms and competitive prices. It's a good deal for the carriers, it's a good deal for our clients, and it's a good deal for us. Pat talked about white space. When you think about the middle of the pyramid, the average middle market account, in my opinion, would purchase or have the opportunity or should purchase somewhere between 10, 12 different policies. We know that we don't have anywhere near that penetration in the middle market.
To Pat's point, we know, and we have the analytics now to look at every single client, and literally, if you were to map it on a legal sheet of paper, every client and the things that they should be purchasing or consider purchasing and check the boxes as to what we are selling them, there is white space all over it. We've gone on a managed campaign to identify what that is, make sure that our support staff knows so that when they're sitting down with the producer and the manager, 120 days or 180 days when you start thinking about renewing an account, why aren't we in these spaces? Who is? Are they buying this? Start the conversation now. We had some really good success last year beginning to fill in that white space.
To Pat's point, I'm not sure we'll ever get there, which is kind of good because that means there's always opportunity, but we're making significant progress filling out some of that white space. We also, through the analytics that we have, we know where we're getting paid a fair amount by an insurance carrier. In other words, and I'll make it really simple. A package policy, a property and liability policy that a commercial insurer would buy tends to be 15% commission, let's say. Right? We know we can go in and line up and look through our analytics by producer, all their package policies. We can see what the average commission is that that producer may have. We can identify those policies that are below whatever that average is. There's many reasons why they may do that.
It may have been taken over from a competitor, and they didn't change it. It may have been a competitive situation where they had to cut the price, and they had to throw in some. There's a lot of good reasons. Or maybe the client just didn't agree to pay a full, if you make 15%. What we found last year when we really went on this campaign was that asking and showing clients that we want to get paid with the fair amount for this policy, well more cases than not, we were able to move that up. Just a couple of points or a point or a quarter of a point or a point or two on the billions of dollars that we place over time is going to be significant in terms of driving better organic growth.
Cross-selling, particularly with the benefit division, we have a long way to go. Every year for the last probably eight or nine years, we've tracked what we give them and they give us. It's gone up every year, and it's getting better. Let me just say that the penetration isn't anywhere near where it needs to be. There's a lot of reasons for that, but we are working really hard on making sure that our clients on the benefit side have exposure to the property casualty and vice versa. Real quickly, an overview on rates, and forget Irma and Harvey for right now because we don't know what's going to happen with that. Property rates were still a little bit soft. Not a free fall, but just a little bit soft prior to those two catastrophes. General liability and workers' comp were relatively flattish.
Auto, it was and is going up just a little bit, management liability, professional liability is kind of flat. When you put it all together, I think we've said this in the quarterly conference calls, there's a slight breeze, a little bit of a breeze, nothing that we can't manage around. It's not like the days of the late '90s when it was a free fall, everything was going down. You're working just as hard as you did the year before, your account's going backwards by 20%. That isn't the case. It's a slight breeze that's very manageable. Our retention depends upon what office you're in. It can be in the mid-90s or even a little bit better than that. For some offices, somewhere in the low 90s, it averages to the low to mid-90s.
Our new business is running about, our goal was to do 15% of trailing revenues, we're not there. Some offices are. We're just a little bit short of that. Altogether, we sell more than we lose. There isn't a lot of wind in our face on the renewal side, we're writing more new business. We're eking out some okay organic growth, which should be a lot better. All these other things that I just mentioned will add over time to making our organic growth even better. Mergers and acquisitions, we do about 15 a year. We're on pace to do that this year. Pat told you the models. It's $4 or $5 million. It's a local broker. Let me give you the reasons why they want to join us. One is they want the power of our niche practice groups.
They see it. Many times they lose to us and see how much stronger that we are. Our CORE360 value proposition is selling to these middle-market brokers who don't have a real value proposition other than a good connection with the buyer, maybe I've got a couple of good markets to quote it. I've told this story before. There are acquisitions that love to sell. They built a really nice shop, they get to a plateau, they can't get it to the next level. We did an acquisition several years ago, a couple of years ago. I've got a poster. Pat was telling you he's got a poster. I got one in Southern California that had built his shop to about $9, $10 million in revenue, he was stagnant. We had worked on him for 10 years to join us.
He finally joined us. Within the first nine months, he wrote $600,000 of new business that he would have never written before by tapping into our niche practice groups. He called me and said, "This has worked out better than I would have ever expected." The career path is another one. If you take a look at our new reorganization, for example, in the U.S., almost half of the new regional leaders either came directly from an acquisition or were hired within an acquisition that we acquired. In other words, it wasn't a Gallagher homegrown office. We have a great opportunity for career path, it really resonates with principals who really care about what happens to their employees. Let me just give you my view. When we meet with potential acquisitions, to me, there's sort of a message track that you get.
Many of them are, "What's going to happen to me? What's my title going to be? What are you going to pay me? I don't want to give up benefits." There's nothing wrong with that at all. You can feel that. There's the other ones that will say, "Well, I built this operation with five or six really key employees. What's going to happen to them? What are their career path opportunities? How can I help them sell more?" Well, I can tell you that that model is those types of acquisitions, with that type of presence, those are the ones we want to go after. When Pat talks about a cultural match, that's the cultural match. That's what we recognize when we go after an acquisition. That's where we try to land.
I just heard the other day, I'm going to steal maybe some of Tom's thunder. Tom told this story. Another reason why an acquisition would join us. We just did a deal a couple of months ago, Tom was visiting this new acquisition. They had a large account that was in trouble, they could not they renewed it and they told Tom the only reason they renewed it was because they joined us. They didn't have the market clout or power, because they joined us, they were able to renew it. They also had a book of small business, personal lines business, I believe, that was getting canceled, they had no home for it. By coming and joining us, we were able to help them move that and keep that book together with one of our carriers that they had no access to.
There's a lot of advantages that we give to an acquisition to join us. Let me talk about quality. Our margin is in the mid to high 20s. We like it there. If you're in that space, that middle market space, in the middle of the triangle, you've got to bring a lot of services to help your clients reduce the cost of risk. One of the things that we don't want to do is to get in a position where we can't do that. Where we are right now gives us the opportunity to invest in claims advice and cost control help, analytics. All these investments we're making to help that client group right in there that doesn't have the wherewithal to get those services. We provide those for them. With our margin, we can invest in the business to do that.
When it comes to quality, we have centers of excellence. We have our India service team, the Gallagher Service Center, which has been phenomenal for us in driving out the cost and improving quality and efficiency. Keith Barton back here created our national accounting center. We're able to take this decentralized approach that I mentioned earlier before and put it all together so that we can drive out the cost of duplication and have much better quality when it comes to accounting and transactions. We went to one service model called Customer Service Organization, which standardized all the operating procedures across the entire network. Believe me, that was a huge deal because everybody, before we launched this, did everything different. You'd get a certificate of insurance done differently in one office than you would in another.
If we moved a branch manager, promoted them to move from here to here, that poor branch manager would have to learn how to perform or run the business completely differently because we did everything in the back room differently. Now it's all the same. Titles, standardization, technology, everything is the same. I'm running out of time here, let me go real quick. That's quality. On culture, it's all about hiring. It's all about the internship program. As Pat said, it's going to work with your best friends. I'm fortunate. I've been here. It's my only employer. I got a life sentence and no parole, and I can't tell you how happy I've been to be part of this, to help build this company with my best friends.
I think those people that stay and those that get the culture, which is most everyone, would say the same thing. I could drone on, but Ray's walking around, so we can take a couple questions.
Yeah, I think we have time for a couple questions.
Yes. Yeah.
It sounds like there's a lot of very impressive things going on underneath the hood in order to maybe drive Organic a little bit higher.
Yep.
Can you maybe talk about how we see the payoff profile of those initiatives that you have going on in terms of timing? Is it something we should think of as, you see a little bit more Organic every year from 2018, 2019, 2020? Or is there an inflection year where you see a real inflection? How should we think about the payoff profile and the timing associated with that?
I think it's going to be gradual. You're changing habits. We've already had some success in the 2016 numbers. We had a little bit in 2015, a little bit in 2016. There is some in 2017. Those in itself, at this point, aren't moving the needle significantly, but they certainly are helping. I wouldn't, in the near future, look to a big jump in Organic because it's all going to click. We're changing habits. We're changing the way people do conduct business. We're getting there, but it's going to be a gradual thing. It's been gradual so far.
Like a little incremental every year.
Yes. Incrementally, we should be building more. I think it's one of the reasons why we've been just a shade better than everybody else in terms of organic growth, because we're doing a lot of these things that I'm not sure everybody else is doing.
One more question? Anyone? All right.
I nailed it.
Thanks, Jim. Next up, we have Tom Gallagher. He's going to be talking about our international P&C brokerage operations. That includes our international retail business and also our specialty businesses over in London. Tom, the floor is yours.
Good morning. I don't know whether or not you can hear me. Let me move this up a little bit. I told that story yesterday.
Yeah.
Guy grabs my strength skills right out from under me there. It's what I was going to open with.
It's a U.S. story, that's all.
In fact, I did have the opportunity to go to our Rockford merger partner, and the story is an unbelievable story. He was excited to have me there to be able to talk about the fact that they had two pages of examples that they were going to show me of where being part of us made a difference to them. One of the most interesting parts of it is when the guys looked at me and actually said, "Do you know that we're going through conversions so that we can get on your agency system?" Your Iowa offices actually came in on a Saturday to help us in Rockford be successful. Who does that? That kind of stuff happens all the time in our company and in our culture, because we're not in competition with each other.
We're constantly trying to figure out how we can drive our business forward together. I'm sure Chet in the U.K. uses the term better together, and that's the way that we try to drive the business everywhere around the world. We're going to actually do a better job if we work as teammates together. I run the global P&C business. Jim can find us Marsh for U.S., and we'll spend most of the time talking about mine overseas. As you know, our business has grown substantially over the course of the last five, six years. It started with the Heath Lambert acquisition in 2011. Let's not forget that we actually began our international expansion back in the 1970s. We've actually had an office in the U.K., in London since 1976. We've had offices up in Canada since 2007.
We've had offices in Bermuda and the Caribbean long before we started to do the expansion through the Wesfarmers, the Oval, the Giles, the Noraxis, and the Heath Lambert acquisitions. If you pull all those together now, more than 3 years have gone by since we did the last big one. What's great about it is there have been absolutely no surprises anywhere in the world. We're actually driving organic growth virtually through all of our businesses around the world now. The integration story and all the things that we've had to do in the past are largely behind us, and the team is really excited about being part of what we represent for the exact same reason that I talked about with Rockford. We're just different. It's just us out there doing the business day after day.
I can replicate that story anywhere that I travel, whether it's Australia, New Zealand, or the U.K., and to our retail businesses. Let's dimension it. Got about a $300 million U.K. retail business. It's a community broker. We compete day in and day out with community brokers in the U.K., and there are hundreds, if not thousands of them. On top of that, we compete against Marsh, JLT, Willis. Most of the big roll-ups are gone now. They've been sold off into other agencies. Marsh picking up the last 2 big ones. Our business in the U.K., we're in competition day after day as a retail broker. In London, we have a $250 million specialty business that's a wholesale business, a brokerage produced around the world and driven into London. We compete against all the big houses. We have a dynamite team in London.
Strong organic growth. We've got unbelievable resources in marine, in PI, in energy, in construction, in mining, in heavy casualty placements around the world. Really, really strong professional team. Australia and New Zealand combined about $300 million of revenue. Again, we've come up against the global powerhouses of New Zealand, and then we have some locally, publicly traded brokers in Australia that also compete against us there. What's great about Australia and New Zealand for us at this point in time, in New Zealand, we are the largest broker in New Zealand. In Australia, we're easily one of the top 5, and there is a little bit of a firming market down there. We've got some benefit of that as well as economies are slightly rebounding. We've got strong organic in both geographies. Move to Canada. Canada is about a $150 million business for us.
We're really good in retail, energy, really good in condominiums, and that business is growing low single digits organically. It's amazing to me that we can go through this process of making these acquisitions, that we keep the teams, we get the teams excited about what's going on, and we continue to drive them forward. What do we do around the world? It's the exact same thing we do in the U.S. We focus on four things: M&A, operational excellence, core organic growth, and finally, our culture. I'll start with organic growth. When we talk about organic growth, it's about doing what Jim was talking about in the U.S. around the world, about building product niche specialisms, about enabling our team to have the resources and the tools that will enable them to be successful in competition every single day.
I know that we touched upon it before about the cyber liability product that we have launched in the U.S. We've actually taken that product and brought it into the U.K. as well. That product is doing the exact same thing that it's done in the U.S. in very, very explosive growth for us. The problem with it is that cyber liability product premiums today are very small. While we're selling a lot of it's not having a huge impact. Critical to us is that we're getting people to buy the cover day after day. Any meeting that I go into today, anywhere around the world, the first thing I ask a client, "Are you buying cyber liability cover?" They just have to.
We see tremendous opportunity for us to continue to sell product, to develop and to sell product beyond the U.S. into all of our jurisdictions around the world. Our specialisms in the U.K. We've got just inside of the specialty group I talked about. When I look at the retail business, we take charities, we take hospitality. We're really good at real estate. We continue to drive these. We're very good at motor trade. We continue to build these, and we've got a building business of risk management outside of the City of London. Going to Canada, as I mentioned before, we talked about the condominium associations. The condominium associations, we dominate the market when it comes to Ontario. We actually dominate it. There is really nobody left in that marketplace other than us.
Our energy play in Calgary is one of the strongest in all of the geographies in Canada. It ties into the team in the U.S., it ties into the team in the U.K. as well. Really, really strong group. One of the things that we're trying to do beyond exporting just a couple of product ideas is export our team and our leadership around the world. Great example of it, down in Australia in the past two months, we picked up a large church program because we had our team in the U.S., the leadership of our religious practice group in the U.S., got down into Australia and actually able to help them prove the skill set that we have.
In New Zealand, we've won two large tenders related to municipal government entities in New Zealand, largely because we're able to bring Pat and some of the leadership of our municipal and public entity business down to New Zealand to tell them these are the depth and resources that we have. It's not just about developing products, it's about actually taking our leadership and enabling our teammates around the world to be able to successfully develop new sources of revenue. For years, we've talked about higher ed, it goes beyond higher ed. We've been able to do this now in a number of different disciplines. Rate environment, you go to the U.K., a little bit of headwinds in rate environment there. Specialty pricing is definitely challenging. Australia and New Zealand, as I mentioned, little bit of rate increase. Canada, it's pretty flat.
In every one of these jurisdictions, it's about taking business away from other people and the things that we're trying to do every day. How do we differentiate ourselves? It's our products, it's our service to our clients, it's our commitment to them. The Gallagher Service Center is really all about trying to drive best practices through all of our businesses. As we see with Irma and Harvey, our ability to help our teammates in different parts of the Caribbean, as well as different parts of the U.S. Can you imagine if you are alone in Saint Kitts, in the Leeward Islands, and you've got no support from anybody in Barbados? They may not have power on the island for another two months. How do you process a claim? It's our teammates in Barbados that are actually helping file claims and take care of those people.
We're able to do that again and again and again. Process standardization for us is incredibly important. There is something about our brand as well. I get asked constantly, will you invest in us? The reason is people like to have our flag. As Pat would say, we don't have any interest in throwing a flag all around the world. There are jurisdictions that we will move into. You saw in Q2 that we did the acquisition in Montreal, a large, very successful risk management broker in Montreal. Really excited about what they do for us in Canada. Provides great breadth for us in terms of what we're able to do for any client that is national in scope in Canada. Very excited about the opportunity there, as well as we announced a small acquisition up in Scandinavia, growing presence in Scandinavia for us.
That team is driving great organic growth in a flat environment with great margins as well. We feel really, really fortunate. As we look at expanding around the world, it's not about being everywhere. We don't want to be. We would rather partner really tightly with good brokers in jurisdictions where we don't feel that we can drive great growth, have meaningful cultural impact on it, that they fit our culture, that we believe that we can work better together and build a business. Moving to operational excellence. We talk about operational excellence all the time, everywhere in the world. We look at our businesses and say, how is it that we can improve what we're doing and processing everywhere so that our teammates can focus on taking care of our clients?
We do this all over the world, Now we've got some margin expansion efforts going on in the U.K. and in Australia. You look into the U.S., you look into the U.K. specialty business, Canada, we've got good, solid margins in our business. If we can get the team working with our Service Center all the time, get the team doing it, can spend more time focusing on our clients' needs. It's critical to us to be able to do that. That's how you retain the business, is being able to stay focused on our clients. Finally, talking about our Gallagher culture and what we're doing as a company. Pat has announced. We want to do 90,000 hours of charitable work as an organization over the course of the next 12 months. I think that's a remarkable number.
It's provided a place where everybody in the company can actually log in charitable hours that they're putting up. It's not something we're publishing to anybody else. It's really something for us. What organization does that? We are all, everybody's invested in it around the world to try and do well in our communities. If we can do well in our communities, we're absolutely confident that we will do well as well. That's it for my comments. If anybody has any questions, please.
Thanks. My question is, in the past, when we've talked about the international business, you've spoken about looking to improve the margins. I know earlier, I guess you said the margins are good, as you think about margin improvement, I mean, when should we think that we will see that happen?
Jim talked about things being incremental, in terms of the things that we're doing in the U.S., all the new products and things that we're doing. I would tell you it is the same thing. You're looking at margin expansion in Australia and the U.K. retail businesses year after year. We're not going to suddenly jump it up by four or five points overnight, it will happen year after year to get to our numbers.
When do you think, is there, in your mind, some kind of timeframe where the international margins get to the level that we see in the U.S.?
I don't think Doug will ever allow us to have a time where we get to be comfortable with our margins, right? The reality is, over the course of the next couple of years, we will be working very hard and making certain that our margins get up to thresholds that are acceptable to us. That is driven largely through the technology play.
A few questions, Tom. This is sort of a hybrid international domestic question.
What are Gallagher's Spanish language capabilities? Is there something about the Gallagher Way that makes it work better in anglophone markets? Do you think over the long run, there's interest in Gallagher expanding? I guess it's a U.S. question, but it's also sort of like it's a change. Is there an opportunity, I guess, in Spanish language expansion here in this country, and how does that relate to international strategy?
That's a great question. We absolutely believe there's opportunity for us to expand into Spanish communities in the U.S., and there's active endeavors to find a way into that community. Without any question about it. We've reviewed a number of acquisitions. We've talked about hiring production staff. We definitely see the opportunity about expanding into the Hispanic community in the U.S. Right now, we have businesses in Chile, Peru, Colombia. We've got a partnership in Mexico. Our businesses in South America are growing steadily year after year. We continue to invest in those businesses. We see South America as tremendous opportunity for us. If you just look at the way that the economies are growing in South America, we can't miss being there. We need to be there, principally in those communities, in those countries.
Is there the potential to do an overall Wesfarmers size acquisition in a non-English-speaking community?
We look inside of Mexico with our partnership with the Interprotección, the largest independent broker in Mexico. We do not see ourselves going to majority in that business anytime soon. We will so if you look at South America, you've got the two huge economies, Brazil and Mexico. In those two economies, you've got Mexico. We've already partnered with the biggest and best independent broker. We have a great relationship with them. We really like working with those guys. It's a great family. It's a perfect fit for us. We trade really well together, too. They produce a significant amount of business for us in the U.K. as well as they do into the U.S., and we try to provide a significant amount of business reverse flow for them into the Mexican marketplace.
Yeah, by partnership too, Pat, we own 21% of our Mexican partner. We probably will take that up a little bit at some point. Like Tom said, I mean, when we say partnership, we actually have an ownership position, and it's worked out very well.
Yeah, it has. It's a great family. The other economy is Brazil. You can't avoid looking at Brazil. We're constantly looking at, is there something that we can do down in Brazil? Do we see it as a platform the likes of Noraxis, Wesfarmers, Giles? No. We see it being done differently down there. In those economies, it's really all about the people. As much as we say it's all about the people everywhere, it's really about the people down there. We're on a go slow basis, but trying to develop really strong relationships with the right people.
On a different note, what is the long-term strategy with Capsicum? Should we expect 10 years from now that you'll be an investor or you'll be the owner? Like why does this structure work for you guys, and how do you think about that?
When you asked Bob, we've got into the Gallagher Re business. This is going to be done slightly differently this time around. Right now, we have a great partnership, a great relationship with the team inside of Capsicum. They've got solid organic growth. They continue to build their franchise. Over a period of time, we'll look at it. We will look at where does that relationship take us? No set position on where we're going to go with it at this time.
Where does it fall in the P&L? Maybe it's a question more for Doug. Is there a gain after from an investment to the bottom, or is it carved out as unconsolidated? How does the accounting for Capsicum work?
We consolidate Capsicum, and then we show the minority interest, which in this case is actually a majority non-controlled interest, as a reduction below net income, so below the line. Right? Even though we only participate about 30% in the economics of the company, but because Grahame Chilton also runs our operations in the U.K., we are deemed to control it, so we consolidate it even though we don't own the majority of it.
Sorry, I have another question.
Sure.
There's several reviews going on in the U.K. market. Just wasn't sure if you had a high-level view, and then how much of Gallagher's business actually goes through facilities in the U.K.? Just what's your view on, I guess, what could come from the reviews that are going on over there? Timeframe, anything like that.
When it comes to the look that the regulators are doing inside of our business, really, it's inappropriate for me to comment about it at this point in time. High level, if you look at the aviation market, we're not even involved in that at all. We're really on the outside looking at it as well. When it comes to the regulatory authorities and the way that they're looking at the industry and the way that we do things, it's inappropriate for me to make any comment at this point.
Yeah, let's be clear. If you're talking about the announcement yesterday on the benefit side, with the other brokers, when it comes to the employee benefit, we're not involved in that one at all.
Oh, I meant more just there's been a lot of conversations about business that goes through facilities in the U.K. That's just what I was referencing.
Yeah, it's a pretty small portion of our business there, too. When you look at that, it's just not a big portion of our business.
Okay. Thank you.
Thank you, Tom.
No.
Next up, we have Bill Ziebel. He's going to be talking about our benefits consulting and brokerage operations. Bill, the floor is yours.
Good morning, everyone. As Ray said, I'm Bill Ziebell. I run the Gallagher Benefit Services division for Gallagher. That is an employee benefit and compensation consulting practice. To get a baseline of, for those of you, I don't know how much you know about our business service, I'll go over some things that might be redundant for some of you. Think about your own jobs, how you chose your careers, where your employer is, how'd they get you to come work for them? Probably a combination of things like compensation, bonus plan, benefit packages, their reputation, your opportunity to get career pathing, and so forth. That's the kind of thing that we try to do for our clients. There's a real competition for talent out there. That's what we've tried to build around our business as well.
How do we help our clients compete for talent, so they can succeed and fulfill their missions no matter where they are, no matter what size they are, that type of thing. Last year, we finished about $900 million in revenue and with margins in the high 20s. We are in the U.S. predominantly, but also in the U.K., Canada, and also Australia. We see opportunities to grow internationally for all those areas as well. How do we generate revenue? We go out, we talk to our clients, find out what their needs are, what their pain points may be. In many cases, it's about compliance, about regulations. In the U.S., it's the ACA. Other countries have different issues. It's always the same thing. How do we put together a competitive offering for our employees?
Once we try to get in and get hired, which we are very transparent and disclose, we then try to expand the relationship with other services we can provide for them so they can keep their talent engaged and so forth. That's our business model. We're trying to build a tier 1 global consultant to help our consulting firm, to help our clients compete no matter where they are, U.S. or internationally. We have about 200 offices, roughly 4,000 employees throughout the network. Our organic growth has been low to mid-single digits the last couple of years. Expect to see that going forward as well. I want to talk a little bit about some of our strategies for growth. Organic, the first one I'll get into. Obviously, we're trying to spend a lot of time on getting new logos, new clients everywhere.
We have implemented organic playbook across our network. That is basically asking our managers and producers to have a plan how they're going to grow each year. Going after new opportunities, winning those, using our niches, using our competitive advantages in our compliance areas and communication, things of that nature, things that the clients need. Finding where they're being served weekly or in a weak manner by a competitor, taking it over, as I said before, expanding the relationship. We're also trying to work with our property casualty folks in cross-selling, looking for opportunities of winning business from them and give business to them as well. When you look at other opportunities to grow, hiring producers, both within the industry, bringing up our interns to our business, but also going out of industry as well. We have initiative in those areas also.
For us to continue to grow, we have to have people on the street competing for business, being able to help our clients, what their needs are. The organic playbook, hiring producers, going after new business, and then expanding that relationship. We have a multitude of things we can do for our clients. In many cases, we're only doing one or two things. The opportunity to do more for our clients is very large. The opportunity to grow and expand our white space will really help us on the organic side, as well as retaining our clients. We have a retention rate mid-90s. We have historically, which is pretty good for our industry. It's way up there. Every single point additional we can do would obviously help us on the organic side as well.
We have some initiatives in that area to help improve our relationships with our clients. If you look at mergers, it continues to be a big part of our growth, has been and will continue to be, especially as we get into international areas. We're also looking for areas, it's not only expands the map, the geography, but helps us get and acquire talent or services we didn't have previously. That's an area that we look for, something that's going to help us bring more value to our clients. As I mentioned before, we're in the U.K., Canada, and Australia. We have lots of opportunity to grow within those countries. There are other countries we're looking at also. In the U.S., we still have a lot of mid-sized cities that we're not in. Even the large cities we're in, we are not the predominant player there.
Opportunity to win market share in every city as well. We're looking for market share through mergers, talent, things of that nature. Far this year, we have about 11 mergers done. We average about 20 a year, we're right on track where we want to be. We have a full pipeline in that area also. Merger partners join us for several reasons, several kinds of reasons, but different weighting for each individual. What we hear lately is they need to join us because they need our resources. They need to join an organization like us so that they can compete. You think about all the things that our clients need today when it comes to technology solutions, compliance, communication, those are things that for a small independent to be able to have those resources requires a lot of investment on their part.
By joining us, they get to take money off the table, and they get to actually have those resources and go out and take care of their clients in a more efficient way. They also want access to our property & casualty cross-selling, things of that nature. There's a lot of reasons why people join us. Continues to be a good story from our side. We believe we're still a very strong merger partner of choice because of our culture, because of our people, because of the resources we have available to our merger partners. We have initiatives under productivity and quality that continue on also. Areas that we're trying to make be more efficient, more consistent, have a higher quality on things. In the past, we've done things like centralizing our underwriting or what we call financial reporting.
Instead of everybody doing it themselves, we have people that do it for our consultants. We have people that are really smart math people that can crank these out, peer group, peer review, things of that nature, brings a higher quality, higher efficiency. Done similar things on our compliance side across the country, across our division. We have 35 attorneys helping our consultants understand the regulations as they come out. It's a very regulated part of our business, and that's true in every country. We have a lot of investments in those areas. Instead of every consultant trying to read the regs and interpret them themselves, we have core people that do it on behalf of them. We do seminars for our clients.
We put out publications to our clients, but we also train and educate our consultants so they can help articulate what needs to happen for our clients also. We're also looking at areas like small group. We have centers of excellence for that, so we can be more efficient. There's a lot of pressure on the carrier markets, on the under 50 employees, trying to take inflation out of the premium. We're always pushing on brokers on their compensation in that space. We thought it was important for us to find ways to be more efficient, bring more value to our clients in an efficient way. We have undertakings in that area to become more efficient on small group. We also have an area of business that is called Benefit Advocacy Center.
It's basically taking calls from employees of our clients, help them with questions they have regarding their benefit package and other things. We have three major centers that are taking these calls. Something like 900 employers are already using, taking advantage of that. In fact, a great story for us out of the recent Hurricane Harvey. Houston is one of our centers of excellence for that. I really love this story because within one day we were up and running, even though that whatever happened in Houston, as you know. Sort of our backup redundancy, disaster recovery plans in the other centers, people jumping in to help out, take care of the clients. It's a real story, a testament to our culture of people wanting to help out, but also taking care of the client, and we know that's paramount.
We'll continue to strive for ways to be more efficient, find more quality, have higher efficiency as we go forward. That'll continue as we go on in time as well. Productivity and quality. I mentioned before the culture, really important to us. One of the things why people join us, you hear it all the time, "You are different. I was hoping you'd have the resources. Where I came from, we had a lot of resources. You have what I was hoping you'd have." Here's the real winner, is that people actually want to help and actually have access to those resources. We hear that time and time again. I believe our culture is special, is different, and it helps us compete out there. Those are my comments. If there's any questions, I'd be happy to take those. Yeah.
When you do an acquisition of a $4 million-$5 million revenue broker, do they have typically one person who's doing employee benefits in that? Then is there a specialization, or are they selling both products, the brokers? How do you Maybe there isn't a general trend in this, but when you go in and these guys do an acquisition, they don't have an employee benefits person, how do you sort of bring them up to speed and train them and?
Well, great questions. First of all, we have four people within the benefits division that focus entirely on finding mergers that are exclusively in benefits compensation space. When we're finding our own opportunities, 99% of those are focused 100% on benefits and compensation. On the opportunities where Tom's business or go out and find a merger, and they happen to have employee benefit teams, we are part of the due diligence and onboarding integration, getting them trained up on our resources, how to access them. Every scenario is a little bit different. If they're in a remote location, they're all standalone, let's find a way to help them. If they're part of a market where we have other locations, we try to get that team more connected directly. Every story is a little bit different.
When there's a standalone P&C operation with no benefits, that's an opportunity for us to go in there and try to find opportunities for the benefits team, compensation team to go in and service those clients as well.
What percentage of your brokers are employee benefits only? Is it a third of your mix or half or?
Well,
The total company.
Of our retail brokerage world, my division represents 25% of the revenue.
Right.
If you look at all of Gallagher, including our risk management, we're about 21%.
I'm sorry, I wasn't clear about. In your 25%-
Is the majority of them employee benefit only or?
Uh-
There's a specialty that really is necessary.
Well, they're 100% benefits and comp. I mean, you have specialists in each area. Somebody focus on a 401 plan, for example.
Right.
We don't really want them dabbling in health or welfare and vice versa. Everyone's focused in the space, in terms of number of producers and so forth. We've got 400 producers. I don't know what the number is.
Bob, we try intentionally to not have a producer sell both employee benefit related covers and P&C covers. We find specialists is the way to go on this. We try not to have a jack of all trades on any type of our.
No, I totally understand that. Just in the Hartford area, the brokers that I know, they tend to have one employee benefit person in their office that does the.
Yeah.
Health care and 401.
We'll do that a lot on the P&C side if we go into an acquisition, maybe of the total revenue, 10% or 15% of it, of that small agency is benefit. Bill's team comes in and does the due diligence on the benefits. Our P&C team does the due diligence on the P&C side, then we break those apart as fast as we can, because we want the benefits folks to report up within their own vertical. That actually is a big sale for us. The benefits folks in those offices like being part of the benefit vertical versus being the benefit guy down the hall.
Right.
It just sounds to me like most of your employee benefits brokerage revenues comes in from employee benefits only.
I would say 98% of it. I mean.
That's true. Yep. Those mergers love us because they get to hang out with other people that do what they do, and they have experts they can bring in as opposed to having to be that jack of all trades.
Good morning, Bill.
Good morning.
I was wondering if you could update us, provide some additional color around the exchanges, I think last time you talked about your relationship with Liazon talked about other relationships that you were working on. Provide just a brief overview of what's going on in that business, please.
Certainly. Your question about exchanges and so forth. First of all, let me just throw out to you that we see technology as important value for our clients and our ability to service them in that area. ben-admin enrollment services are really large these days, really important. Marketplace, private exchanges is just one facet of that. We're out there talking to our clients about their technology needs, we actually made some investments in that area. We acquired Grupo Marcucci beginning of this year just for that reason, because she is very well known in this space about knowing what's out there in terms of competitors and giving a broader answer than narrow down on yours. The point about the marketplace is, it's still thriving for us. We're still doing very well in that area. We have something like 50,000 employees.
It doesn't cover all covered lives, 50,000 employees enrolled today. We have a pipeline of enrollment coming up here January 1. We'll see where that goes after that as well. It is one of our offerings. One of the things we think is very important that you understand is that we go in with a very consultative approach. We're not trying to pitch a product. We're trying to understand the client's needs, and we then find the solution that meets their needs. In many cases, it will be a private exchange, but in some cases, it might just be a ben-admin platform. We have a portfolio of solutions. Just like we have a plethora of carriers to choose from, there are quite a few technology solutions to choose from. Liaison is one of those.
It's our primary on the private exchange, but there's other companies like Businessolver, bswift, ADP, others that are in this space that we also have access to and can bring as a solution to our client.
Okay. Just as a follow-up, I mean, you talked about the various ben-admin platforms.
When you get into the small middle market employer area, what seems to be the trend? Is there a change in trend or what products seem to be more valuable to them than others? Just give us a sense of the market.
I think the smaller you go, the more the needs are of the employer to actually have a full service solution to handle everything they can. That's where you start seeing things like private exchanges thriving because they're handling the enrollment, the engagement, the communication for those employees as well. That's why they like those things. When you get to larger employers, they're in many ways already on the path for defined contribution. They have cafeteria plans. They have a pretty robust communication. They have a pretty strong ben-admin platform. They differ based on segment. You probably see a little bit more focus on private exchanges as you go smaller, a little bit more on ben-admin enrollment systems as you go larger, generally speaking.
Just one follow-up. I'm sorry. I know one of your competitors has talked about some success with the enrollment or new production on exchanges coming into the end of this year, and I'm just curious, you said you have about 50,000 employees on yours.
How's the enrollment, the sales process going this year? Would you characterize the RFPs being the same as last year, more or less? What kind of color can you add around that, please? Thank you.
I think it's a little bit more, and we might continue to hire in this space as well. Again, I'm going to come back and say, we're not pushing a product like you said one of our competitors is talking about. We are ramping up our HR and benefit technology team, and they're going to help us go out there and uncover opportunities, but also bring solutions to our in-force clients when they know that there's an opportunity or a need or a pain point. We'll bring those folks in, and we'll just start talking about what they're experiencing, what their needs are, what they think they want. We're not going to come in with one solution. That's what I'm trying to drive home for you, is that the marketplace is one of those solutions. Okay?
All right. Thanks, Bill.
Thank you.
We're a little bit ahead of schedule, but I think we're going to take a break until 10:00 A.M. Anyone who's listening on the webcast, you'll hear silence until 10:00 A.M., and we'll resume about a minute before then. Thanks. Next up is Joel Cavaness. He's the leader of our wholesale brokerage operations, Risk Placement Services, and he's going to spend the next 25 minutes talking about his business. Joel?
Thanks, Ray. Good morning. I hope everybody enjoyed Doug's tour. Everybody pig in a poke. I'm here to talk about Risk Placement Services. RPS operates as our domestic wholesale operation. Give you a little bit of a history of RPS. We started RPS about 20 years ago with four employees in downtown Chicago, doing property and casualty wholesale brokerage. Over the last 20 years, I've spent 100% of my time growing RPS to what it is today, which is about 1,700 people with 75 locations operating not only wholesale brokerage, but MGA program management, standard lines aggregation, and most recently, getting into more of the insurtech, fintech space through e-commerce, which we'll touch on later in the discussion. A little bit about who we work with. We do a lot of business with the Gallagher offices around the country and candidly, around the world.
We trade very well into our London operation as well. For the Gallagher offices, some of you have probably saw the press. The GGB guys, which is our retail side, have selected four main wholesalers to do business with, three besides us. It continues to trade very well into the business. We trade both on a wholesale brokerage as well as both property and MGA. In addition to that large relationship that we have, we also have about 27,000 other relationships where we trade across the country. That's everything from large national brokers, excuse me, like AssuredPartners or BB&T and many others, to the association groups like the IIA, the SIAAs, the ISUs, the ARM partners, and many other, where you have roll-ups of groups for whatever reason.
They're typically non-owned relationships, but they join an association group for market clout, market leverage, additional resources, marketing opportunities, and finding products. We trade very well into those businesses. We started with the SIAA just a short number of years ago, and from a very small start, we are now their largest wholesaler and actually in an entire relationship. We're their sixth-largest trading relationship in the country. Very excited about that. Lastly, we trade with very small retailers across the country. There are 40,000 independent agents. In addition to that number of independent agents, there's also captive agents that we trade with. Some insurance companies who have a captive distribution network, we bring solutions to them to things that the captive parent can't do. That's a very large business for us as well. How do we add value to the transaction?
We're basically a solution for them in any of the businesses that we do, and we'll talk about examples in each of the segments that we operate in. That's the value proposition, is either we have a market, we have an exclusive, we have a distribution model that we can do to solve their problems. Our goal is to solve problems very quickly in any of the four businesses that we operate. In those four businesses, our largest business is our MGA business, which is where we are effectively an outsourced underwriting business to insurance companies. The examples might be Nationwide E&S, it could be Nautilus Insurance Company, it could be Western World. It could be a lot of different insurance companies who have elected, instead of having offices across the country, so they have geographies that touch a lot of these areas.
They'll outsource all of that to us, and we have underwriters in our offices that spend all day looking at opportunities that come in the door from the retail clients that we have. Most of these are smaller transactions. They might be a bar, a tavern, a restaurant, a garage, could be just about anything. Businesses that are brand new and startup. If you have a restaurant where the guy doesn't have a long history of operating in a restaurant, they would come to us because a standard market wouldn't insure them because they don't have a history. They come to us, and we have a stable of insurance companies who we underwrite on behalf of, and we'll Will, bless you. We will underwrite and hopefully quote, bind, and issue the policy for the insurance company for that new restaurant.
Typically, the life cycle then, if it's a successful restaurant, the life cycle is over 3-4 years as he develops experience and hopefully proper experience, gets his business in the black. That business traditionally moves into a standard market opportunity, typically cheaper, better terms than what we might be able to provide. We'll get the next new restaurant that starts up right down the street. That's typically the life cycle of those type of accounts. Some accounts, like a garage operation, doesn't really matter. The standard market doesn't really typically like that business, so we keep it for a long period of time. Transportation's another big example of what we do. A lot of startup trucking companies, they need insurance. They have to come to a non-traditional source for their insurance, and we do that.
We do a lot of startup small fleet truckers who aren't big enough to get noticed by the trucking insurance companies. We do that a lot. That's another specialty. I can go on and on, but really the example of that, the most important part to note is that we actually operate as a traditional underwriter in that segment. We get paid a commission to do it, and the source in it, we operate, we do everything for that insurance company. We don't pay claims for them, and we don't place their reinsurance, but everything else we do for them. That's our largest piece of our business. The next in line would be our brokerage business, which is where we would have a building, for a proper example, in Florida. It's on the coast.
It could be possibly a high-rise, could be just about anything, but it has a catastrophe exposure associated with it. Most standard lines insurance companies, The Hartford, Travelers, those kind of people, aren't interested in taking catastrophic risk. That building might be valued at $200 million. The retailer comes to us, and we basically structure a deal for them through the various insurance companies that we have relationships with. Our relationships in that particular example are willing to take catastrophic risk, but they typically won't take the whole thing. They might take $10 million, $15 million, $20 million, and we would take all the different companies that we have that would provide $15 million and $20 million, and we layer them all together to put together the program. We give it back to the retailer, they take it to their client, hopefully they sell it.
We don't have binding authority in this particular example, so they would come back and say, "Yeah, okay, the client bought it." We would go then notify the insurance companies they're now on risk on this building in Florida on the coast, and that's pretty much the example of the transaction. Some of the services that we offer, why people come to us, is we'll do modeling for it. We actually run AIR and RMS in a modeling scenario in downtown Chicago, where we provide a service to the customer that says, based on all of these models, this is what the results of the models say. It doesn't really give them a suggested layer price or amount of layer that they should buy. Based on the various scenarios that the model can run, here's what it spits out.
That's a great value add, very few of our competitors have a modeling service like that to give it to our retailers. We do lots of different things in brokerage. We do property, we do tough casualty, we do transportation, we do healthcare, and we do a lot of executive lines business and professional liabilities. On the executive lines business, as an example, would be the directors and officers for more difficult-to-place insurance. If it's a well-run Arthur J. Gallagher account, it's probably not going through RPS. Readily available, people like the business. If it's something a little tougher, like what will happen to Equifax coming up, they'll probably be more aligned with the type of customer that we insure. Somebody's a little bit more difficult. Maybe they've had some loss problems alike. That's pretty much our brokerage business. Our third largest business is our program business.
That's the business where we have very specific program for insurance. It might be for a church, it could be for a public entity, it could be for a golf course, it could be for 35 different examples of programs that we operate. Retailers come to us because we have a very tailored product for a client that they might have. We like that business. It's a very sticky business. You can specialize in it, and then you can expand it, so you can actually grow it. If you have golf course programs, you can expand it into hole-in-one coverage, and you expand it into this and that across the country. We like that business. It's highly profitable. Again, it's an underwriting business, so it's our responsibility to make sure that we continue to underwrite to a level that our insurance company partners make money.
In any of the businesses where we operate as underwriters. We typically would get paid an upfront commission to deliver the product, and then how we perform with the insurance company, we get to share in their profits. It's our job to make sure that they're making money. If we do that effectively, then we get to share through a profit-sharing arrangement. Our last division is our standard lines division. It's a business that we think is going to have a lot of upswing, certainly in the next few years. This is a business where we have relationships with very small, tiny retailers who need carrier contracts. A Chubb, an AIG, and many other insurance companies won't work their way down to the level that we do from the standpoint of relationships. Give an example.
We have 50 client relations people scattered across the country, and about three-quarters of that 50 number, they're basically windshield people. They go town to town, to town, to town, to town, meet with our customers and deliver solutions to them. They may not have a contract with the Chubb Insurance Company, right? One of the big things that Chubb offers is a high-value homeowners program. Everybody has at least one rich friend. What we do is we deliver them the opportunity to place that with Chubb, or we deliver them the opportunity to place it with AIG. It's really marrying up the needs that a small retailer might have because they can't keep a contract. They only have one of, two of those, three of those. We're fine with taking ones, twos, and threes.
To have a full contract and keep it going to Chubb would want something like $2 or $3 million of that business, and they don't have it. They only have a few. Those are our four main divisions and the examples. Again, in every one of those, it's a revenue-sharing arrangement. In the small business, there's typically three sources of revenue for us. We would get a commission up front. We would get a third of the commission. We would also typically get a fee for issuing the policy, so a policy fee. We operate in fees. The third area is our profit-sharing arrangements that we have where we make profits for our carriers.
Competitors, if you look at our landscape, there's a few very large ones like us, and then there's a whole bunch of small ones, which we'll talk about the opportunity on the small ones. The big ones would be the Amwins and the CRCs, the Brown & Brown, the Swett & Crawford, which merged with CRC about a year ago. All of those people would be considered our competitors. This business, if you follow our particular segment of the industry, there's a really good AM Best report out there that would show you what the growth rate of the surplus lines or specialty carrier business has been. It's a very good article that NAIC did put out, now the WSIA puts out.
Going down, the opportunity in the competitive space, there's a lot of small wholesalers who candidly have been continued to get squeezed by, unfortunately for them, people like us. We get a lot of activity through mergers. We've done about 16 mergers over the course of the last five years. Most of those are obviously smaller guys that come to us and say, "I can't deliver modeling services," or, "I can't stay up with technology," or, "I need succession," or, "I need to look at my business and figure out how I'm going to monetize my biggest asset." They come to us, and we're more than happy to talk to them because what that does, if you think about it, just gives us an additional group of retailers that they have a relationship with for us to sell all of these other products that we have.
Our whole goal is to sell everything to everyone. If we have a customer or client out there that's only buying one product, our goal is to sell them 10 products because we want to get 10 lines into every fish for us to continue to get more, get deeper relationships with every client that we have. That's what mergers do for us. Gives us more opportunity to get more product and more distribution. We'll talk about how important that is when we get down to our e-commerce thoughts. Speak about really briefly about our EBITDAC. Our EBITDAC margins are very healthy. We operate in the mid upper 20s in all of our businesses. Continue to focus on growing not our percentage as much, but the dollar figures associated with it. We continue to focus very hard into our strategies. First one being organic.
Our organic strategies we work on every day. Our organic strategies are surrounded around, again, our client relations group that we just talked about, broadening the number of people that we're selling to and keeping them aligned with us. We have a group of, again, the client relations people who work with nothing but our national clients. We can grow faster with them as a dollar figure. If we keep them happy and keep them aligned with what we're doing. Every one of our national clients has a person assigned to them to make sure that we're driving more business into those relationships. That's been one of our high areas of organic growth within RPS over the last three or four years. We'll continue to expand on that. The clients love that. Our second is producer recruitment.
We're up significantly this year in our same store producers across the entire country. We spent a lot of time making sure that we're hiring the right kind of people that can deliver the solutions to our retailers, and we like that. We like to continue. We're very active in the marketplace, making sure that we're not only just growing our own, from the intern into our career development program, but also getting the successful, knowledgeable people that can get us way out ahead on a quicker basis. On the M&A, as I said, we've done about 16 over the course of the last four years or so. It is top of mind every day. I come in every day trying to do more mergers. There are a lot of them out there. It's competitive. I'm not going to kid you.
You have to get out there and like yesterday, we had a conference call at the end of the day about this particular business owner. It's a nice business. It's a very, very nice business, and he won't talk to anybody but us. That's the kind of competitive advantage that we deliver, due primarily to the culture that most people know that we maintain. A really good culture where people know that they can sell their business to us, and we'll help them grow it and take care of their people and their clients. Talk about our productivity and our quality. Most of you have heard, and I'm not sure if Vishal was talking this time, but many of you heard about the things that we're doing to improve our quality and our productivity. I've definitely drank the Kool-Aid. I'm very excited about the prospects of what we do.
We had a meeting yesterday talking about our process improvement. We've staffed RPS now with an entire team of process improvement. You can imagine, I'll give you an example of how much small business we do. We have 110,000 policies under $1,000 in premium. If we bring process improvement to that, it can just save a tremendous amount of money by improving that process, making sure that we're continuing to deliver. It's highly profitable business for us on the front end, and it's highly profitable business for our carrier customers, so we get profit sharing on all of that. I would be more than happy to take an additional 110,000 of those policies over the course of the next 12 to 18 months to help leverage the profit sharing that we get on the back end. It's phenomenal business.
Speaking of our culture, I think you guys probably saw as you walked around the building, our employee engagement survey, Pat probably talked about it maybe this morning. I just actually sent an email out. Our RPS was over 70% engagement, we still got a week to go. That's hard to believe in a business like ours, with this many employees, that you already have over 70% of your employees have sent back their engagement survey. Our goal is 100%. I think that if people in this business would tell you they'd be happy if there was 30%. We're going to push towards 100. I think that's very cool, I think that speaks a lot.
It actually speaks volumes to the kind of culture that we have, that people are really willing to sit down and take the 15, 20, 30 minutes it takes to fill out an employee engagement survey, I think that's very exciting. Where are we going for differentiation? Why people come to us? I'm going to give you one small example, then I'll probably be at my time. One of the things that we've talked about in this room is the development that we're doing in e-commerce. You guys hear a lot about fintech, insurtech, all the money that's driving into this. Let me talk a little bit about ours, give you an example. This past year, we've transacted over 18,000 policies just in cyber liability.
It's a product that's designed for businesses of under $250 million in annualized revenue, they can come on and within moments, I do mean moments, they can get a quote, they can fill out the rest of the information and get a bindable quote, they can get a policy, they can pay their premium, all with under five minutes. It's been a phenomenal product offering. Through that, we've been able to continue to leverage more products onto our platform. We're now up to nine. Our goal for this year is to get to 17. You had to have a stretch goal. Not sure we're going to hit 17, we're going to work towards it.
What we're trying to do is get more and more products up and running where we have 100 products on this platform, on our portal, it's called rpssmallbusiness.com, where people can go in and 24/7 transact no touch or no touch business. We're in the process of rolling out a flood product, a BOP product, a tenant discrimination product, small private D&O products, all kinds of products where you can go in and ask a small set of questions and get a bindable quote. Very excited about that, it drives more differentiation, you can do a lot with it with the technology. When you think about us, when you think about RPS and Gallagher as a whole, we have all the pieces. If you invest in a fintech business, they got to go out and develop the relationships with risk takers.
They got to go out and find clients. I already have 28,000 clients. Think about the opportunity that if each of those 28,000 just sold one of each of those 100 products, the opportunity that exists out there. We're very excited about that. We're very excited about the opportunity to continue to invest in that business. With that, I'll take any quick questions. Yes, sir. Just quick.
Yeah. Joe, I'm trying to figure out this whole Equifax thing.
If I'm a buyer of cyber, how much cover can I get, in general? How much appetite is there on the part of the insurance companies to take on large cyber risks and whatnot? Is it at this point, is the industry still developing that they're still trying to figure out the models, so the amount you can buy is limited? How does that work?
On the cyber side, if you wanted to go out today as a fairly middle-of-the-road business, you could get up to $200 million in there. You could protect yourself pretty well. After that, you would have to go probably to the reinsurance market, and of course, it gets pretty cheap when you get to those levels. If you were a decent-sized billion-dollar business that's maybe not tech-oriented, you could go out and buy $200 million. It's a very changing market right now. Every time something dings like this, we get a lot of sales, right? Because people are like, "Oh yeah, that's right, I really need to buy this product." It's really where we're playing. We play on the large level, where you have to look at the risks.
Somebody like an Equifax would have to fill out an application that's big, because of all the controls, as they should, because they have an enormous amount of personal data on people. Where we play in RPS right now on that side, we play the smaller side, because people aren't going to hack Bob's Garage.
Of course.
They do collect personal information, credit card information, all that. He does need to be covered. We just happen to think that's a better place to play for us. Although we'll go out and broker an Equifax if it was brought to us. We do a lot of state programs, a lot of hospitals, a lot of people with a lot of exposure. It's high-end.
I realize it's not you, but is there tolerance for the insurance industry to take on $1 billion of single point coverage? Is there a want at risk?
Well, in this particular, I would say that if it can be assessed and controlled or at least quantified what the risk might be, you could probably go out and place maybe $1 billion, it would take a lot. It would take a lot to get it. $1 billion is a big number. It'll be interesting, as you look at some of the past big hacks, they'll tell you the people that are involved in these would say that whoever hacked them has enough personal information for the rest of their lives and maybe their children's lives because they'll never be able to use all of it. It's just a hack.
I have a question. How should we think through the impact of profit commissions within your wholesale business in the recent storms?
Well, it's a little early to tell. Now, Hurricane Harvey was not an underwriting loss for us in RPS. We'll have some impact on manufactured homes, where we do a lot of manufactured homes through the Southeast. It was primarily a flood event, we don't normally, in E&S or in flood anyway, are really necessarily impacted that much with our profit sharing. Florida is still too early to tell. Candidly, it's really been very difficult for people to even assess where they are with claims because they can't get cell coverage, or they don't have power. It's still a little bit early. Claims are coming in steady. We're watching it every day.
We've centralized all of our claim intake for RPS in Covington, Louisiana a couple of years ago because we like having the redundancies that are available down there, and some of the people that do it are very talented for us. Right now, I checked it again yesterday right before I left, and he said it's just a steady flow, they haven't been coming in over the transom. It's a little early for us to tell. Yes, sir.
One last quick one from Bob.
Yep.
In the last five to 10 years, your top three to five insurance carriers that you deal with, who's moved in, who's moved out, and what's the sort of change in the relationship dynamics between you and the insurance companies today versus a decade ago?
Yeah, it's interesting. They have, Bob. They've changed a lot. Where we didn't do a lot with, say, an Everest Re, they're growing rapidly with us. A Swiss Re's growing rapidly with us. AIG, where they've had some pullback in the kind of business that they're willing to write, whether that's trucking or heavy auto or whatever, where maybe there's been a pullback. There's been some shifting there. Validus, who Western World, who was a small little company owned by the Brazilians privately, Validus goes and buys it, and they've been very active in growth strategies. We've been growing with them quite a bit. Then, of course, you take the combination of Chubb and Westchester. We did a lot with the Westchester Group. Didn't do much with Chubb. Of course, them making that merger has changed that dynamic as well.
Anything in the chemistry with the companies or technology or just how you're.
I think they all get excited about the technology just like everybody else. Where's it going to take them? How can they look at it to have a competitive advantage? Nothing on that side. I think everybody's hungry for growth in this particular market, it's really picking your partners to make sure that you're picking them right. Then, of course, you get the thinly capitalized guys, and those are the ones that have the jackpots now for taking the swings.
Thanks, Joe.
Thanks. Have a great weekend.
Next up, we have Scott Hudson, who's going to be talking about our claims management business, which is primarily Gallagher Bassett in the risk management segment. Scott, the floor is yours.
Great. Am I on? Can everybody hear me? Yes. Okay, good. Good morning. Like everybody else, I'll take a few minutes to dimension Gallagher Bassett. I'll step through kind of the major topics around organic growth, M&A, productivity and quality, culture, and I'll wrap up my comments with just a reminder on how we distinguish ourselves or differentiate ourselves in the market. Dimensioning the business. Last year, 2016, finished at $720 million. That's just under 20% of the entire enterprise when you look at risk management and brokerage combined. We pay out about $9 billion in claim losses each year. We don't take risks. Those are other entities' funds. We're the stewards of their financials. That equates probably to something in the neighborhood of about a $13 billion insurance company.
The way we add value, it's around handling the claim to a superior outcome. We're largely in the claims business. We do a little bit of risk management, kind of loss prevention, but it's all making sure that the financial outcome and the experience that the claimant has with the claims that we handle is superior. Clients. There's really 4 primary client segments that we serve. There's the large commercial. That's always been kind of the bread and butter of the organization. Those are the companies that take on a fair amount of risk themselves and unbundle their claim program from the insurance carrier. There's large public sector clients. I want to talk a little bit about Australia in particular. That's the bulk of what we do down there, but we're also gaining a fair amount of ground here in the U.S. in terms of the public entities.
Then we deal with local authorities over in the U.K. Alternative market players and captives. We've got a nice, healthy and growing captive business where we're the claims arm of the group captives. Then there's our carrier segment, which I've talked about a number of times to you guys, which is a strong business for us, probably now doing in excess of $100 million and probably one of our stronger growing parts of the business. The way we make money, there's a couple different types of contracts. We get paid on a per claim basis in some cases. Some of those are handled the entire life of the claim. Sometimes it's during the length of the partnership with the client. In other cases, some of the larger ones, we're just providing staff to the clients, and we're getting paid a multiplier on top of those staff.
In other cases, it's a little lower cost with a pretty significant incentive built on top of that contingent on how well we perform. Competitive landscape. I've said this a number of times. It's different by location. In the U.S., there's a number of competitors that we've had for many, many years. Sedgwick, Broadspire, Corvel, York. Some of them are owned by carriers. None of them are owned by brokers. Some of them are standalone TPAs. Corvel is an outgrowth of a managed care company, and they're primarily in the comp space. I've referenced the major geographies we play in. In excess of 80% of our business is still here in the U.S. We're still excited about the growth outside the U.S. The U.K., we've got 500+ people. That's been growing nicely. We've also got a very strong presence down in Australia and New Zealand.
We're roughly 5,400 employees. If you just look at the financial numbers, the metrics over the last five years, we've been mid-single digits on the organic growth. We do a little bit of M&A. We've actually picked it up here recently, bought a couple of things, and our margin last year was 17.3%. That's the basic story around kind of the dimensioning of the business. Let me talk about organic growth for a second. The story is sound this year. We've got a good pipeline of new business. If you guys recall, towards the end of last year, it tailed off a little bit, but we've seen strengthening of the business. Our focus in terms of where we're trying to grow the business is in the fastest-growing segments. I've mentioned carriers themselves. We're still seeing new opportunities with carriers.
It's a mix of carriers from large, kind of the standard well-known entities to some startups. In particular, in the insurtech space, we've actually had a couple of organizations that we're doing business with. Alternative markets, I mentioned the captive business. We're seeing nice, solid growth there. We're also seeing expansion of our business into other product lines. One of the things that a few years ago, we were predominantly a BOP business with a little bit of general liability. I think where we see a significant opportunity is moving into some specialty lines. We just picked up a client here recently in the product liability space. We're in the professional lines like medical malpractice. Product recall is something that we're talking about. The thinking there is that will solidify even more the relationship we have with those clients.
Those are in some respects, they're viewed as more value-added lines to the clients. What we're trying to do is focus our attention on those segments and the industries where we have good strength add some additional specialty lines to the offerings that we have for our clients. The other thing we're doing is a lot of what happens here in the U.S. around medical programs and other things is there's opportunities to export those outside the U.S. Some of the markets we operate in, like Australia, and even New Zealand, somewhat to the extent of the U.K. They're not quite as advanced in terms of some of the techniques they use around claim handling. We're looking at opportunities to do that. We'd love to expand geographically. I mentioned the places we're at. We can actually handle, through partnerships, claims in over 60 countries.
We have the wherewithal to be able to make that offering to our clients, but it's not our focus. We're very thoughtful in terms of where we may plant the next flag, but we are anxious if the opportunity does present itself. Two things that really drive our growth beyond those dimensions. One is, I talk a lot about superior outcomes. If we can deliver the best claim results, that more than anything, is the thing that will differentiate us no matter what market we're working in, no matter what line of insurance. Lastly, we're spending a lot of time in terms of building up our marketing capabilities, getting our brand out there. There is an opportunity. I think we're pretty darn good at selling.
The fact of the matter is you can always get better and execute better on the selling side, getting the reputation well-known in the marketplace. Our reputation is pretty darn strong as well. A couple of other metrics. Retention for us, which is a contributor to, it's important to organic growth, is well into the mid-90s. As I mentioned, we've seen mid-single digit growth in the business itself. The fact is, the business is relatively sticky. Service has to become a pretty significant issue for our clients to leave. Moving beyond organic growth. Mergers and acquisitions. You guys all know this, we're not as acquisitive as the brokerage business, but we're putting some renewed energy in looking for particular partners. We have done 3 transactions this year.
Although far less material, I think long-term, it actually could have a pretty significant impact beyond the immediate financial impact. When we think about it inside Gallagher Bassett, it's a little bit less about volume. We're looking at adding skills and capabilities that we don't have. I mentioned product lines. Let's move into product liability. Outside the U.S., it could be moving into new and different geographies. It also can be bringing in new talent within a given industry. We've got depth in transportation. One of the companies we just announced recently, was a company by the name of National Transportation Adjusters. These guys are steeped in expertise around, as they would describe it, wheels in the U.S. That gives us added depth. We've got a nice core business, a lot of synergies that are possible there.
A company that we bought earlier this year in the U.K. was a company by the name of Strada. We've got a nice motor offering there, this gives us additional capability around uninsured loss recoveries. In most of these cases, what we're buying is enhancing what we can do for clients. Down in New Zealand, we bought a company by the name of Symmetry. They brought property capability that we didn't have, motor capability we didn't have, and marine capability we didn't have. In all the cases, when we're looking at it, we're expanding our breadth of skills and capabilities for the organization in half. The punchline around acquisitions. Look for things that are of strategic value to us, whether it's in different geographies, or whether it's enhancing our skills and capabilities. Moving to productivity and quality.
I've mentioned that we're in the 17%+ margin, it's expanded probably nicely over the last five years. Scale and efficiency does matter. There's two sides of the coin on this. As we get bigger, the mid to back office functions, there are scale advantages around IT, finance, and so forth. At the same time, a lot of the programs that we do are customized to given clients, we still need people to handle claims with clients. We are largely a people-driven business. It's not quite as scale-driven as it relates to those folks. We do have folks in our offshore service centers. We're doing some centralization of activities. You remember Vishal talked about some of the things he's doing both in the U.S. as well as in India, in some of our service centers. We're making full advantage of that.
We've got in the neighborhood of about 300 of our people. Most likely, that will expand within both of those areas. Technology and analytics, big deal for us. There's a couple pieces to it. It's using the technology to become more efficient. We just implemented a new liability system down in our Australian operation that our team down there thinks will add or enhance our productivity down there. Then there's other instances in which we're using technology to actually help our quality, where we're actually building models to help our adjusters know what is the best possible decision to make on a given claim. Then in other cases, it's an analytical tool set, most people would refer to as like a risk tool, where we put it in the hands of risk managers or clients put it in the hands of brokers that we work with.
They will use it to do assessment and valuation on the performance of the program itself. More recently, we also were organized around our client segments. There was a day not too long ago where an individual resolution manager, as we call them, adjuster, could handle claims from a captive, a carrier, and a risk management client. Now we're dedicated to each of those client segments. There are enough differences that our ability to deliver a high-quality outcome is dependent on people being dedicated to those specific operations. The last thing I'll mention is security and data privacy. It's a big deal for us. We've got a lot of personal information. We get medical information and so forth. I think one, there's a significant investment being made. Our IT guys are on top of this.
We also have to go through, in a lot of the situations where we're proposing on clients, they'll bring in their own IT organization to test the tires on our security simply because they're obviously partnering with us. We've passed all of those tests with flying colors. I think that at this moment in time, we feel pretty confident in terms of the strength of the operation that we're building. Lastly, culture. Being a part of Gallagher speaks volumes for us in terms of who we are at the marketplace. People like to come work here. At the end of the day, it's pretty simple. We are different. We attract a lot of people that work at our competitors. They know a difference. They love the family-oriented aspect of it. They love the expertise-driven. They love the performance-driven culture that we have.
Those things do make a difference in terms of our ability to attract and retain some of the best professionals in the industry. Even more importantly, some people that haven't typically worked in this industry that are necessary to populate our analytics function, that are necessary to populate our IT organization, that are necessary to populate our financial management organization. The culture is an advantage when it comes to recruiting. The other thing is, I've talked about this before, we're in the business of putting people's lives back together. Rather than thinking of ourselves as a claims processing operation, we're working very hard at getting that notion out there. People, well, people and clients, we're taking care of their people. It's important that we have that sort of mindset, and that is helping us in terms of our overall culture as well.
Lots of interesting and great stories that I could share in terms of the sort of things that we do for people. Our people in our organization are heroes every single day in terms of the things they're doing for people that had an incident that was somewhat unfortunate. I'll wrap up real quickly with how we differentiate ourselves in the marketplace. I mentioned that it's superior outcomes. We've got to be able to prove to somebody that if we're handling their claims, they're getting a better result. Secondly is the care, compassion aspect to it. The relationship with Gallagher matters. We are long-standing relationships, stable, financially strong. That makes a difference for a lot of our clients. When it's all said and done at the moment, things are pretty darn solid. We're seeing some growing strength on the organic side. With that, has Greg got the microphone?
Greg, what do you got?
What do I got? Well, I got a lot.
Tell me the good stuff.
I got a lot. Well, as you're going through your commentary.
Yeah.
You talked about some partnerships with InsurTech.
Yes.
You later in your presentation talked about technology and analytics.
Yes.
I think they're two separate buckets.
Two separate buckets. One is the client.
Tell us more about the InsurTech space.
Okay. A lot of the carriers we work with are actually building out. Some of them are funding InsurTech operations. Pat's probably talking, there's hundreds, there's thousands of them. They're actually insurance carriers. Those are clients of ours. I think we've got maybe somewhere in the neighborhood of four, five, or six of them that have come to us to be their claim handling arm. Separate from that is what we're doing internally to enhance our ability to provide service as it relates to technology. The interesting thing around the InsurTech companies, to some extent, we've got some interesting names in our roster, ones that you would know well. When it's all said and done, it's your guess as good as mine as to whether they prevail. We're prudent in terms of how many of these guys we want to work with.
At the same time, placing a bet with one or two is probably insufficient. It's almost as if right now we've got a little bit of a portfolio. The claim volume at this stage of the game coming from any of them is not enough to make a difference. At the same time, a lot of our carrier partners are interested in this area, and these guys are growing in terms of potential prominence long term. We're in the game, as it were.
Just as a follow on.
Yeah.
We're hearing noise about artificial intelligence seeping its way into the insurance supply chain, if you will.
Yes.
How do you think about that as it relates to your business?
We do it. We've got things going on as it relates to, I throw out all the buzzwords, AI, machine learning. There are activities that are underway primarily around helping our people be far more effective at handling claims, whether it's predicting which claims are most likely to be litigated, which one, at which point in time you should put a nurse case manager on, and how to go do that. Our team, we're in the midst of building those models and deploying those capabilities into our workflow. I tend to look at it and say it's the application of technology into our business. Sometimes I think people get a little bit caught up in which term you want to use, whether it's AI, whether it's machine learning. At the end of the day, we're bringing technology into the process of handling claims.
Sorry about this.
Yeah.
Just one follow-up. As you're thinking about this, you see all these new emerging ways to handle this process, is there a lot of opportunity for expense? Is the 17% margin, does it have the potential to go higher because you can have the potential to take costs out of the system or out of the process because of this? Is it something, it's a multi-year process, or are we going to wake up in three quarters from now, you're going to say, "Hey, we're rolling this out across our platform, and we're going to deliver 200 basis point expense savings.
I'm sticking with my 17-plus margin. That one we're not going anywhere on at the moment. There are some opportunities. Some of them are productivity.
Yeah.
There are still administrative tasks embedded in our claim handling process that I would prefer that an adjuster of ours isn't spending time doing. Whether we're moving that offshore, whether we're centralizing in the U.S. or automating it, some of that is going on. A lot of what we're doing related to technology is more around decision support. The majority of claims that we handle are ones that still require decision-making and thought. It's not just straight-through processing where we're fully automating it. Maybe someday way down the road, some of these things.
When you've got a 2- and 3-year claim where you're interacting with the individual and you're trying to divine what's the best path forward, it's more about leveraging the breadth of experience we have in the form of handling millions of claims and how you kind of harvest that information and bring it to the desktop of the adjuster. I don't think we're expecting exponential improvements. I'd like to see some improvement in productivity, but it's not going to be exponential. I got more, but I'll let someone else get a taste here.
Thank you, Scott.
Okay. Thank you, guys.
Next up, we have Doug Howell, who's going to give a financial discussion, including talking about clean energy. Doug, the next 25 minutes, all yours.
Turn this mic on here. Patrick, I turn on for this? Is that right?
Okay.
All right. Can you hear me? Here we go. We're live. Thanks, everybody, for joining us today. 25 minutes, I guess I'll have to speed date through a lot of topics. I think that to open it up, I think that first I have to say, for all of our colleagues and clients down in Texas and Florida, I hope everything's okay. I think we'll rebuild this. Like Pat said, it is exciting to be in an industry where we help people put their lives back together. Godspeed to everybody there. I think that hopefully you took away from everybody, there seems to be a good sentiment of optimism. We're talking about business opportunities for growth, expanding our share of market, expanding our share of wallet.
I think every single one of the folks that were up today seem to have an element of optimism in their outlook. As I look out, here are some things that I want to make sure that I highlight to get the housekeeping matters done on the front end. We posted our CFO commentary on the website. There's a couple adds in there, I want to give some dimension to that. If you look at, by and large, our outlook looking forward when it comes to margin, there's a couple things. As you recall in our July conference call, earnings call, we said we expect margins to be flat in the third quarter. The reason for that is two reasons, is that we give our raises out in the second half of the year.
Now, if you go back historically and look at what our margins have done, they've expanded in the first half of the year. Like 2014, we expanded 186 basis points in the first half, the second half, 111. 2015, we expanded 139 basis points in the first half 20 basis points in the second half. 2016, 61 basis points expansion in the first half, 26 basis points in the second half. Last year, we brought it in 2016, we brought in the whole year at 43 basis points worth of margin expansion. In the first half of this year, we expanded margins 84 basis points. Any margin expansion in the second half of the year can be difficult and traditionally is not where we see margin expansion. We see it in the front half of the year.
Please make sure that you've taken that into consideration as you've built your models. The other thing we've added in the CFO commentary is the fact that there's on contingent-
Is that added or is that a reiteration?
That's a reiteration of that. What I've added is one of the other reasons for this is not only raises, but supplementals and contingents tend to be more flush in the second half of the year than they do in the first. I think that there might be some over-optimism on If you look at supplementals and contingents, we add a comment on page five of the thing, that expect revenues from supplementals and contingents in the third quarter to basically be flat In the third quarter 2017 with the prior year. All right? There's a consistent pattern there, too. As I went back and looked at it, I don't know if I have it right here in front of me, but let me see if I can find that. We have contingents and supplementals in total.
In 2015 versus 2016, they were up in the first quarter, up in the second quarter, maybe just flattish in the third quarter and flat in the fourth quarter. In 2016 versus 2017, flat in the first quarter, up in the second, flat in the third. You're seeing a little bit of that. Just make sure you take a look at your model. Between raises going out and between supplementals and contingents kind of being flat in the third quarter, that's why you wouldn't have margin expansion in the third quarter. I just want to reiterate. Elise, you had your hand up first.
Yeah. I have a couple questions on that.
Okay.
First question is, have you ever actually pointed this out to us in advance of a quarter that supplementals contingents would be flat? I just can't remember.
It just depends on the era on some of it. I think that the reason why I'm doing it in the CFO commentary is when we used to only provide the supplement when we do the quarter, we have the 5 years of historical quarters. We'd point you to that and say, as you make your supplemental and contingent picks, please look at the history in the past. We probably haven't done that as much anymore because now we're talking more out of the CFO commentary than the supplement that we provide on the website. This is a little new, but it's just something that I thought I should highlight because I figured you're going to ask me, "Well, why wouldn't margins go up in the second half of the year?
Okay.
Why did you say in July? I'm telling you the reason why, is we don't get as much supplemental and contingent, and we give raises out mid-year, basically is why.
Okay. The second part of my question.
This isn't an alarmist, this is a model clarification.
Yeah. Pat said, re-emphasized in his opening remarks when I asked the question, that organic growth for the year would at least be as strong as last year. Right?
I think what he said was 2017 feels like a lot like 2016.
Okay.
Maybe even a little bit better.
Okay. Yeah. If 2017 feels like 2016, maybe a little bit better, means that your core commissions growth will be stronger, you can get better in line with last year's level?
A smart person might come to that conclusion. Yeah. I think that we could. You see a little slip in the base contingents, base commissions and fees versus the contingents. Overall, we're kind of like we were last year. Some of the geography is getting a little harder to do. A supplemental versus a base, it's a fine line. If we get an extra point at the desk when we're placing the business, that's called base. If we get it at the end of the quarter because the carrier sends us one check for all of the placements in the quarter, that's called a supplemental. There is a little bit of gray.
That look, he's always talking to the all-in.
Correct.
Okay.
Yep, all in. Right.
Does the supplemental and contingent outlook for the third quarter embed any storm impacts? Could that be better or worse depending on how-
I believe the answer to that is no. Still a little early to tell. Joel said just a minute ago that we're not seeing that quite yet. It shouldn't affect the supplementals. I don't believe it should affect the contingents, because the contingents are coming in from prior performance at this point. We recognize contingents as received, basically. Supplementals, we make our You'd see that in the first quarter next year, is where you'd see it. If there In March of next year. Now, that will all be changed when we go into revenue recognition next year, because we will be required to start, in many cases, not all cases, accruing contingent commissions as a portfolio and setting up a reserve then for ones that we think that could go sideways on us. That will change.
If we didn't have a change in accounting, you'd see it in the first quarter next year.
It's like a two-quarter lag, typically.
It's just an annual. Contingents are typically done on a calendar year basis. How do we do for the calendar year? We'll pay you in March or April next year. It's not necessarily on a quarter-by-quarter lag. We don't do contingents based on a single quarter's results. We do it on an annual basis. Anyway, I think that just to make sure you highlight, so take a look at your models on that. I just wanted to emphasize that why do we forecast margins to be flattish in the second quarter. Always, if you don't grow over 3%, it's pretty hard to grow margins in general. Margin opportunity. There was a question that said to Tom, said, where do we see opportunity? We still have margin opportunity in Australia and U.K. retail.
I think that as we improve our operations there, the CFOs of both of those units are in the building today, and we're working hard on next year's plans. We're getting margin expansion now. I think we'll be pretty well through that process by the end of 2019. Tom was saying, is it a couple years or whatever, I think we'll be through those initiatives. Again, between those two locations, we have about $500 million worth of revenue. If there's five points of margin there, maybe there's 25 points that will get us up to where we want to be on a run rate basis. Another thing I want to point your attention to in the supplement is rollover revenues. In your models on page five, we give you the acquisition, our best estimate of acquisition rollover revenues.
We think it's about $38.1 million that will be rollover revenues from historical acquisitions. That doesn't include what we would close in the next 15 days. If you think about it, if we close something in the next 15 days, odds are it will be a September 30 close, and that wouldn't change that number dramatically. At this point in the quarter, we're pretty close to that number. It could move maybe a half a million dollars, but it's not going to move that much of revenue.
What's the rough mix of commissions and fees? Should we just use historical relations?
I think that almost all of these that are coming in would be mostly commissions or fees.
Commission?
I think that the nature when we do a small shop, there's not a lot of them that are working on fees. I think you'd err to that. Let's see. Gallagher Bassett revenues, we're seeing some lumpy behavior out of that. If you see it one quarter, we have 10% growth, another quarter we're flat. You're seeing it. Scott talked a little bit of that. You might see a little lumpiness going forward in that on a quarter-to-quarter basis. By and large, this year feels better than last year, even on Gallagher Bassett. We're working on. The other thing in the CFO commentary, we used a word called pending when it comes to workforce and lease termination costs. We typically haven't provided much commentary, but we've got some exciting projects going on with real estate consolidation right now.
I don't think we'll have much here in the third quarter, but for the full year, we could have some nice real estate consolidation happening by the end of the year. If we did, we'd take a one-time charge, and almost all of that would be writing off historical assets of those locations, leasehold improvements. It would be a non-cash charge, we're working on that. That's why I called that as pending in there versus no commentary provided.
What page is it?
That's on page two of the CFO commentary sheet. In the yellow section, it says Workforce and Lease. That's all. What's pending is lease termination costs coming for that.
Stay tuned.
Stay tuned. Maybe it's $5 million-$20 million worth of write-off of non-cash assets on it if we get some of these larger footprints consolidated down, which is great, because the savings on them are pretty spectacular going forward. Good work by the team there. Cash. At the end of August, we've got about $350 million worth of free cash. We're up from where we were at June 30, so that's good. M&A pipeline, still a really strong pipeline of nice tuck-in acquisitions that we're still seeing that we can buy at fair multiples in the seven to eight times range, something like that. We're seeing really nice tuck-in opportunities still for us. Integration, pretty well done. CapEx, actually, we say in here that there's very little impact. With the move up of the pound, very little impact.
Could be a little bit of a tailwind in the fourth quarter versus it won't happen much here in the third quarter, but it's not going to be a $0.01 or more, or something like that. Really, we're not using shares in acquisition other than tax-free exchanges. Those were my housekeeping items on the modeling. Questions on that, then I'll give some commentary just on maybe next year a little bit, then go to clean energy, then talk a little bit about next year.
Mine might be kind of a next year question.
Okay
On the tax side, if you can just walk us through when we start thinking in our models about the tax rate, when some of the laws expire. When your actual tax rate on your P&L should start increasing, versus obviously we know that you will have the credits in terms of the cash taxes that you have to pay.
All right. Great question. What's going to happen after 2019 and 2021 when our clean energy plants really go into retirement? All right? First and foremost, what's going to happen to the tax rate for the brokerage and risk management segment? Nothing, because we do not allocate any of the clean energy credits to those segments. We tax those segments in our reporting at the statutory rate in the countries that they produce the revenue. Nothing will change there. The overall corporate tax rate will go up on a GAAP basis because we won't be generating credits. On a cash basis, it will actually get substantially better. When we get to 2019 and 2020, you can just basically take out, in the shortcut table that we provide for the corporate segment, just remove clean energy, and that's what we'll look like.
That line is. We've self-contained it down there. On a GAAP basis, that will be the change. On a cash basis, since we're not spending money to generate credits, we will actually now have the full benefit of all those credits coming through and reducing our current taxes paid with no cash expenses. To the extent that GAAP earnings go away, cash earnings might actually exceed that. That's the way to think about it.
Isn't it that we don't take the whole thing away? You still get part of it.
No. Here's the thing. After 2021, those tax credits. Right now, our balance sheet is $550 million. I might be off a little bit on that. By the time we get to 2021, under the current design, we might have $1 billion of tax credits that we get to use for the next 7 years at about $150 million a year. We're building a balance. Right now, it's cash flow positive, we're using some of the positive cash flows to generate future credits. In 2020, the GAAP earnings will go down by, I'm just going to make this up, $100 million, and the cash earnings will go up $150 million. That's the way it will convert. Now, tax reform can change that, right?
If we get a reduction in the tax rate, that's fine, because I don't think they're going to get down to below 20% in legislation. Right now, we're benefiting our cash taxes paid by about 15%, of the 35%, we're using 15% in credits, maybe a little more. If we move down to 20% with no AMT, we'll actually use 20% of the credits.
Yeah.
The point is this, GAAP earnings will go down, cash earnings will go up by more. Sorry, I probably butchered that a little bit, but
Just following up on your comment about not having to use shares for acquisitions. Can you dimension, obviously, there's been an inflection in cash flow over the last couple of years with all the integration costs not having to be incurred, plus just earnings growth on top of that. Can you dimension what your capacity is going into 2018?
Yeah, I think that we can touch on a $1 billion worth of acquisitions using cash and debt only in 2018.
How much of that is 2018 free cash flow versus debt capacity?
Of the $1 billion, 25% will be debt and 75% would be free cash flow.
Okay.
Something like that. Free cash flow, the way I define it, after dividends and everything. Maybe it's 70/30, something like that.
Okay. That implies a pretty healthy pipeline of acquisitions at 7 x-8x .
Yeah, if they're there, then we would do it. There is a healthy pipeline, trust me. If we don't spend it, we'll buy back shares with it.
Buy it, okay.
I know where you're going. I don't think that we need to hoard cash in order to be ready to do acquisitions in the future. Just buy shares back.
Right.
Clean energy, I think that we're in good shape right now, the way we feel through September 15th here. I think that we've got some hot weather coming in areas that we have plants running. We didn't lose the plants as a result of Harvey or Irma to any extent. Utilities typically do their maintenance plans here in late September, early October, because you're typically not in the air conditioning season at this time, but there's some hot weather coming. I see if the hot weather comes and they don't take them offline to do maintenance, then I see a decent outcome. I think that we're in good shape for this quarter, and we'll see what happens in the fourth quarter.
You mentioned that you're going to talk about next year. Outside of tax, is there something you had in mind that you wanted to highlight?
Yeah. Here's the thing, I'm really excited because next year we start what we call our dominant priorities week. That's where we've got all the business units in, and they say what's their aspirational goals for next year in terms of what do they want to accomplish. I see us having some really terrific opportunities right now to There's big initiatives that we have on using data to sell more. There's some exciting things that we're going to talk about next week on that. That's not selling data, that's using data to sell more. I feel like I'm excited about the efforts around organic. You heard Jim and Tom and some of the-
You're talking next week? What?
Next week, we have our management meetings, and in that meeting, we're going to talk about digital efforts that we are ready to roll out to help us with organic. You're not going to be there, Greg, but that's all right. You'd be welcome. We're also going to talk about the productivity opportunities that we have to continue to get better, faster, cheaper with a higher quality. There's some really exciting opportunities. You heard Vishal Jain speak, I think it was last December at the IR meeting, and we really are getting some terrific momentum on that. I'm also very excited about our headcount controls, just in terms of managing the workforce. Last year on our service layer, we had 16,000 people. Now, on production layer, we're up nine people in total for the entire year. Out of 16,000, that's pretty darn good.
This year, we have so many interns in here that some of them get counted a little bit, but we're only up 40 or 50 people net, something like that, on 16,000. What's happening is productivity lifts are showing themselves right now and not having to go out and hire. I think that's terrific. Our service centers offshore now have almost 3,000 people in them, and they're delivering higher quality work. As a matter of fact, Bob sent me a note that on a certificate of insurance, apparently, one of the companies that he's associated with uses Gallagher as a broker somewhere in line, and I sent back and I found out exactly when it came in, exactly his turnaround, and it was less than a full day between request and delivery.
The actual time that it took to come in and come back was a very short amount of time. I don't know if this case was 19 minutes like Pat talked about. As I go into these meetings for next year, we've got opportunities for continued organic growth, I think better than even this year, the way it kind of feels right now. We've got opportunities to become more productive that should help us still be able to pay raises to people, because we are in an environment, raises have to be given in many cases, otherwise we become non-competitive. I think that productivity can offset some of the raise strain.
I feel as the CFO, just looking across all our units, every one of them's got nice little opportunities, and every single one of them's got normal business problems. As we come into this, integration's behind us. We're operating as one company. Our teams are stable. Yeah. This is an interesting year coming into the dominant priority and budget season, unlike before. Last year, I was there saying, "We've got to get integration behind us. We've got to finish these projects," right? The year before, it was like, "Oh, my God. We got to integrate these operations." Now we're at this point, I feel good about next year. The tuck-in pipeline is there. We've gone through a lot of leadership changes inside of the company without a burp or a blip. Think about it.
We basically changed out almost all of the. There's so many retirees going on our regional leadership, and we just continue to sail through that. These are people that are. I joke that Bill Zabel and Mike Pesch, you saw Bill, and Mike Pesch will be here next time. They joined the table, and Pat calls me the new guy because I've only been there for 14 years. I said, "Oh, Bill and Mike are joining." Ah, damn it. Mike's been here 25 years. Bill's been here 20 years or whatever the number is. I'm still the new guy at the table. The succession planning that's going on, we're just doing it without big fanfare on there. Coming into this season, I'm pretty excited about next year.
What about headwinds?
Inflation is a befuddlement to me a little bit. Where are we starting to see the creep in of inflation? I think that we're well-controlled enough to come up with creative solutions to knock off the inflation issue next year, like travel, consumables, real estate. We still have tremendous opportunities to rethink how we office our folks. When I got here, I think we were at an average of 320 square feet per person. I think our average worldwide now is down to about 150. If you take out the dense-packed areas in London, we're still down in the U.S. type of multiple, well down below 200 square feet per person. I think there's opportunities there. That will creep back in. It's not cheap to rent buildings anymore, right?
We haven't built new buildings in 10 years, so we've got to come up with faster ways. Clearly, I think there's spend needs when it comes to technologies in terms of making ourselves a little bit more automated in dealing with our customers. We'll spend some money on that, but not big numbers.
Clean energy earnings growth this year is going to be pretty strong. Corporate total adjusted north of $20 million. When you think about the earnings growth rate going into next year, should we think a pretty strong growth rate as well? Or how do you?
No, I think that on a GAAP basis for our clean energy investments, we're probably at the peak because we've got almost all the plants in service. To be honest, I don't know if I want to put the final plant in service to generate tax credits that we're going to use in 2028 or 2029. I've got to look at that now. Do I want to spend the cap? Do I want to spend the $15 million bucks to put another plant in place in order to get tax credits out in 2029? I don't know if I need them. I'm kind of waiting to see what happens with tax reform a little bit, if there is any, because that might tell me whether it's worth it to do it.
I think that we're kind of at the top end of where we're going to be in terms of GAAP earnings on it. Cash earnings still underlying. The more U.S. income that we generate, the more free cash that we generate. The more credits we can use. That will actually go up. I don't see GAAP earnings going up much.
The comment about 2018 organic being better than 2017, is that in both segments?
Yeah. I just feel like 2018 is starting to look like we're starting to see some exposure growth in places. I think the fear of recession, you guys follow this better than I do. What's your bet on a recession? I don't know if we're going to have one right now. I think that we seem to be in a pretty good earnings growth period here in the U.S. I think the Australian economy is coming back better. I think the mining sector has bottomed out and coming back up. New Zealand's starting to have some nice growth. Canada seems to be doing okay. We've got oil over 50. What's going to happen with Canadian oil production? That will go back up, U.S. oil production. I'm just trying to look for the headwind. I don't see it. Now, that's when problems happen, when you can't see something coming.
I feel pretty good. That's the same whether it's in Des Moines, Iowa or New York City or in Texas. That's going to be a huge building boom. Florida, we may not pay the lawsuit, but somebody's got to rebuild it, right?
Yeah.
Exposure units, I feel, are going to go up a little bit. I'm not as worried about recession as I might have been in May.
What's the fiduciary cash balance?
Fiduciary cash balance is whatever the 350 isn't. Take cash, what, 350?
Sorry, you're making a little money on this.
Oh, yeah. How much are we? I don't know. There's probably $1 billion sitting there. It's $1.5 billion. I look at Ray or Sarah.
Yeah. I think $1.25 billion.
Yeah.
Yeah.
Yeah, something like that. I think that fiduciary goes up a little bit.
Every rate hike is straight bottom line?
Yeah. Basically, almost all of that. Anything. Remember, the short end isn't really moving. It's moving a little bit, 25 basis points. It's not chump change, but it's not like it was 6% when I got here.
Yeah.
So.
Another on the organic growth comment, if there is a pickup in exposure growth following on the two storms, or if there's more storms, that's not contemplated in your initial outlook for next year?
No. I'm just factoring economic excitement in the United States. Economic activity. Think of your own personal situation. How fast are you getting a contractor to come to your house today versus five years ago? You got to wait three or four days to get anybody to come do anything. I'm just feeling that. The cranes on the horizon. Just any place I go, there just seems to be economic activity. We do have an aging infrastructure also that has to be rebuilt at some point, right? We can't defer it anymore. I think that I just am feeling underlying in our data, we're seeing some nice exposure. I was just at a young person's meeting, a young producer's meeting, they're feeling some excitement in the economy right now, too.
Okay, irrespective of, I guess, price increases following on the storms-
Yep
Obviously, there was a very big flooding event in a part of the country. There is some element, some commercial line coverages does include flood.
Yeah, a lot of them.
That's an opportunity for there to be a greater, irrespective of price increases, for more commercial flood coverage to be sold?
Yeah, I think here's the thing, is one of the things that I always say is that I hope our brokers do a really good job of this. We have to educate our customers in the fact that they have the ability to buy commercial flood or excess flood, right? If they don't, they need to expressly tell us in one way, shape, or form that they don't want to buy the cover. I think this will cause people to maybe buy more cover. I think that any time you have a risk that they get hit, people tend to react to that. They also might have an appetite that I'm just going to worry about it once every 12 years, and I don't care. Storms are funny. We got another one churning up, cell number 15 coming off of Africa. We've got Jose that's spinning again.
I don't know if it's been upgraded to a 2 yet. I don't know. I just was looking at him. Listen, that could come up the East Coast again. We're only at September 15th. Remember, Hurricane Sandy didn't hit until Halloween, basically, wasn't it?
Yes. Yeah.
We go to Thanksgiving. If we get a little bit of a warmer system, if you get the jet stream pushing north a little bit, you could have a lot of twisters coming up for the next 6 to 8 weeks, 10 weeks. Most of the time, you get the Gulf storms early, and then you get the East Coast storms later. If I had insights to that would be awesome.
You just provided it. What are you talking about?
Informed insights. Those are speculative insights. I think one of the important things, too, that also brings me excitement is Pat's comment about the fact that we compete 90% of the time with folks that don't have our capabilities necessarily. Between Marsh and Willis, Gallagher, Brown, Lockton, JLT outside of the U.S., there's plenty of market share for us all to grow very well. I think that when clients realize that an insurance purchase in the realm, in the layer that we have is an informed purchase, it's a consultative purchase, it has huge consequences if you don't buy it right. Remember, insurance, the risk isn't what you buy, it's what you don't buy. I think that we have a really, really good consultative offering to give our clients, and we don't make that much money at the end of the day to not take that advice.
When you think of a guy spending $100,000 on premium, right? $100,000, that's a big annual spend on premium. Gallagher might get $10,000 of it, and the guy actually doing the work is going to get $3,000 or $3,500, right? That's a lot of value there for $10,000. I think that for the cost, I think that it's again, we're trying to put together, that $10,000 account, premium account might have six, eight, 10 policies that are associated with that. I think it's a really good time to offer. Liberty rates are up 3%, down 3%. It's a really good time for our folks to come in and demonstrate the capabilities. I think smaller businesses are having big business issues. Cyber is a classic example of it. Every company, and they should also have traumatic event cover.
There's a lot of things that can happen to a small business today that you can buy cover on, where before they're just trying to get their fire or their wind or their workers' comp, their dram shop liability, those things. I think that we are entering into even more of a consultative period versus a do-it-yourself period in our layer of customers. That's exciting. Most of that service is being provided by baby boomers that don't have a succession plan. All their kids are in this room, doing investment banking and analysis. What other questions?
What about revenue recognition?
Oh, revenue recognition, not spelled W-R-E-C-K. Revenue recognition is coming. I don't know how many of you are aware of it will change how, for the brokerage business, our revenues are recognized and how our expenses are recognized. Since most of you follow the insurance space, I'm looking out here, is you've got to think that we're going to have a little bit of a DAC, and we're going to have an unearned premium reserve, right? The difference is most carriers recognize their revenues, just divide by 12, right? The new revenue recognition standard will say, "Gallagher, you recognize your revenues based on the service load that follows the effective date of the policy." The cost to originate that policy or originate that contract, you have to defer some of those costs.
It could mean you defer some costs for a few months. When you place the policy, you reverse that. You take that as an expense at the time. We might recognize 85% of our revenues on day one, recognize the expense on day one, and then we recognize the next 15% of revenues over the next 3 months as we service the policy, issue auto ID cards, and service the business. Some will be over 12 months, some will be over two months. It depends on the actual underlying business. Boy, am I happy that we really understand the service layer in our company. Those 16,779 people I was talking to you about that are up nine people from last year, we know exactly what they do on any given day because of all the investment we put in modernizing the middle office layer.
I can tell you the service load Down to almost the nth degree on it. For us, it's a huge effort. We're spending a couple million dollars a quarter on it. That's going through the corporate segment right now. As it just goes through the numbers, we tell you about it's going to be a big deal, we're going to have to spend some time in the fall and spring. This will come out, our first quarter of 2018 earnings will be on the new basis, we'll have to restate 2017 to put on a comparative basis.
Is that?
Cancel all vacations.
Sounds like fun but-
Yeah. You're going to love it.
Is it a short-term or at least a one-year or shorter term earnings, GAAP earnings tailwind in the sense that you're accelerating revenue recognition and then you're deferring some costs and-
We're going to retroactively restate back to, I think, they'll have 2016, 2017, and 2018. We'll do a cumulative effect of a change that goes back to 01/01/2016.
Okay.
Yeah.
There's like.
Like 12/31/2015.
Bases are going down is his question.
It's like you're accelerating revenue recognition, then you're DACing some of the cost, right? That you're creating some excess margin, at least in the short-term, until you unwind the DAC balance.
Yes, maybe, remember, we've got to roll off of the prior. Remember, we're not all January 1 type renewals. In answer to your question, our early indication is it might not dramatically change our annual margins.
Right.
It might shift some of them into different quarters. Like right now, seasonally, we're the smallest in the first quarter, right?
Yeah.
It might actually reverse now that we become seasonally strongest in the first quarter because most of our benefit business that we do all the work in the fall, the effective date of all that benefit business is really January 1, but they're paying us in the fall. Right? We recognize the revenue then. If we have to go to January 1 and recognize it, you could have a significant amount of benefits business that really gets accelerated or deferred, depending on how you want to look at it, into the first quarter. I don't know those yet, and that's why we're spending. We meet on this every day. We've got a team of people that are working through this hours and hours and hours.
We have a lot of external resources that are working on this as we get extra labor in to help us on this.
I don't have an exact answer, but you should understand we will restate the prior year, so we have comparability, but it might shift the quarterly emergence of revenue. I don't think it's going to be a huge issue on a calendar year basis.
Restating prior year means the prior year earnings will be kind of similar to what they were. It's just that you may see some shifting around the quarters.
Quarters in particular, yeah.
Okay.
That's kind of our best guess now. We're into this at this point.
We'll get the restated prior year-
Yeah
before you report first quarter?
I hope so. One of the things about this is we're testing. We're going to go live. We're actually in a great spot because we're going to go live really in November, and we're going to run parallel for a couple of months under the new basis and the old basis. We're going to do that. Unfortunately, what we're doing is we're changing. I've been an accountant for 35 years, so I've had the opportunity for 420 months to close the books, right, under a certain basis. In the next five months, I got to figure out how to do it all differently on a revenue basis. Testing and learning on a month-by-month basis that we've had the benefit for 30 years, we have to do that in five months.
My answer to your question, I hope that we could publish some historical restated numbers before we get to April of next year. I can't promise it because I want to test and learn, rerun it. We even talked about just to get more closings in, should we try to do a weekly close just to test and learn that many times? They kill me when I say that.
How long is it?
I hope to help you, I think it's going to be something between now and then that I hope I'm ready enough in advance.
How long are you going to have to run parallel for?
I'm going to do it between now, I'm going to try to get five months of test closings in before we come live on March 31st next year. I'm hoping to get five tests in before then just to see the process because it all has got to be Sarbanes-Oxley compliant.
Yeah.
It's a big effort. It's got to be audited. All the public accounting firms are going to have to come in and audit the restatements. Right? It's a big effort to get there. Running parallel, we'll always run kind of old and new GAAP until we eliminate over time. Our debt covenants are based on old GAAP, so I got to convert back to old GAAP, or I got to do amendments on the debt covenants to use the new basis. Right? We'll run parallel for a long time.
Are there any savings from saving parallel running costs in 2018 as that tails off?
Here's the thing. Imagine this. It's $1 million extra. When we get into that point, it'll cost $1 million extra to run the network. We'll close on the old GAAP basis, we'll convert to new GAAP, eventually what we'll do is we'll eliminate a lot of the old GAAP stuff that no longer needs to be done on an old GAAP basis. Because remember, we have cash books, we have tax books, we have old GAAP books, we have new GAAP books, and in some cases, we have regulatory books. We got five different books. If we could get down to just tax books and new GAAP, that would be great. Over time, there might be a harmonization exercise that goes through in 2018 and 2019 in order to get to that point.
From your purposes, old GAAP will go away, and you'll never see it again after April of next year. Sorry I didn't do this. All right, everybody. Thanks a lot for coming in, making the journey. Hope that everybody's flights go well getting back home or drives downtown this time of day. I appreciate it, and we're excited about next year, and I think that. Let's hope that we have a good closeout to the quarter. Thanks, everybody.