I'm Ray Iardella, Head of Investor Relations at Arthur J. Gallagher & Co. I want to welcome everyone to our second quarter 2017 investor meeting, including those of you that are attending here at our headquarters and those of you who are listening on the webcast. As you can see from our agenda, we have a great lineup of speakers today. The format will be similar to the past, with each speaker providing about 20 minutes of prepared remarks, and then we'll open up for Q&A for those of you who are here in Rolling Meadows. Note that we'll be using a microphone during Q&A, so for the benefit of those on the webcast, please wait until you have a microphone before you ask a question. Additionally, we just handed out our CFO commentary as of June 13th, and we posted the same document to our website at www.ajg.com/junethirteematerials.
An 8-K regarding this information was filed this morning as well. Before I 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 portions of our website for additional information related 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?
I've still got to stay on the mic, right?
You want the loud one?
No, it's all right. I usually don't use a mic in groups this size, right? I do realize that we're webcasting, so I'll stand here today. I'm not usually very good at being tied to a podium. As you can see on the agenda, the title of my next 20 minutes or 25 minutes or so is the Chairman's Global Vision. Pretty lofty title. I just continue to look at this business as probably the most exciting business on the planet. I'm excited today because at 10:15, I'm going to be over at the Hyatt Hotel about a mile down the road, I'm going to be addressing 300 first-year interns, about 285. We're going to introduce another 250-plus young people to a business that I think is the greatest business on the planet.
I think we're probably the greatest business, the greatest company, and the greatest business on the planet. That's the chairman's vision. I think that when you look at what we've done over the years, it's fun for me to come to this building. Those of you that are on the webcast haven't seen our new digs, but this is the building we left 26 years ago. It was a 40-year-old building in need of an awful lot of repair, and we took it back to the studs and made a headquarters for ourselves that I think is really second to none. It's put a real boost in our step from a cultural perspective. Welcome to our new place. There's no really new, earth-shattering information that I have today.
I'm going to repeat what I've said to all of you. I look at the faces in the room, and many of you have been following this story a long time. We're trying to do four things every day. We get up every morning, we just focus on four things. The first is we're trying to grow organically. Organic growth, we recognize, is absolutely critical to the health of the organization and to our ability to post the kind of results we want to post. Organic growth starts with don't lose your customers. It's retention, and it's being out aggressively seeking new business. We are a new business-generating enterprise.
Everybody gets up every day and realizes that all of us, I don't care if you're in HR, I don't care if you're in finance, I don't care if you're in legal, you're support for the sales organization. Organic growth is our number one focus. Secondly, what I think is something we are very, very good at, we're trying to buy the best operations in our business. Primarily, as you see us tick off an acquisition about every week, these are $5 million-$10 million shops. Why is that? When you take a look at what the marketplace looks like, last year, the July article of Business Insurance, number 100 in the U.S. did $25 million in revenue. I was at the Bobby Reagan conference a month ago, and his research, he believes there are 39,000 agents and brokers in America, not people, companies.
If you think about it, there's 29,900 agencies smaller than $25 million. If we're going to have a pipeline of people that we're talking to in terms of mergers and acquisitions, by definition, most of them are going to be much smaller, which is good for us because these tuck-in acquisitions, number 1, have terrific returns. We'll succeed in that acquisition if the principals, the entrepreneurs that started that business stay, and literally 99% of the time we get that right. We offer a good place for people to bring their people and to have career paths. When we tuck them in, we offer that entrepreneur a tremendous addition to their capabilities, and that increases their ability to help us grow organically.
When you think about all the stuff that we're doing in terms of organic growth and what we're doing with our verticals and understanding the niches that we're in and creating new products, we bring new people in through the merger and acquisition process, I call it the candy store. They literally open the curtain and go, "Man, this is fantastic." The third thing we're trying to do every single day is be more productive, have a higher level of quality, improve our margins. We, as you know, have offshored a bunch of work to what we call our centers of excellence. That has helped us increase our margin over the past decade by four or five points. More importantly than that, though, to me, is the increase in quality that we've had from that. I'll give you an example.
Back to being at the Bobby Reagan conference a few weeks ago. I asked the crowd, there's probably 200 agents and brokers in the audience, these are Bobby's customers. He's a consultant in our industry and a banker selling businesses in our industry. How many of you in the room can tell me the level of quality that you have when you issue a certificate of insurance? No hands go up. By the way, they shouldn't go up because nobody out there is really measuring the quality level at which they issue certificates. We are, because we issue 98% of them from India at a 99.7% quality rate because we test and test and measure and measure every single day. Why is that important? I believe it's a real sales tool.
When I'm sitting in front of a middle-market construction client, and I tell that client that he or she can be guaranteed that 100% of their certificates that are going out are going to be right, they're not getting kicked off jobs. Those certificates of insurance are showing up on time, and they're right. They've got the right policy number. They've got the right additional insured. They've got the right limits. That's important because one day off a job and a contractor is really not happy. I'll give you an example. One of our largest contractors, I won't tell you who it was, it was local, very sizable account, called me up, this is about 10 years ago, called me up on a Monday and said, "You better get this straight.
If my certificates of insurance are not out by Thursday afternoon, I'm giving a broker record letter to one of your competitors. I'm firing you Thursday." Our Chicago office, I'm in a panic. I'm like, "What the hell happened downtown?" So-and-so quit. So-and-so didn't get to it. The account executive wasn't paid. We've got probably 15,000 certificates of insurance, and this is when they had to be printed, stuffed in envelopes, and sent, that we've got to get out between Monday and Thursday. Basically said, "Look, I don't care if you're a D&O expert. Start issuing certificates. We're all on deck. Let's go." We got them done. That never, ever happens anymore, not anywhere in the network. Those certificates get done, they get done on time, they get done accurately. That's the kind of thing that happens. That's number three.
It's organic growth, mergers and acquisitions, be more productive, have a higher level of quality, and the fourth thing we work on, and I hope you see this and feel this at our headquarters today, is maintaining what is a very unique culture. The culture is our glue. It's the thing that is really differentiating us from our competitors. It's this whole idea of 300 kids in our internship. We're going to work these kids through the next eight weeks. They'll be part of our fabric. I'll end up spending time with them. Doug will end up spending time with them. We'll have them out on calls. They go on sales calls. They help us with proposals. It really puts a bounce in our step, and it's amazing the impact that this program has had on the company. I'm an intern.
In all fairness, when I was an intern, it was Pat Gallagher, Bob Gallagher, Kevin Gallagher, and Jim Gault. Jim was our effort at diversity. He was a Protestant. If we get those four things right, we'll continue to grow the business. When I look back and I reflect on my career, which has been just an incredible journey, and I see where we are today and the opportunities that we have, it's like the opportunities just continue to explode. They just get stronger and stronger and stronger as we get bigger. You sit there and you think, we got to $1 billion in 2002, how hard is it going to be after 75 years to get to $1 billion, to get to the second $1 billion? The truth is, it was easier. Getting the second $1 billion was easier than the first.
Now we're at four-plus, and before we know it, this enterprise will be $10 billion. We're already employing 26,000 people around the globe. We can look at our clients, and this is as exciting to me as anything. We can look at our clients and say, any account of any size, located anywhere in the world, we can be helpful. We can do that account. When I think about the dynamics of the industry, and I do want to close and get to questions. When I think about the dynamics of the industry, I look at this fragmentation, right? We've got in the U.S., something like 39,000 competitors. To be number 100, you did $25 million. When I look at that $25 million competitor, and I lay out what our capabilities are against them, it's a pretty good story for us.
I think about the 38,900 that are smaller than that, and the idea that, A, we would like to buy you if you fit culturally, but B, I'm happy to compete with you. We know that 92% of the time, because we measure this in Salesforce, when we go out to compete, we compete with somebody smaller than we are. We're competing with Marsh, Aon, and Willis 8% of the time, and that's good competition. They win. They're very esteemed competitors. They win, we win. 92% of the time, we're out competing with somebody that does not have our capabilities, and we get stronger by the month and stronger by the quarter and stronger by the year.
From my perspective, the message I have for the young people today that I get to meet in a couple of hours is, number 1. You're learning about the best business on the planet. Number 2, if this is a business that fits you, the career opportunities are just endless. We're the company that you ought to be with if you're in this business. I've only got 25 minutes today, and usually a little bit longer than that. What I'd like to do is just go to questions, and any questions that any of you might have of me. Yeah, wait for the mic. Crystal, up here.
Good morning, Pat.
Morning, Greg.
Your message hasn't changed.
You've been listening to it for a lot of years.
Yes. Congratulations on your consistency.
Thank you.
Can you talk about, in the organic piece?
Sure
Can you talk about how retention varies by country now that you have this global platform? Can you talk about some of the challenges outside of the U.S.?
Yeah. I tell you what, thank you for the question. Well, first of all, let me talk a little bit about our organic growth. If you take a look at 2017, what we've been saying consistently is that 2017 feels a little bit like 2016 when it comes to organic, and maybe even just a touch better than 2016. We're a strong, driven new business company. Greg, to your point, internationally. When we did the acquisition in Canada and Australia, New Zealand, and the U.K., Australia was organically sinking a bit. We were probably sinking about 5%-6% monthly, quarterly. Canada was flattish. U.K. was flattish. All of those operations are in positive territories. We're in positive organic growth in every single one of those territories, which I'm really, really pleased with the team. Good focus. Retention has improved, and new business has improved.
I think that's simply a matter of aligning with folks that understand that business. We have brought a lot of management attention, got good management in place on the ground in each of those locations, and very focused on new business and holding on to what we got. What was declining in Australia by as much as 5%-6% is now positive by 1%-2%. Crystal?
I guess just talking about last year, there was some tough property business that impacted the growth last year. Can you give us an update on how that's doing this year?
Well, when Joel Cavaness comes and speaks about our wholesaling, he'll give you probably a much clearer answer on that. Property, in general, has been softening over the last five years. Now in all fairness, our clients deserve that, right? Property goes by what happens with the CATs, the catastrophe. When you have a catastrophe and rates run hot, over time, those balance sheets replenish, and you should get a decrease. What we're seeing now is more flat. We suffered a couple of years where 10%-15% decreases in the property line were common, and today we're not seeing that. We're kind of at a place. In fact, I'll comment on the market in general.
It's interesting because I'm reading all the various studies that are coming out, there was one this week that said, the marketplace is flat, there was another one that said the marketplace is up 1%. Guys, the truth is, I've been through four cycles. A real hard market is up 20%. Boom. It happens overnight. You're driving to work and the market's hardening, and you're getting calls from carriers saying, "I'm off all auto. I'm off all CAT property." Bam, bam. Prices are jumping like crazy, and customers are unhappy. It's terrible for customers. It lasts about 18 months, and then phew, it's come down for four or five years, right? It goes really negative for a long time. That hasn't happened for eight years.
If you take a look at the last eight years, really since 2001, 2002, when we had a really hard market, 2005 was the sort of the start of softening. I would say since 2009, market's up 1%, market's down 2%. Market's up 2%, market's down 3%. That's a band that is really flat. What we're seeing is that the market is changing by line, not just in general. To your point, Crystal, property came down. As property came down, we didn't have general liability tanking. What I think has happened in the market, number one, you don't have the investment income that we had in the '70s, '80s, early '90s. Number two, I think you've got much better information. Frankly, number three, I think you've got very strong management at these companies that are saying, "No, no.
We're going to maintain our discipline around pricing, and we're going to get enough money to get a return." In the '90s, I kept saying to my team, an insurance company or two is going to go broke, and the rest are going to get the message. Well, if you go look at the graveyard of the '90s, it was pretty brutal. There were an awful lot of insurance companies that went broke. The market continued to soften until 2001. This market where a band of up one, down two is really stable, in my opinion, is it's Goldilocks for the brokers because now we can compete not just on this goofy price that somebody walked in and dropped 50%. We're competing on our knowledge and our capabilities, and it's not around the price. It's around what retention should you have, what coverage enhancement should you have.
We can really apply our skills, and it's better for our clients. When you go in and say to a client, "We've really redesigned the program. We think it looks good, and it's going to cost you 1% less," they're happy. Paul? Go ahead, Paul.
I want to ask about a longer-term question. One of the things I noted in your comments was you said you thought that the brokerage industry had 39,000 agencies. How much do you think the brokerage business is actually growing? We see your organic growth, but I don't know if you're actually gaining share. I don't know if it's just directly proportional to the insurance industry's revenue. I'd like to know how much you think you are gaining share when we look at that organic growth number.
If we grow organically 3%, 4%, some quarters 5%, we're getting share. We're taking business from other people. Now, there's two things going on that drive growth in the brokerage business. First, any economic growth creates additional exposure units. As you know, whether it's automobiles, payroll, sales, exposure units is what drives premium. You also have a world that's getting way riskier. If you had woken me up in 1995 and said, "Tell me about cyber insurance," I would've said, "What are you talking about? Some cyborg in a movie?" Today, you can't go anywhere without talking about cyber insurance. We quote 200 cyber quotes a day electronically and bind 100 of them on three-to-four question application. This is small accounts, very low middle market accounts that are buying cyber cover because guess what? They're taking credit cards.
If you take a look at how the world's getting riskier and how people are trying to deal with that risk and economic growth, again, we're in a sweet spot. The reason I love this business, well, I have a whole bunch of reasons, but one of them is, frankly, it's the most important business on the planet. You can't trade without me. In my experience, my clients would stop paying their people before they stop paying their premium. Because without insurance, you're gone. It's just that simple. You don't exist. You can't send a container. You can't build a house. You're not putting electrical lighting in. You don't have a business without insurance. Guess what? You're not supposed to be in your car driving without it either.
The point is, this business is so important to commerce and to the wellbeing of trade around the world that it's never going away, it grows every year. The other thing about the business that I love is it's unbelievably creative. We've done 500 acquisitions since 1986. Not two of them have been exactly the same. We're buying tons of middle market brokers, both benefits and property casualty, $4 million, $5 million. You would think that that would be cookie cutter. It's not. We learn. Every single time we do an acquisition, we bring another set of brains in that says, "Have you ever thought of this?" You go, "Wow, that's a great idea.
Let's apply that now to what we're doing in California." That grows, which is why, back to your original question, I believe we are taking share primarily from the smaller players. The ultimate question for me, I don't know when this is going to happen, I see these dramatic forces in the marketplace, I just wonder when the dam's going to break. Right? When does our organic growth go back to 15%-20%, not because a hard market, but because that guy with $5 million really can't compete. He can't compete. Right now, we go out and we compete hundreds of times a month, we write about 35% of the stuff we quote. We know we're competing 90% of the time with somebody smaller. Wait a minute.
Our expertise, our capabilities, our connectivity, what we can do for your business to help your business grow is so much greater than the Jones Agency across the road over here. When is it all of a sudden going to be these guys get swamped out of the business? I don't know, I think it's coming. I don't think they can compete, I think that's going to be apparent. Right now, you got the baby boomers, my age group, starting to retire, a lot of the times when we quote, the reason we don't write more than 35% is because of the relationship. We can't get somebody fired. I heard a great quote from another broker, not mine, I stole it. It said, "Being an insurance broker is tough.
It's a lot like going to a party with happily married couples and trying to pick up chicks." They picked. You got to go convince the person she picked wrong. It's hard. Right? I think that's going to change based on capabilities at some point. 3%, 4%, 5%, I'm thrilled with those numbers. That's great work, especially in a flat environment. I keep sitting there saying, "Why does anybody stay with the Jones Agency?" I don't care if you play golf with the guy every week. He can't bring any of the capabilities we bring. Most importantly, what happens when you have that bad loss? Where are the capabilities around when the product has to work? 99% of the time, you don't need it. You only need it when you need it. There's one behind you there. Yes.
Hi. Yeah, thanks, Pat. I was wondering if you could give us your view of what's going on with terms and conditions and contracting on the commercial side. Are they getting more restrictive?
No.
Is the opposite happening?
No, the opposite's happening. Where the market is probably soft is in terms and conditions. When you keep the premium the same and broaden conditions a bit, it does bring more losses your way. It's a tougher environment for the underwriting community. We are able to benefit our clients a bit with some broader terms. Crystal?
Along those lines, do you have any visibility on contingents and supplementals for this year or maybe just 2Q in general?
Yeah, I think our contingents and supplementals, you can ask the individual operating divisions. I think we're probably at a point where the growth in those is coming from our acquisition activity. By and large, the arrangements we have with the carriers that we're trading with are stable. If in fact, these terms and conditions. If you take a look, and we disclose this every quarter, you can see what's supplemental and what is contingent. The reason we do that is because they're supplemental and contingent, and they're very meaningful. They're a huge part of our profit. If the carriers start to have real problems with loss ratios, the contingent side of things will get tougher. That is where we have some risk. Right now, our relationship with the carriers has never been better.
If you take a look at our mission statement, we intentionally did this years ago when we wrote the mission statement. We put out our stakeholders, our number one stakeholder is, in fact, of course, our customers. Our second stakeholder are our employees because we don't have a product other than the employees. Third are the insurance companies. We're not taking risks. We need these people to be viable, if we get those three right, by the way, our fourth stakeholder is the shareholder. Right? If we get the first three right, the shareholder does well, and I think we've proved that over the last 33 years of being a public company. We work very hard with our carriers to make sure that they are, in fact, doing a good job of underwriting.
We want them to succeed, we consider that a key partnership that benefits our clients. Ray, you ready?
Sure.
Welcome everybody, thanks for spending some time with us. I appreciate it. Have a great day.
Thank you.
Thanks, Pat. Next up, we have Joel Cavaness, who's the leader of our domestic wholesale brokerage operations. Joel, the next 25 minutes are yours.
Can I turn it on? All right. Good morning, everybody. Welcome to Rolling Meadows. If you can get a chance to walk around the building after it's over, if you want to see what our culture is all about, go downstairs and look at the number of people that all go downstairs in the common area and eat together and talk and just discuss things. It's just phenomenal the way this building was put together, and that was part of the purpose of this building, to continue to enhance our culture. It's exciting. I'm Joel Cavaness. I run, as Ray told you, I run the domestic wholesale business. The domestic wholesale business trades under the name of Risk Placement Services. We are a separately incorporated part of Arthur J. Gallagher & Co.
For fairly obvious reasons, we brand it as Risk Placement Services because we do business with both the Gallagher producers as well as a lot of non-Gallagher brokers. We do business with thousands of independent agencies, both large, small, association groups, all kinds of different distribution groups, and we'll touch on that a little bit for you as well. To give you a little bit of history, we started the company 20 years ago last month with four employees in downtown Chicago, one property broker, one casualty broker, and two assistants. From that awesome start, we now have over 1,400 employees across the country. We're excited about our growth, where we've been and where we're going. We got a great path to the future, and we're excited about that.
Give you a little bit of background on myself, just so you get to know me a little bit better. I celebrated my 31st year with Arthur J. Gallagher & Co. last month, that's quite the milestone. You'll get to meet a lot of people today that have very similar backgrounds to mine. They have been with the company pretty much most of their life. That's exciting from a cultural perspective because we've all been together, we've all worked together. We all do a lot together that makes it easy to make sure that we're all heading in the same direction. A little bit more about me. I spent 10 years in St. Louis on the retail side. I moved up here to take over a marketing organization that ultimately we turned into Risk Placement Services as we grew and developed and kind of changed our business model.
To kind of give you the broad view of RPS, we basically run four different businesses. Our largest business is our MGA binding business. Give you a little flavor on that. The MGA binding business is where we operate as a quasi outsource to insurance companies. Insurance companies who do not want to invest in underwriting and certain amount of technology to issue policies, be in a position to bill the policies, all those kind of things. They outsource that responsibility or opportunity to us. We have geographic locations across the country because that's what The two primary purposes, obviously, of underwriting is to get to know the geography and what goes on in that environment, to know, obviously, the accounts. There's certain box that you live within. Different companies have different boxes, different size accounts, different interests, different exposures that they're interested in doing.
As importantly, get to know the retailer that's sending you the business. As Pat talked about the Jones agency across the street, we are happy to, as long as they're credible, they pay their bills, and they're licensed, and all the other things that we do, we're happy to do business with the Jones agency and send us business. For that, the services that we provide them, we quote the accounts, we accept them. We do our due diligence on the retail insurance agency. We accept the submission of insurance, and we underwrite it, we quote it, we bind it, we bill it, we issue the policy. We basically do everything for the insurance company. We do not do claims for them unless it's outsourced to Gallagher Bassett. We don't do the claims, and we don't do the reinsurance.
It's our responsibility to get the policy to the carrier so that they know that they're on the risk for that particular account. We do hundreds of thousands of accounts like that every year. We like it. Just small business. We're good at it. We've used our centers of excellence to issue policies, to be able to turn them around at a very short period of time, to measure it, and all the different things. That kind of leads in, I'll touch on mergers in a minute a little bit more, but I was down in working on a merger two weeks ago, and I said, "What are you looking for in a merger partner?" All the things that we do are exactly what they're looking for. They're looking for somebody. We're not in the policy issuance business, right? We're in the insurance business.
Policy issuance is just a requirement as part of our business. They don't want to do that. That's not what they do. That's no fun. It's no fun to be an accountant. Sorry for the accountants in the room. That's not what they do. They're insurance people, right? They're looking for us to do all those other services, which we're happy to do. We're really, really good at it. We can measure everything. Every policy that comes out, comes out exactly the same. That's been a phenomena that we've worked on over the course of the last probably five or six years of getting better and better and better to produce those results so people aren't worried about it. Working on a model office, which leads into productivity improvement. Working on a model office where what do we do in our offices? What are we good at?
We're good at brokering and underwriting insurance, right? We don't necessarily want to collect money. We don't necessarily want to do the policy issuance, do the typing that's involved and the input on it. We can do that centralized, much better, more efficient, and work on process improvement all the way across. We're really working on that. We're excited about what ultimately that's going to bring to us. What it's ultimately going to bring to us is the very small accounts. We can do them almost in a non-transactional way, I've got a lot of things that we're working on in RPS to get better at that. Small accounts, policies till canceled. What happens? I have 110,000 small accounts, very small accounts, micro accounts, that I would not have to issue another policy for.
Saves me tons of money, tons of productivity lift, because exposures don't necessarily change in these small micro accounts, right? You're not going to have a 10% lift in this or a 10%. We issue them till canceled, so all we do is bill. We don't have to underwrite them anymore. We get them, we're working with five different insurance companies to get an agreement to green light to do that. We're excited about the prospects of what that could bring to us, because as you work your way up from under 1,000, over 1,000, next to 2,000, over 2,500, all of that. We're excited about that. That's generally our binding in our MGA business. We have underwriting authority for over 30 different insurance companies, different parts of the country, different kinds of accounts.
We like that business, we're continuing to build out our geography. You can build that business two ways. You can build it based on geographical reach. We're not quite to where we want to be. We're getting closer every year. Your product offering. Those two areas are two key organic growth levers that we push on to make sure that we continue to grow in the MGA and binding space. Our second main business is our brokerage business. That's a little bit different because what we do is we go out and work with our retailers on larger, more complicated, more difficult to place risks that we take to the broad market.
We'll take it to Lloyd's, we'll take it to [RCI], we'll take it to AIG, we'll take it to Arch, we'll take it to AXA, all different places, and individually negotiate that deal. We bring the best terms that we can get in the marketplace back to our retailer, and we give them our terms, and hopefully we bind it and we write it. We do not issue the policies. The carriers are responsible for issuing the policies. For that, we share in the revenue stream. If it's 20 points of commission, we'll keep five; they'll pass 15 or somewhere in a two-third, one-third manner. We do have some insurance companies who do provide a supplemental on those. I did skip that on the binding side.
A big component of our profitability is we share in the profitability of the insurance companies based on our underwriting results. If we make them a lot of money, we get paid extra in the form of contingent, it is based on the profitability of the book of business at the end of periods of time. One year, three years, et cetera. It's great. That keeps us right in the middle of the road. We don't veer off. That's why we let our underwriters do what they do best, which is underwriting. In that particular business, it's all about the looks, right? It's not about writing bad business, it's about getting more looks, which corresponds to our client relations. We have an entire client relations group. Underwriters may not always be the best salespeople, okay? That's not what they do. They're there for their technical expertise.
We have a client relations that has about 50 people in it, and what they do is they work with our retailers to get us more looks. If an underwriter gets 10 looks, his chances of writing are better if he gets five looks. As Pat said, you're going to write 30% of what you see. It's not too far off of where we are. If you get 10 looks, you're going to write three and a half accounts. If you get five looks, you're only going to write one and a half accounts. It just makes more sense to get more looks, more things in the pipeline that we can look at, underwrite, and hopefully get on the books.
If it doesn't work on the underwriting side, if you get an account in, it's great because if Crystal gets it in and it doesn't fit an appetite that we have, Crystal can push it across the desk to a broker, and they can broker the account. It's a very seamless way for us to be able to look at all of our business. Moving back to our brokerage business, it's heavy property business. I know Crystal asked a question, we'll get to that if you have one or more from our viewpoint. We do a lot of property, we do a lot of casualty, we do a lot of healthcare, and we do a tremendous amount of executive lines business. As Pat talked about, cyber, crisis resiliency, D&O, E&O, all of those lines of business. Our brokerage business is fairly straightforward.
Again, it's about getting more looks, about getting more business in the door for us to take a swing at. Our third business would be our programs business. Our programs business are very defined, typically either homogeneous programs or line of business. We might have a workers' compensation program, which would be broadly workers' comps, or we might have a country club program. We might have a public entity program, which we do. We have a bicycle manufacturers and dealers program, and on down the line. Programs are a little bit flavor of the month. The program business, you have to watch your results. I was on a conference call yesterday with one of our heavy auto programs because heavy auto, as you guys have probably read, the losses have been rough. We had a conference call yesterday afternoon to make sure that we're staying out ahead.
Monitoring our results every month with our partners to make sure that we're getting what they're looking for. This particular program has seen significant rate increase. It needed it. It had a very difficult experience. It has to do with non-owned auto. The person that delivers your pizza, delivers your food, you guys have seen the profile. You answer the door, right? You take the pizza. The profile is sometimes difficult. It's somebody driving, could be 18 years old, driving mom or dad's car, whatever, whether the insurance company knows it or not. We were lucky enough that we had a business that we merged with. We're lucky enough that we have the kind of relationships with the markets out there that we could actually replace. It was with AIG. Everybody read AIG got out of auto, broadly.
We were able to go to the marketplace and sit down with a carrier that we have a lot of business with and hammer out a deal, hammer out a relationship. We're doing monthly calls, making sure that we're staying on top of that. It's great business. You just got to be careful because it does have significant exposure to it. That's our program business. We're continuing to look at additional programs because there's a lot of upside to the program business. Again, it is underwriting. When the market gets soft, as Pat talked about, programs come under attack because a program manager should know what the price should be, right? That's all they do.
If the price needs to be $10,000 and they underwrite it to $10,000, but a less experienced underwriter in that class of business says, "I'll do it for $8," well, then you lose it. You got to be, again, very careful, very diligent. You have a big responsibility to your insurance company partner to make sure that you're underwriting that business profitably. That's our third division. Our last division is our standard lines business. That's the business where we basically provide standard market solutions. The Chubb, The Hartford, Travelers, the AIGs, all of those carriers, we make those contracts and those products available to very small independent agents. Okay?
If you are, as Pat described, the Jones agency across the highway here, and he's a very small, one-person shop, he can't typically keep a contract with the Chubb or The Hartford or Travelers, or certainly all of them, because he doesn't have enough volume. We already have the contract, and we can make those contracts available to those smaller independent agencies and make them look a little bit bigger. They might have three friends, as Pat described at the country club, that are high-value homes. They don't have a market for it. We'll make high-value home access available to them so they can walk into their country club friend and say, "I have Chubb, I have The Hartford, or I have AIG, private client," whatever it is. It's a wonderful business for us. It's been wonderfully profitable for us.
What we're trying to do now is we're trying to take a business that's basically been Northeast-based and start driving it across the country. If you look at the country, the opportunity, this is not an opportunity in Kentucky. Okay? It's not an opportunity in rural Tennessee. It is an opportunity across a small line of the U.S. If you go from the Northeast all the way through down Florida, across Texas and up through California, there's a pain line there, and that's the pain line that we like to expand into. That's our four businesses. I'll talk about a few of our strategies. I touched on a lot of them. I want to give enough time to have you guys get any answers to your questions. Basically, organic growth is always top of mind.
We're always trying to figure out where we go next. We talk about it a lot. Is it in producer hiring? Yes. Is it getting more looks? Absolutely. Is it improving the way that we do our business and the way that we expand our product offering? Absolutely. We're getting ready to roll out a product, something that we didn't touch on is our e-commerce, which Pat did touch on a little bit. We're very excited about the prospect of digitalizing what we do. Pat mentioned that we're quoting 200 accounts a day on cyber with five questions. That's right. It only takes five questions to get a bindable quote, and then we can actually issue the policy online. It's a great product. We wrote 13,000 policies without touching them last year. That's phenomenal. What's next? Well, what's next?
Crisis resiliency, tenant discrimination, all the small products that you can ask a small set of questions and get a quote. We can give you a quote for crisis resilience, a fabulous product, for $1,000. It's fabulous. It provides a company with a footprint of what to do if something bad happens. We all know it happens, right? It's happening, unfortunately, in the world more and more and more and more. This gives those companies the peace of mind that if something does happen, they have a footprint on who to call, what to do, how it's going to react, and who's going to call them back. It's just a wonderful product and everybody should have it.
Cyber's the same thing, doing a lot of professional liability work and accountants and title, all the different things that are, again, they're small, but we can provide a very quick quote, bind, and issue within a matter of minutes. We've invested heavily over the course of the last two years in this. We have now finished our landing page. We're up and running, and we're very excited about what the prospects of this is going to be. That's one of our side things that we're working on, and we're taking some of what we've achieved and put the money behind new things that we can do to talk about. I think we talked yesterday about the insurtech stuff, and there's thousands of these coming out a week. The good thing with us, we've already got the distribution, right? We've already got that.
There's 21,000 people that are signed up on our e-commerce, 21,000 people. If you have 21,000 people selling anything, it's got to be successful, right? Unless it's not competitive, and obviously, we think all this stuff will be. We already have the insurance companies, we got that piece. We already have the technology now built. We already manage all of our clients. We have a whole group of people that do nothing but manage our retail distribution, making sure that we have contracts, making sure that they're licensed, making sure that they have E&O, making sure that they have fidelity. That's what that whole team does, make sure that happens. We've got all the pieces. Now it's just a matter of pumping the product into the space to get it out there, because again, if you get six, eight, 10, 21,000 people selling anything for you, it's wonderful.
They only got to sell one a piece, and one to the next one, and one to the next one. Very excited about that. That's part of our organic growth. We touched on our productivity. We're getting better every day at what we do. We've now invested in RPS within a team, our operations team. These are process guys. Okay, I don't think that way. I'm a broker by nature. I don't think about the process that these guys thinking about how we can continue to improve all the processes that we do across our company. These guys are going from office to office to office to office, helping us roll out our model office projects. We're very excited about that. Our culture is great. People are wanting to merge with us. We're talking to mergers every week. We have somebody now dedicated solely in RPS.
Before, it was kind of a part-time job. Now it's a full-time job of looking for mergers, trying to find the right people that fit our culture, fit our business, help take us to the next level. There's no stopping here. We're running right down the track. Very excited about that. I'm happy to answer any questions about market conditions of the wholesale space or anything that hopefully I can help you with. Yes, Greg.
Thanks.
Thank you. Just two follow-ups to some of your comments.
Sure.
First of all, you talked about business that's coming from Arthur J. Gallagher and then from outside Arthur J. Gallagher.
Right.
If you could provide some perspective on percentages.
Sure.
From a broader perspective, there's a lot of rhetoric and commentary around insurtech and technology. Obviously, there's always an investment and return issue that you have to deal with technology in your business. Maybe you can talk about some of those issues as you see them, and how you evaluate the merits of making further investments in technology.
Yeah, great. Not a problem. The first one's really easy. When we started this company 20 years ago last month, we said that we wanted to be an independent wholesale operation. We didn't know exactly what it was going to look like, but our model at that time was Alexander Howden. They were owned by A&A, sucked into the Aon organization and et cetera. We always said we want to keep our balance about 25% of Arthur J. Gallagher business and 75% independent. We've achieved that literally within points every single year for the last 20 years. About 25% of our revenue comes from the Gallagher, from our sister organization. Again, you guys have seen the press release, some of the things that have come out in the insurance articles. Gallagher continues to look at consolidating their wholesale partners. That's been out there. That's fine.
That's their choice. The retail producers in Tom's world have choices. What we have to do is make sure that we're the first choice for them, because it happens at the desk level. Nobody's going to force them to do business with RPS. Everything has always been a choice. We think that we're better because what happens if, as Pat said a minute ago, that 1% of the time where there's a claim, okay? Everybody probably had a claim maybe in their life. It's never a simple process. When there's a problem, the guys within the Gallagher organization work for Tom Gallagher. I'm going to be there. Me, personally, will be there if a problem crops up. I will be there to help. It just happened a few weeks ago. I went to Atlanta to solve a major claim problem. We can't run. I'm here.
Can't go anywhere. The insurtech fintech question, the insurance business is huge. Someone is going to hit it big, right? Somebody will do it. It's just a matter of the thousands of people who are trying, who will that be and what is it going to be? Some of the things that are out there today, pet insurance, some of the renters insurance, some of the different things. The people who have been successful are the people who have taken a large, narrow focus to insurtech and done something purely for that. The people who are trying to solve everything for everybody will never get it done. That's my thought on it. I think that it's too big. It's too complicated. There still is a lot of legalities involved in insurance business. You still have to be licensed in every state.
You saw what happened with the Zenefits guys not being licensed. Well, it's the first thing we all have to do, is we all have to get licensed to transact insurance. There's state surplus lines, which is very complicated. It can be a very complicated business. Those who will succeed, in my opinion, are those that take a narrow niche and perfect it. You're trying to solve everybody's problems, good luck.
Thank you.
Yes. Yes, sir.
Pat was talking about how organic in 2017 could be better than what it was last year. It kind of sounds like in your business, from your comments, that that could be particularly the case in your business. What's the source of the strong organic and the improving trajectory?
I think obviously, it's a very consolidated market. You guys have seen that in the wholesale business. We kind of started that trend along 20 years ago. It was very fragmented. The business, it's becoming less fragmented. Obviously bigger players can bring more resources to the table. As an example, somebody talked about property earlier. We have a full staff that does nothing but property modeling, okay? They run both RMS and AIR, and we provide that to the retailer. Now, it's an extraordinarily expensive venture. That is not a cheap thing to do, to have, A, analysts who do it, who know what they're doing, and then of course, the modeling software that is very expensive as well.
If you're a small independent out there, you probably, most likely, with assured confidence, I can say, you probably don't do that. Those are the things that give us the leg up just by having the scale, the backroom, the relationships with our markets. That's just one small example of our opportunity. Continuing to do things like e-commerce and investing in new things, new offerings, and then, of course, you have client relations. Well, our client relations department is unmatched by any of our competitors. We're out there meeting with the clients every day, and that's what it takes. Did you have something? I take one more, and then I don't want to chew up any of Tom's time.
I was wondering if you could kind of compare and contrast the economics of the MGA business versus your program business. I think we tend to lump MGAs and programs together, what are the differences from an economic perspective?
I think you mean from the business side perspective or just in general?
Just from a business perspective.
Yeah. I love both sides of that business. They are very, very, very different. They can't really be lumped. The marketplace is different. The appetite is different. The dynamics of the business are different. The way that you approach your retailer, because like country clubs as an example. Country clubs are typically there's one or two in town across America, right? Some towns don't have any. When you're looking at country clubs, you have to go through thousands of independent agents to get a scale of it. If you go to bars and taverns on the MGA side, you go to small town America, how many bars and taverns are there? There's a lot, right? There's one on every corner. That has a much broader appeal, and you can write 10 in town. You can't write 10 country clubs in town.
I don't know exactly where I could go with that. If I had to estimate, I think there's about 4,000 program managers in the space right now and more every day. The guys that do really well and have had their market for a long time, they have a high value, because they're really good at what they do. You always look, when you go in to look at a program, before we would buy one, you have to go look at their loss ratio. You actually look at it a little bit differently. You have to look at their loss ratio. You have to look at their underwriting integrity. You have to look at all the underwriting audits that have been performed, et cetera, to look to make sure. Then, of course, what's the ramp-up?
If you have 70% of the market, it's going to be tough to grow. When we look at an MGA, we can grow because we can write, instead of one class of business, we can write 500 classes of business. Yes, ma'am. I'll take one more, and then we both got to run.
Sorry.
That's okay.
Could you talk a little bit about the market environment and kind of how you see it so far in 2Q and also for the rest of the year, your outlook for it?
I think Pat answered it pretty close. It's pretty undynamic right now. Class by class, risk by risk, individual risk by individual risk. It's going to vary just slightly. I wouldn't say that the market is certainly not going up except in some particular auto lines where there's been really terrible experience. New ventures for trucking, more expensive, truckers with losses, harder to get, all of that kind of stuff. The market is, I would call it uneventful right now. Property you asked about earlier, what's leading that? No losses, of course. People are seeing big losses. There's some big ones out there. There's been some huge frame hab losses. Huge. You're not seeing the major cat events. You're seeing catastrophic loss, right? Hail losses, tornadic losses, those kind of things.
Of course, the ILS money, the private equity money coming in, that just creates more capacity. I would call property as somewhat of a commodity. It's based on the supply and the demand. There's only so much of demand out there, and there's a lot of supply right now, a lot of people liking it. Kind of give you. It's not exciting. Thank you all very much. I hope you enjoy it. Again, if you get a chance, go downstairs and check out the culture that you'll see around 12:00 o'clock. It's phenomenal down on the first floor. Thanks for your time and effort.
Thank you. You want to introduce Tom?
Yep.
Thanks.
Oh, we only have one?
We got one.
Okay.
Just sort of one quick housekeeping item as we're getting Tom mic'd up. If you could, when you ask a question, maybe state your name and your company name, just so the people on the webcast have that additional visibility, perhaps who's asking the question. With that said, I'm going to hand it over to Tom, who's going to talk about our international P/C brokerage operations.
Good morning. As you should know, my role has changed over the course of the last eight months, and I'm actually involved in the U.S. business as well as the person who runs our retail businesses around the world. Ray and Doug and Pat have asked me to keep my remarks this morning largely toward the international business. I will draw some of the U.S. things that we're doing here into some of my commentary as I go forward a little bit. Let's set just the dimension of our business around the world. You remember that we've acquired, and it's coming up on three years right now. We acquired a number of large agencies around the world. We took on the Giles and Oval, Noraxis, and Wesfarmers acquisitions.
The Oval and Giles acquisitions in the U.K., added up on top of our Heath Lambert acquisition, put us in a hugely competitive position for our retail business in the U.K. ISA, when they got into their troubles in Canada, wound up taking a retail business that they'd built with some of the best retailers in all of Canada and having to put it to market. We had the opportunity to acquire this business and have a wonderful team there. It's about $150 million of revenue that we have there. You go to the Wesfarmers business, you look at 2 separate countries, relatively the same amount of revenue in both of those countries. You're talking about $300 million of revenue between the 2. When you dimension it, all in all, we're about $1 billion outside the U.S.
As we finished last year, that was about 34% of our retail business being done outside the U.S. The part that I forgot and didn't mention was our specialty team inside London. That's a $250 million business for us. It specializes in doing more akin to what Joel talks about than what we do in the retail space. They provide access to the London marketplace for our team. As Pat talks about, Doug talks about, Joel talks about, Jim Gault has talked about forever. We talk about 4 things inside of our business all the time. We talk about organic sales, we talk about acquisitions, we talk about operational excellence, and finally, about our culture. When we look at these things inside of our international business, what's absolutely remarkable to me is that those things resonate incredibly well to our teams all over the world.
Particularly, I'll go in reverse, particularly the culture part of it. As I talked about in New York, if you go back and you think about these acquisitions, they were acquisitions largely from roll-ups. In the U.K. and Canada, Australia, New Zealand, we're talking about little businesses that came in either private equity in a roll-up or Wesfarmers was a multinational, was looking to expand its base. What do they represent? Small agencies, small family-run businesses all over the world that look remarkably similar to what we're about. That when they came into our business, it wasn't a clash of cultures, it was a relief. I think I mentioned in New York, the guy that sits in one of our offices in the U.K., who's actually had 7 different flags, jerseys that he's worn, and he's never once sold or moved his company.
He's been bought and sold the whole time. Being able to come to our firm and actually put on the Gallagher jersey and know that over the course of the next 10, 15, 20 years of his career, he's got an opportunity to work consistently with us is something that is just tremendous for him. It's the story of our company and our acquisitions, whether we're in the U.S., we're in U.K., Australia, New Zealand. Our successful mergers are with people who want to join us and want to be part of who we are because of what we represent. We care about our clients, we care about our employees, we care about our insurance company partners. We're not just trying to stack it up and sell it off. We're actually in the business strategically and want to be in the business strategically for many decades to come.
Productivity and quality. You take a look at productivity and quality for our business around the world, the opportunities for us to do what we have done in the U.S. is tremendous. Since most of these businesses were roll-ups, what do they do? They don't want to spend a lot of money after a roll-up. They let the businesses operate and function largely as they did prior to the acquisition. What that means is that it doesn't cost a lot of money, but you operate. Take the example of the U.K., we have not 60 offices, we have 170 different businesses that formed part of those roll-ups. You're operating your businesses 170 different ways.
For us, the opportunity to really come in and to work with them on developing target operating models, build out professional standards, run our business as scientifically as an insurance agency can be, is of incredible value, both to us, to them, and our ability to deliver professional services to our clients. For us, the constant inside of our businesses is how do we do it better? How do we deliver better for our clients? How do we make it easier for our teammates? The lessons of our CSO operations in the U.S. and the work that Vishal and his team have done around the world are lessons that we can actually take virtually in all of our retail businesses. There are geographical differences, no question about it, and they do things differently and things structure out differently.
Instead of doing it 170 different ways, if we can get the teams in each country to doing it one way, what is the opportunity for us to be better at what we do in the delivery for our clients? Constant focus on it. Constant focus. Move forward. You look at the mergers and acquisitions process that we have. What an opportunity. Jim, I'm sure, has told you the story about this. There's a very simple question that we ask merger people to know whether or not they're a cultural fit. Right? It's not a hard one. If the merger partner is all about me, me, how much money am I going to make? What is my role going to be? How do I fit into your organization? What is my title going to be? Go sell to one of the PEs. Go ahead. Go get it.
If you're first concerned about your clients and second concerned about your team, you're a perfect fit. Now we've got to figure out how to make sure that we get that hope into our organization and really drive together as our business. I think you see our merger and acquisition program, both in the U.S. and as we continue to expand overseas, is one that's really focused at being able to deliver consistent process and support for our new teammates as they come on. We've got an opportunity to absolutely differentiate ourselves every single time from the others.
When we talk about the fact that we don't spend the kind of money that the PE firms spend to make acquisitions, it's because fundamentally, we're targeting almost different businesses. We had platform agencies made those decisions, one at high valuations, but on a day-to-day basis, we're fine that our price multiples are lower than what the PE firms are generally paying. Finally, to organic growth. Organic growth in our business, more than anything else, is about two things for me. Feet on the street. I know Pat talks about this. How many people do we have out selling a product? Then how do we support those people in many different ways? Do we support those people by providing them with the tools and resources that they need to differentiate themselves? Do we support those people digitally?
Do we support those people for doing the things that we need to do among all of the different environments around the world to make them able to have something that they can talk about other than price? In the U.S., we've launched our CORE360 application and our process, where we actually believe that we can differentiate ourselves with virtually every single one of the businesses around the U.S. In one sense, it's a marketing tool. In another sense, it's the opportunity for all of our teammates to really fundamentally understand what it is we're trying to deliver to our clients day in and day out. At the same time, we're dragging that process around the world. Our teammates in the U.K. are talking about CORE360, in Canada, in Australia, and New Zealand, talking about CORE360.
If we can actually get the entire team functioning very similarly around the world, a tremendous opportunity for us. Tremendous opportunity. Feet on the street. They talk about our intern program here. We have great success with the intern program, but it's not just the intern program where we're pulling people in. We're actively recruiting to find people who are salespeople, not account executives, salespeople, and they don't just have to be in the insurance industry. Because there's a difference between somebody who can actually do a great job of maintaining an account and somebody who can wake up and go create new relationships. It's in the new relationships that we can actually drive organic growth in our business.
All the time, when I'm working with the team, I am trying to find out actually how many hunters do we have in the business and how do we continue to expand the number of hunters in the business? How do we make certain that the people that are on our team that are true hunters, true door openers, really like being here? How do we support them? What do we do with it? How do we attract others into it? We actually go outside of our industry and look for salespeople. We go inside of our industry and try to find people with great reputations who've shown a knack for taking care of their clients and bring them to our company as well.
When I look at who we are and what we're about, the more opportunities that we have to put people on the street, provide them great support, we can deliver great organic growth inside of our business on a continuing basis. We measure it down to the individual branch. Hundreds of branches around the world. We're constantly focused on being able to better understand what are we doing at that branch level, how many feet on the street do we have, what kind of retention rates do we have, what are the new business sales rates that we have so we can constantly be moving our business forward. It's a journey. We're always focused on it. With that, if there are any questions, happy to answer them. Sure.
Vaibhav Vish from Citadel. It feels like with the acquisition, a lot of the large acquisitions largely integrated. What's the expense save opportunity and the margin opportunity from that? Secondly, it feels like your organic environment is improving as well, and specifically on the international side. How much of that drops down to the bottom line in terms of margin expansion?
Sure. I think as Ted would say Do you want to make a comment regarding it, or you want me to?
Go ahead.
Okay. As I'm sure Pat and Ted would talk about, we really have margin that we really don't want to continue to expand most places around the world. We want to continue to invest in our businesses. When you look at the U.K. retail business, when you look at Australia retail businesses, we've got some work that we have to do, and we continue to do it to make those operationally excellent the way that we are, and we stay focused on them. Beyond that, it's about taking what we do and finding ways to drive it back into people, because that's what drives our business, people to drive organic growth.
I have two questions for you.
Sure.
First of all, when you're talking about feet on the street in these other countries. Can you talk about retention of producers?
Sure.
Also, can you talk about the average compensation rates for producers in other countries and how it compares with the U.S.?
First, retention rates for our production force. When you look at our production force around the world, we measure it every single month inside the company. How many salespeople do we actually have around the world? There are lots of salespeople in our organization, but I focus on those that I know can create new faces. That's the ones that I was talking about a minute ago, the people that can create new relationships. I don't worry so much about account executives. They're all great teammates, but it's the people that really drive new faces that I am focused on, and our retention rate is very high on those people. When it comes to people in certain jurisdictions, take the U.K. specialty business. We've done a very good job at retaining our team over the last few years. Look in different places, and it's about leadership.
One of the things that we constantly try to do is figure out a way to drive leadership. In terms of compensation, when we look at compensation in the U.S., it's very prescriptive in terms of formulaic process. You go to the U.K., the regulator does not like a formulaic process at all. We vary it based upon the local jurisdiction. In the end, if we just peel everything away, our real production force, the people that are out able to drive new business relationships and have big books of business, they're paid relatively the same around the world. All right? No other questions? Terrific. Thank you very much.
Thanks, Tom. Next up, as we pass the mic over to their next speaker, is going to be Bill Ziebell. He's the leader of our employee benefit and consulting and brokerage operations globally. Bill, as you get mic'd up, the next 25 minutes to 30 minutes are yours. We have you until 9:45, then we'll be taking a short break.
All righty. I think this works. Good morning, everyone. Welcome to the new corporate headquarters. My name is Bill Ziebell, as Ray indicated. I lead our benefits and compensation practice for Gallagher. This business was started back in the '70s, became its own business unit back in the mid-'80s. Last year, we finished approximately $900 million in revenue. Our margins are high upper 20s. Our business model is helping our clients attract, retain, engage employees, whether that's benefits, compensation, retirement plans, things of that nature. If you think about yourselves, you have an employer. Your employer came to you and offered you a job. Why did you join that organization? Reputation, career opportunity, experience. Those are the kinds of things we help our clients with as well. On top of that, you have a compensation plan. There's a salary, there's a bonus. We help with those.
You have a benefits package, medical, life, disability. Maybe you have some voluntary products. We help with those. You have a retirement plan, whether it's a DB pension plan or a defined contribution 401 plan. We help with those as well. We're trying to help our clients compete for talent, retain that talent, and engage that talent so they can succeed as a business. It doesn't matter whether you're a nonprofit, hospital, manufacturing. It really doesn't matter. To fulfill your mission, you need talent on your team. Think about your organizations. That's going to help you understand what we do for our clients. If any old person will do, then you don't need us. If you want talent that helps you be successful, that's where we get hired and help our clients with that. Okay?
Same four pillars I want to get into as well with you all, focusing on organic. We have put a lot of emphasis on organic. Historically, we've been running at the low to mid-single digits. We have a focus on hiring more producers. We have an organic playbook we're asking our managers to implement across the platform. We continue to add resources and tools to our playbook to help our producers compete and succeed. White space is one of those areas. We have literally thousands of clients where we're doing just a few things for them. We have opportunities to sell more stuff to them and helping them as well in terms of attracting and retaining employees. Organic growth is a big focus for us as well.
Moving on to mergers and acquisitions, we average about 20 a year, give or take, of all various sizes. So far this year, we've actually closed on 17. Some are smaller book purchases, some are bigger. On average, we do about 20 per year. Our merger partners join us because, frankly, a lot of them, different reasons. Lately, in the last few years, it's been because they just can't compete anymore. With all the changes in regulation that come out here domestically in the U.S., it's something that the investments put into their business just can't keep up with that. At Gallagher, we've made a lot of investments in areas like compliance attorneys on our staff that their whole sole purpose is to help our clients navigate the regulatory waters. As regulations change, we're needed even more.
Regulations have been accelerating, not decelerating in the last 10 years. These are also going on internationally as well. Our business is still primarily in the U.S., but we're also in three other countries, Canada, U.K., and Australia. In those areas as well, there are regulatory changes that happen from time to time. We have a multinational employer practice where we consult with our clients on the needs that they have with regulation, compensation levels, and benefits around the globe. On the merger side, merger partners join us. Cultural fit, I think you just heard Tom talk about, very important to us. We do believe we're the merger partner of choice, continue to be because of our culture, because of the resources we bring to the table.
The things that can help our clients and our merger partners, such as our compliance resources, underwriting resources, and just all the things we have available to help their clients as well. Communication solutions, engagement surveys, retirement plan solutions, things of that nature. We continue to be the merger partner. That'll be a big focus for us going forward as well. Moving on to productivity and quality, we have a long history of trying to find ways to help our different operations be more successful. If we can find a way to raise the quality by having more consistent approach on underwriting, on our compliance teams, how we deliver our solutions to our client, we're always looking for those. As we find those ways to improve quality, oftentimes there are productivity gains, and as Tom mentioned, we have our mergers where we want them to be.
We're making those investments back into additional producers, consultants around the globe. Historically, as mentioned on the productivity and quality, compliance, underwriting were areas we made some innovations. We're looking now to help out with other areas. Small group is an area where we're spending a lot of energy to get more efficiencies, higher quality. A lot of the carriers are taking the inflation out of commissions with small group. In some cases, it's under 50 employees, other cases under 100. Regardless, we're trying to find a way to be more efficient to bring the value that our clients expect from us. We're looking at having six centers of excellence for our small group, and that's underway right now. Other ways today, our service centers are helping us enrich leads for our producers.
If they have an opportunity, we can have the service center go do all the research for them on the client, the decision-makers, who they're with, what choices they've made in the past. Our producers and consultants can walk into that opportunity pre-armed with information that our competitors won't have. We think that's a value add as well. Productivity and quality is certainly an emphasis for us. Culture is very important to us. It's our fourth pillar. It's an area that I can't emphasize enough for you. People join us because of our culture. They stay because of our culture. We have great people. I think of myself as a steward of our culture. If you have somebody that doesn't seem to fit in, it's important not to hire them to begin with, but if you make a mistake, let's get them out of there.
When you think about different examples, our intern program, we have senior people bringing interns around with them on sales calls with clients. They're spending time investing with those young people because they know that their legacy is how they're going to pass their clients off to the next generation. Collaboration is huge here at Gallagher. We bring in new producers all the time from all different types of competitors, large and small. We hear consistently that we are in fact different. We have the tools and solutions they were hoping for. The collaboration, the willingness by others within the team to help them help their client is without pale. A lot of comparisons, sorry. That is what differentiates us. We really want to help. We're very collaborative. We're very welcoming to our teammates. Culture is very important to us as well.
I think that's pretty much the summary for Gallagher Benefit Services. Happy to answer any questions you might have. Yeah. Oops, you were second. Sorry.
That's okay. Thanks. James Naklicki with Citi. I guess the overall arching theme, at least in financials, is there's this trend towards indexing funds, and it's cheaper and cheaper and cheaper to invest. On the employee benefit consulting side, can you talk about if there's pressures there that are similar in the business? Is the competitive market forcing the cost down to the employer?
What we're seeing is that there are plenty of good plan choices out there. If you think about historically on the qualified plan side, the decision-makers on hiring someone is focused on three Fs, fund choice, fiduciary responsibilities, and fees. Yes, they all do a pretty good job these days. What we're also finding is that most of our prospects have not done a very good job of getting their employees to retire on time. They're not engaged. They're not contributing. They don't understand. They may have financial understanding. They still haven't been motivated. They're spending too much money. They haven't put saving money for retirement as a priority.
We're often getting hired today because we roll up our sleeves with our clients and be very consultative about what's going on with their employee population, segment by age groups, how people are participating or not, try to find ways in plan design and communication solutions to get those employees more on board. It's less about pressure on financials because we're very transparent about our compensation. We have been for a very long time. It's about the value add that we bring to our clients. We get hired all the time for that differentiating feature. Yeah.
Okay. Good morning, Bill.
Good morning.
Thank you for your presentation. A couple questions for you. First of all, can you speak to, and just within your group, M&A multiples within your business and how they've changed over the last couple of years with private equity involvement? Can you speak to also the size of your business? You talked about what it is, but you didn't really tell us what the size of it is. Then finally, as you're doing the integration of these 17 deals this year, can you talk about some of the integration challenges? Do you run them all on the same agency management platform, et cetera?
If I could start with the last question first in the agency platform.
Yeah.
We have our own cash receipt system dedicated to the employee benefit and compensation side. It's a little different than on the P&C side. We don't collect premium from our clients, okay? We use BenefitPoint for our agency system platform, and like the rest of Gallagher, we also use Salesforce for our CRM side, okay? Very consistent in that approach. Do we share multiples, Ray?
We get multiples for the entire-
Yeah, they're very similar to the rest of the organization. When we want to go after a platform, we can go higher on prices as well.
Yeah.
As I heard Tom talk about, it's about the partner more than anything. I always ask the merger partner, merger candidate early in the process, "What's your criteria for making a decision?" If it's good for the owner and their family, good for their staff, good for the clients, we're probably a good match. You can tell very early on, someone's only worried about the one stakeholder and how they get the multiple up. We are an employer of choice. We get to find the right mergers, and if we have to go higher, we will, but we're finding plenty of good opportunities in lower ranges as well. There was a third aspect to your question, size of our company.
Yeah, the size of the business. Maybe you can dovetail, and I'm sorry, I have to cheat on the fourth question, which would be, in the past, Jim Durkin's commented about private health insurance exchanges, there's not a lot of dialogue around that.
Maybe you could just update us on that. Size of business and private health insurance exchanges.
Sure. We're $900 million last year, roughly. We hope to break through the billion mark soon. We have a lot of opportunity internationally, as well as getting white space out domestically. Is there something else you were looking for besides the size?
No, that's perfect.
Okay.
All right, then private health insurance.
Private health. What we're seeing with regard to private exchanges is that they're on an adoption rate, very similar, same pace as when defined contribution 401 plans came out, as well as consumer-driven health plans. They're still being adopted out there in the workforce. What's going on from our perspective is it's never been a product that we've pushed. It's in our portfolio. We've never been the owner of the technology. We've stuck to our knitting. We want to be the advisor to our clients, make sure they're choosing the right solution for them. We are building out an HR benefits practice. Our marketplace is part of that, and we want to sit down with our clients and ask questions first. What are you trying to get accomplished with this system?
By the way, the ACA has driven up the complexity for tracking and record keeping beyond ever before. You're seeing a lot of demand of us by our clients to help them with these solutions. We made an investment from a merger side, beginning of this year, a practice that all they do is focus on HR technology. It's really more of a broader discussion with the client about what's the right fit. Is it a robust ben admin platform that you're looking for? Is it an HRIS system, or is it actually a private exchange, okay? We don't go in there pushing one thing. We're very much a consultative approach to our clients on everything we do. That said, today, to this point, we have something like 200-plus employers on there, 44,000 employees enrolled. We have a very robust pipeline on that as well.
Again, it's about fit. We're not pushing a product. Did I answer your question, Greg?
That answers my question.
Great. Yes.
I think you said that you had completed 17 acquisitions so far this year.
That you typically do 20 annually.
Are you running ahead of schedule on just getting acquisitions done this year, or are you planning on doing more than the 20 that you typically do?
Well, we have a few more this year that are smaller in size, more tuck-ins. The number does change, and average is an average, right? You can have wide variance to that. We have a little more quantity, but the average size is less than $2 million and so forth, all right? Any other questions? No. Well, thank you. I am going to give this to you.
Thanks, Bill. I guess now we are going to move on to our break. We are actually going to break until about 10:00 A.M., and those who are listening via the webcast, I will give you about a two-minute warning when we return. For now, Kevin, go ahead, then we can move to live music.
You are now rejoining the main conference.
Brokerage operation. Jim, the next 25 minutes are yours.
Thank you, Ray. Good morning, everybody. I don't usually use notes, but I just addressed our 250 interns.
Mike, turn the mic on, Mike.
Hello? Does that work?
Yep. Perfect.
Thank you, Doug. Doug is now our AV guy.
Is it on? Hold on. Try again.
I'm talking. Test, one, two, three.
Yeah, there we go.
Okay. I don't usually use notes, but I didn't want to drift off into my speech to the interns about what a great business it is, but I can if you want. I got the opportunity to fill you in on the U.S., let me first say that we went through a reorg, if you may, or a well-planned succession plan back in early December. About five, six years ago, we had identified the next generation of leaders that we wanted to take over the U.S. as those of us hit our 60s. We put them in very good positions to grow and change and support the regional presidents. We created a position called the executive vice president, regional executive vice president. Mike Pesch was one of them who worked under Tom Gallagher at the time.
Eventually, Mike got promoted along with Bret VanderVoort and some of the others over the last couple of years. What we did was we finished the rest of the promotions back in early December. My entire team, which was made up of Doug Brown, Mitch Brashier, Jim McFarlane, the holdovers from the old group, have all moved to the side to a chairman role, support role for their regions. We split the regions. We had five of them. We now have nine. We then created a 10th region called the Small Business and Affinity Region. I'll touch on that in a minute. Mike Pesch is now the CEO of the U.S.A. Mike comes through our internship program. He's been with the company now through the internship program and getting his MBA for 25 years.
Again, this is a really well-planned succession plan that came off without a hitch. Everyone was ready for it. They knew it was coming. They saw it coming. The smoke went out of the chimney and we made the change.
Jim, is there now nine executive vice presidents, regional presidents?
No, there isn't nine now, Greg, but eventually the plan is that each one will get one of those as well.
I'm just trying to understand from a human resource, what's different from Because you were going through names, and I don't know all the names.
We had-
Numbers.
In real simple terms, we had five regions that we eventually created nine regions from. For example, we took the Northeast and we split it in half. When Doug Brown took that region over, it was $70 million in revenue. He got it to $250 million. We split it in half. We believe that smaller groups grow better. We promoted Dan Tropp, who came out of our acquisition program. He was an EVP, did a tremendous job rebuilding our Dallas office. He went to what's now called the Atlantic region. Patrick Kennedy was an intern, moved to Manhattan, took over what's now called the Northeast. The Southeast, which was Mitch Brashier's region, was split into the Mid-South and the Southeast. That's Peter Doyle, who was another intern, and Bumpy Triche, who came up through the acquisition of the Broussard, Bush and Hurst operation.
In Chicago, we split that in half. Cindy LaMantia, who's been on board for many, many years, took what we call the Great Lakes region, which is Ohio up through Michigan, Minnesota, and all the public entity business and whatnot. Patrick Gallagher has the rest of the Midwest. Bret VanderVoort was already in the position in the Southwest. He took over a couple more states. We split the West Coast, Jim McFarlane's West Coast, where he had everything up and down the West Coast and into Nevada and Utah and all that. We split that into the Northwest under Jim Buckley, who came through an acquisition, and Scott Firestone, who came in through an acquisition.
About a year and a half ago, we started to create the Small Business Affinity Group because we got in the affinity business, which is some of our best organically growing business. We decided that many of the tools and technology that we use to build affinity can be used to build and grow our small business. We're taking that small business out of the branches, and we're putting it under the management of the Small Business and Affinity Group. Much more efficiently handled. That's how you get to 10 regions. Congratulations to Mike. He'll do a terrific job. I can already feel it. He already had his first operating team meeting in April, and the energy of his group is really fun to watch because I know all of these young, new promoted leaders, and they are really, really good.
It's very exciting. Greg's been around before, for those of you who have not come to these meetings or attended these meetings, let me go back and give you an overview of what we're all about. I'll just give you sort of an overview of the U.S.A. last year did about $1.2 billion in revenues, which is a third of our overall brokerage segment. If you look at our client base, it's a triangle. In other words, the biggest accounts at the top, those large accounts that have global exposure and billions and billions of dollars of property and sales at the top, there's very few of those. I don't mean few of those that we handle, just very few of those, the actual market for those.
You get down into the bottom of the pyramid, where you have all the small accounts, the barbershops and nail salons and all the small stuff, and everything in between, we call middle market. We play really well in that middle market. That doesn't mean to say we're not in the small stuff, because as I said, we do small business. We're trying to do it much better and more efficiently. We also do large accounts. We have our fair share of large Fortune 500, Fortune 1000 worldwide companies that we place some or all of their insurance or risk management program. By just unit count and focus, we're predominantly in the middle market, and we're really good at the middle market. I'll explain why that is. Our value proposition's pretty simple. What we do is we go out and we assess a prospect's exposures.
We discuss those with the prospect or client, determine what their risk tolerance is. We design a program to transfer what they don't have the risk tolerance for, and we help them manage what they retain. We will market that program. We hope to close the program, and then when we do, we will help them service that program through loss control on the retained side and good claims management. Good service throughout the year to provide professional service and quality to them to minimize the chances of anything going wrong. Think of it in terms of what we do is in terms of your own homeowners. If you own a home, you got to insure the home because the bank says if you got a mortgage on it, you got to insure it, right?
You have liability for your home, and then you have your automobiles. Well, that's what we do on a commercial basis. We do that on a personal lines basis as well. Predominantly, we're a middle market broker going after the middle market companies that you see right across the street here. That's what we do. We get paid basically four ways. Pardon me. We get paid on commissions, predominantly through commission-based. We also get paid through fees, and that's fees in lieu of commissions. Sometimes we might get commissions and fees. In some states, it's legal, some states it's not. It's always negotiated and disclosed to the client.
We also get paid on supplemental commissions, which are a true-up, if you may, of the premium that we would have with an insurance carrier at the end of a period of time for one point or two points additional, and/or contingents that are based upon the profitability. Everything we do is standard in the industry, and there's nothing that we're doing that's unique. Our mix is, I would bet, is pretty typical with brokers our size and complexity and even some of the ones smaller. Here's what's interesting, though. I said we're in the middle market. We know through Salesforce.com that 90% of our clients and prospects were competing against someone smaller than us. We're not competing against Marsh & McLennan and Willis, except for 10% of the time.
When you look at the depth of resources and the people and the teams that we have, we believe that we should, if it's a fair, level playing field, we should be able to win more than we lose, and we do. We love to compete in the middle market because we can bring more depth in services to the middle market client than the average Itasca Insurance Agency or the Rolling Meadows Insurance Agency. Our long-term vision is simply to be the high-quality growth brokers, and I think we demonstrated that over the last 45 years that I've been associated with the company. I already mentioned the geography of the USA. We have 10 regions, including the affinity and small business region. We have about 150-175 offices. We're doing an acquisition probably once every couple of weeks, so it continues to grow and expand.
We've got 4,300 employees as of the end of last year. Our organic for the last several years has been in the low to middle single digits. Our acquisition goal is to do about $100 million in run rate revenues per year. Our adjusted margin is in the mid to high 20s, and we're very proud of that. We've come a long way. Doug Howell has been very good at helping us run our business better, and I hate to compliment him in front of everybody, but it's true. There's four things we're trying to do every day. Okay? We're trying to grow organically. We're trying to grow through acquisition inorganically. We're trying to get more productive. You hear this all the time from us, we truly believe our culture is the secret sauce. This is a cult. This is a special place.
That's exactly what I just told our interns, that they should be fortunate to understand that an opportunity in the insurance business is great, but an opportunity here is greater because take it from somebody who's been here for 45 years, I feel like I'm the luckiest person to ever take a job anywhere because I happen to fall into a company that really is a great group of folks and people that care about their clients and their people. It's very, very special here. That's our fourth thing. Organically, we got a number of tactical things that we're trying to do to grow the business. 20 years ago, we created our verticals of our niche practice groups. 80% of what we do is in about 20-24 practice areas, whether it's industry-based, whether it's healthcare, not-for-profits, construction, real estate, or we have some coverage niches as well.
We have big casualty or property or captives. Those are for design of specific issues. We have our best people networked across the country to help on every single opportunity that we have, that's one of the things that I think brings more power to us than it does from the Itasca Insurance Agency or the Rolling Meadows Insurance Agency because we can draw on that talent. It's an organized group of people to help us drive that business. Those leaders have a responsibility to build the revenues each year in and year out, and our people are required to tap into them. Not on the $1,000 small account that goes out to small accounts, but certainly anything in the middle market. I would define middle market, everybody's got a different definition.
I would say it's accounts that pay us anywhere from on the low side, $10,000-$15,000, to as much as a quarter of a million dollars. That's the preponderance of our business. We have lots of accounts below that, and we have several accounts, many accounts above that. That's really where we play when it comes to the size of them. That's how I define the middle market. We've been trying to help our branch managers over the last several years with a lot of initiatives. We are becoming much more centralized in terms of the things we're trying to drive, both from a technology and from a quality and a service standpoint, but also in the front of the store. By that, I mean help our branch managers get better ways to sell.
We put together a playbook a couple of years ago that outlines the many initiatives that we're leading here now to help them build their revenue base. We've got a number of initiatives. There's five that I'll touch on real quickly. One is what we call white space. We happen to know that somewhere between 60%-70% of our clients in the middle market, we provide up to three policies. That's it. I believe that the average middle market client is buying anywhere from eight to 12, perhaps. That either means that there's somebody else that's sharing the bed with us, and/or the client isn't buying certain things. We're on a mission to identify what those white space opportunities are. Actually, literally, it's a white space.
You put down all the opportunities, things that that client should be buying, we believe, and transferring risk, then we check the box, and if there's nothing checked there, that's the white space. We're sitting down with our production staff and saying, "We ought to talk to this client about this because who's handling it? We don't want to be responsible if they've got somebody else doing it and they don't want us to handle it, but you ought to talk to them about this." By the way, they have an exposure. We're building benchmarking capabilities to be able to look at a client or a prospect and say, "By the way, did you know that 80% of your competitors buy this product and you're not buying it?" We're making some real traction on white space.
We built a couple of panels. I talked about this the last couple of years. Again, we can't take credit for inventing panels, but we're late to the game, but it works very well for us. We built a panel for middle market umbrella liability and middle market professional liability. There's just a list of four or five companies that have agreed to give better forms, better pricing to the client to be part of the panel. They pay us a little bit more to manage the panel, and the client wins. It's a win-win-win. The client gets a better product. The insurance carrier gets a much more efficient delivery, and we get paid to manage the process. Everybody wins. Those are called the advantage panels. We're making a couple of extra points on those placements that we weren't before, and that helps us. Commission adequacy.
Several years ago, and again, those of you been around here before, I talked about how we finally went to one agency system. As a company that grew a lot through acquisition for many, many years, we allowed the acquired entity to continue to keep their agency system. With many vendors out there, we had different uses of the systems, and trying to combine them all and get data was virtually impossible. We went to the Applied Epic system about four years ago, and everybody's on it now, and we convert acquisitions to it usually within the first year. Now we're getting really, really good data. In particular, we know what we're making on each individual transaction, and we know where perhaps we should be making more based upon what that carrier pays for that particular cover.
Now, many times, there's good reason for that. Many times, the producer out there is in a competitive situation, or the client renegotiates. There are reasons why we don't get paid exactly the amount that it says by contract we should be getting paid. We've identified many clients where we're not getting what we should be getting paid, and last year, we had some pretty good success. If you think about over $8 billion in placements that we make, just moving it a basis point or two by picking up a point here and there is very meaningful to us, and it was very meaningful to our results last year. We're big in cross-selling. We've talked about this many times.
We believe that our clients need the best of Gallagher, not just within GGB USA, but they need to take part with Gallagher Bassett and Gallagher Benefit Services because we believe that the best and the most efficient delivery for a client is to use all of Gallagher on a holistic basis. We put a lot of emphasis, particularly on the GBS side, because we know that somewhere between 80%-85% of their clients do not use us on the P&C side, and the same is reverse with them. There's huge opportunity with them tracking this for the last several years, and every year we're getting better and better and better. We track it just by revenues. How much are the revenues going up?
Every year, they've gone up nicely, but they still aren't where they need to be, and hopefully, we're going to get there in the next several years. Finally, I talked about this in the past, too. A couple of years ago, again, this is not our idea. We're sort of late into the market on this. Because we now know the data on what we have in terms of our renewal book and because of salesforce.com, we know what's in the pipeline, we are selling data to carriers who want to get a window into that where it's a good match for the client. This is good for the clients because it's a much more efficient process for insurance markets to go after the business that they really want to get. Every carrier is good at certain things, and every carrier wants certain business.
When they have a chance to see what's in our pipeline and say, "Wait, can I see this?" Now, not everything gets converted. In fact, when they get into it, many times they go, "Well, wait a second. It's way bigger. No, it's in a state I don't want to be in." There's many things that will occur, but for the most part, it helps us manage and grow with our market partners that participate much better because of the delivery of it all. Those are the five things we're doing to drive better results in the organic side. There's one other thing, too, I want to mention. I want to give Mike a lot of credit on this. We haven't had a single value proposition for our division. Pardon me.
Yet we have a lot of great things that we've been doing for our clients for 45 years. About a year and a half ago, Mike took on the project with who are now the current regional presidents of trying to get us to come down to a single value proposition that would fit all of our middle market and large clients. It's called CORE360. We trademarked it. It basically is six components of the things we do to help our clients reduce the cost of risk. It truly is a value proposition that the 90% I talk about that we compete against cannot match.
It's how we help clients understand their risk tolerance and structure, how we market it, and how we try to get them really good pricing on what they transfer, how we identify insured and uninsurable losses, and help them understand what's out there and understand what they need to do to manage those. What we do to help them manage their contractual liability. What am I missing? I know I'm missing one more. Drawing a blank. Okay, well, that's good enough.
Also got clients.
I got it. Anyway. We're training our staff right now on it. There's a mobile app, so everybody's got the same app now. There's a mobile app. We're training them all these. When you go in on a prospect, we're going to be using the same language in New York as we will in Los Angeles, as we will in Seattle, as we will in Houston. We'll be using the same basis to have discussions with clients about what the tools and resources we bring to help them reduce the cost of risk. The second thing we do, as I mentioned, is going to grow by acquisition, the inorganic growth. I said that we have a goal of trying to do at least $100 million, and we're well on our way this year.
In the first five months of this year, we've done about a dozen transactions, and we're well on our way. We have a pipeline that's full. I'd be very surprised if we didn't make that goal or exceed it based upon how well we've done in the first five months. There's lots and lots of opportunity. The pipeline continues to be full. The pricing is very competitive. Private equity is still very active in our business, as is some of our strategic competitors. Our sale is different. We are very competitive all the time, but we're not going to be the highest price sometimes because our sale is different. We're about, I'm going to come back to the cultural thing, we're about building together over a long period of time.
There are sellers that believe that the best thing they can do for their clients and their employees is to match up with our culture. As long as we're competitive, they're going to join us. Those are the type of people that we attract, and we've done quite well, and we continue to do well. They're also attracted to the tools and capabilities that we bring them. I'll give you a quick story, and I may have told this before, but we did an acquisition a couple of years ago, about a $10 million agency on the West Coast. The principal there. It's very typical. He'd gotten to a plateau. He was the leading salesperson. He got it to the $10 million. He said to himself, "I got to reinvest in the business. I got to hire some producers.
I don't know if I have the capability to do that, to continue to drive it." We'd known him for a long time, and he cared about his employees. He thought we were a good cultural match. What was interesting was one of the strategics, it came down to us and a strategic competitor. The strategic competitor actually made the sale for us because they said, 'Well, if you join Gallagher, it's not like us, because what we're going to do is we're going to let you just keep doing what you're doing." He looked at him and he said, "Wait a second. What do you mean?" He says, "Well, Gallagher will give you a playbook." He said, "You don't get it. I want a playbook. I want the playbook. I need the help.
I've gotten to as far as I can take this thing." He told me this after he did the deal, and he said, your best salesperson was your competitor. This guy wrote $600,000 of new commission in the first year. He called me after every major order, and he said, "I would have never written that order if I'd stayed as I was. Because I joined you, because I joined Gallagher and I reached out, tapped all the resources I could," he said, "I'm going after stuff I would have never gone after." Those are the type of people we attract through the M&A process. The third thing is productivity and quality. As I said, we want to be the high growth, high quality broker. As I said, our margins are in the mid to high 20s.
I think we've said many times we're very comfortable with where they are. We don't believe that once you get past where we are, that you can invest as well into the business. We've seen it before, and we compete against those that some that have very high margin brokers, local brokers, and others that just don't bring the resources. At some point, you got to say, we got to make sure that we're bringing the right resources to our clients and prospects. I mentioned about going to a single agency system has been very efficient, but also about four or five years ago, we embarked upon a project to standardize the backroom. If you think about the way our business was run for 30 years through acquisitions, we said, keep doing what you're doing. Kind of that broker that lost the business to us, right?
Keep doing what you're doing. They would use the agency systems differently. They would process a certificate of insurance, which is a very simple thing in our business, completely different in every single office. If I moved, which I did, if I moved one of our guys from Minneapolis to run the Manhattan office, true story, he had to go and relearn how the whole office ran from the back room because we didn't do everything the same. What we did was we understood all the actual steps of every single process, and we put together a way to standardize titles, standardize service, built the technology underneath it. We call it client service operations, and it's been a major contributor to our ability to maintain and control our costs and be much more efficient and deliver quality.
Tied into that is our India service center, the Gallagher Service Center, which every day is taking on more and more transactional work and insurance work and helping our people spend more time selling insurance and servicing. Finally, again, I'm going to come back to the cultural thing. I said it's our secret sauce. It was really cool to stand in front of 250 interns at 9:00 A.M. this morning and tell them about my experience. 45 years ago this week, I started as an intern. I told them the story about I walked in the very first day, and I shook hands with the other three interns, Kevin Gallagher, Bob Gallagher Jr., and Pat Gallagher. I tell everybody I was the start of diversity in Gallagher.
When I looked at that room, you look at 250 young people in that room, I said, "Divide the room in half." That was the entire company that day. When you look at the opportunity that we have to continue to grow and build this organization, there's no end to it. It's really, really exciting. Between the young people and one of our new ways to attract good salespeople is we've created this new initiative called Hire Right. Actually, it's a couple of years old now. It's probably a year and a half old. We're going after really good salespeople that want to make a change into an industry that's really great.
In other words, we're going after the medical supply salespeople, the real estate salespeople, the technology salespeople that have hit a ceiling, that they're probably in their late 20s or mid-30s, somewhere in that bracket, where they're ready for a change. They realize they've maxed it out. We're putting them through a battery of tests to make sure that they are good salespeople. We figure we'll teach good salespeople insurance. You can't necessarily teach a good insurance person to sell. We're having some really phenomenal success. We've got a couple that are just way out ahead, that are already making calls, bringing on experienced people, and selling like crazy. That's the GGB USA story. We're really proud of the franchise we've built. We've got a great new young management team that's going to take this thing to new heights, and I'm very excited about it.
With that, I'll answer any questions.
One question.
We'll take one question.
I just have a question on organic growth for the year. I think that Pat has told us that he expects a similar organic growth to last year, and I think in the first quarter, you guys started out a little bit weaker than the rest of the brokerage, and then it was on top of a kind of tough comp from last year. How do you see the environment kind of impacting your view on organic for the domestic retail?
I'm with Pat. I think we would expect or hope to do at least as well as we did last year. We did have a little bit of a slower start in the first quarter. It's one thing I didn't mention is overall rates, there's some headwinds. They're not gale force. I've gone through the traditional soft markets where things are going down 15%, 20%. It's nothing like that. There's a bit of a headwind in just about everything. Depending upon where the property is, it's got a little bit of difference. Some's going down. You get a little bit of an increase because there's been some losses. Third party liability, automobile liability, professional, there is some rate pressure.
If it's going back a couple of points, a point or two, combined with our renewal retention, which tends to be anywhere from the low 90s to mid 90s, you've got a little bit of a headwind there that you've got to upsell. Hopefully if we can get that back up to the 4% or 5% that we really want to hold ourselves to, our organic will turn around. I will tell you that right now we've got a little bit of headwind. All right. Thanks, everybody.
Thanks, Jim. Is this one on? Next up, we're going to pass the mic over to Scott Hudson. He's the leader of our claims management business, primarily Gallagher Bassett. We'll have him now. I think, Scott, you have about 20 minutes. Hopefully you can fit in your comments in that period of time, and the next 20 minutes are yours.
We'll make it fit.
How's that sound?
I promise. Morning, everybody. As Ray said, Gallagher Bassett. Here's what I'll do quickly. I'll dimension the business. I'll talk specifically about what we're doing to drive organic growth. I'll hit on M&A. We actually had a couple of transactions here recently that I want to mention to you. I'll talk about productivity and quality as well, the culture, then I'll just summarize at the end as to specifically what we're doing to differentiate ourselves in the marketplace. Size-wise, $720 million. We're roughly 17% of the overall Gallagher franchise. We pay out about $9 billion in losses each year on behalf of our clients. It's their funds, whether it's an insurance carrier or whether it's a large self-insured. If you want to put our size in perspective, it's roughly equivalent to, like, a $13 billion in premium insurance company. We serve four different segments of clients.
You've got kind of the bread and butter, which is the large risk management client, the McDonald's and so forth, that has been kind of the hallmark of the business for years. We've got public sector clients, whether they're states, local municipalities, along those lines. More recently, it's insurance carriers, where we're actually handling a part of their claim operation. Then we also have alternative markets, captives, MGAs, and so forth. The way we add value, it's essentially bringing deep skills and expertise to the handling of a given claim. Then the other aspect of it is, we will do it the way our client wants to have it done. I did draw a little bit of a distinction there. If a carrier handling their claims, it's probably more in line with the way the carrier wants to do it.
You come to us, we will work in partnership. We have an opinion on how to do it, but we will guide the client and listen to them in terms of how they want their workers' compensation or liability claims handled for their business. Major geographies, we're still predominantly in the U.S., but we've got a sizable presence outside the U.S. A number of people, close to 1,000 in Australia, now up close to 200 in New Zealand, then around 500+ in the U.K. Our competition, it varies by geography. There's a traditional set of TPAs that we compete with here in the U.S., Sedgwick, York, Broadspire, and so forth. You go over to the U.K., we're probably going toe to toe with law firms. Law firms are competition for us. There are some TPAs. We're always competing with the carriers, the unbundled, don't unbundle.
Down in Australia and New Zealand, it's predominantly the carriers. There's actually a couple of brokers that have businesses, which is not the case here in the U.S. any longer. Then there are a couple of TPAs as well. The competitive landscape, it varies by where we play. Our vision is pretty simple, to be the preeminent risk and claims services company throughout the world. We want to be the best. We want to be able to prove to our clients that you get a better outcome when you're with Gallagher Bassett. We've got just over 5,000 employees, about 5,200. Over the past five years, the organic has been mid-single digits. Acquisitions has not been a cornerstone of what we did. We've done five over the last five years, but as I mentioned, we did two recently, and there's a few more in the hopper.
The expectation is we're getting a little bit more acquisitive. Our margin is just over 17%. If you looked at it for 2016, it was 17.3%. That's kind of just a cut across the top of the business in terms of the dimension of GB. If we look at what we're doing to drive growth, I will mention five things. First, we're trying to focus on the fastest growing segments of our business. That's where we're going to see the greatest growth. We're seeing a lot of activity directly with insurance carriers. We've won some business recently with a number of them, and we still look at that as where a lot of longer term growth could come. If you look at the risk management business, the reason why we're competing every day for clients, but the fact is that market is not growing in size.
There aren't McDonald's coming into that market each and every day, whereas the insurance carriers, which handle probably 90% of the claims, is a place where we haven't played in the past, attacking that market directly, I think, has tremendous upside. The alternative markets, captives, MGAs, another place where we've got actually a pretty strong position, very strong position, but the fact is, there's endless opportunity there as well, simply because that wasn't a primary focus a number of years ago. More recently, we've started seeing some activity with insurtech type companies. We've had a handful of them come to us. They don't want to start up a claim operation. Doesn't make sense. A little bit difficult. They'd like to get out of the gates and start writing business.
We're a perfect alternative for them, and we've got a few of those in our stable and would expect, as those continue to enter the marketplace, to see additional opportunity there. That's number one in terms of focus on the fastest growing segments. The other thing is product expansion. We're predominantly a work comp and general liability business. We've actually pushed very hard over the last couple of years to get into the specialty business. When I say specialty, medical malpractice, products liability. More recently, we've had a couple opportunities around product recall. We are expanding the product line so that we can become kind of a full service provider to each and every client that we have. We've gotten into the disability business. We've got a couple clients down in Australia that has enabled us to get into that space.
We're also doing some storm work in Australia and New Zealand, something we've done over the years. We've actually created a catastrophe team. The idea of expanding our products where there's opportunities for us to grow our business and not just being a work comp and general liability provider. Market and geographic expansion. We do expect to continue to expand our footprint geographically. When there's opportunities, we're going to do it in places that have good common law, where we can be protected, our interests can be protected. The expectation is that our clients exist in many places that we're not today, and we would hope to be in those locations and be able to serve them on a much broader basis going forward.
Probably at the end of the day, the key to growth in this business is to deliver one heck of a great outcome on a claim. We're making significant investments and advancements with our product. We've got a product development team that's thinking each and every day how to do a better job of handling a claim. The last thing is just our brand and sales execution. I think we believe we're pretty darn good at selling, but the fact of the matter is, there's opportunities to always get better. We're looking for new sales talent each and every day, and if there's good people out there that we can bring into our business, we will absolutely do that. A couple of statistics.
Our retention kind of worldwide has been the mid to upper 90s for a while, as I mentioned I talked to you about organic, last year, our new business development has been in the mid to high single digits, not organic, the new business to the platform has been around that level, we're seeing somewhat similar to that as we move into this year as well. M&A, let me shift to that. As I said, that hasn't been something that we've done a lot of. We're not quite like the brokerage business. We actually have a team now focused pretty acutely on trying to find opportunities in the marketplace. The sort of things we're looking for, it's less about scale and more about adding capabilities, things we may not do today around specialty lines and the sort.
We did do 2 acquisitions this year, one down in New Zealand. We bought a company by the name of Symmetry. They're in the property, motor, and marine business. It gives us an entrée into carriers that we didn't. We were working primarily in the personal injury space for the government down there. This gives us an opportunity to serve carriers directly, so we're pretty excited about that. Just in the past week or so, we bought a company by the name of Strada over in the U.K., which strengthens our motor transportation offer in the U.K. Specifically, they have uninsured loss recovery capabilities that bolsters our offer. They're also, we get legal services. We're rounding out our service offering in the transportation space, which I think already out of the gate is proving to be beneficial to our positioning in the U.K.
Moving on to productivity and quality. Our margins, just north of 17%, they've expanded nicely over the last five years. Let me mention six things in the kind of the realm of productivity and quality. There are scale advantages in our business. There's no doubt about it. We're always looking for ways. We grew up as a business with a whole bunch of branch offices. That probably wasn't the most efficient model. It was the most effective model at the time, and we're looking for ways to consolidate those operations. The guy here in the U.S., Ajay Sinha, Craig Keating in the U.K., have reduced the number of locations that we've had, so there's consolidation taking place there. We're offloading and centralizing a number of administrative activities that the resolution managers, our adjusters, have to do every day. Mail processing now is in a single location.
We've got a call center in a single location. There's certain activities that we're trying to take off their desks. We use the GB Service Center for a variety of finance, payment processing, and compliance functions. Second thing around productivity and quality is global integration. One of the things we can do in terms of our own quality is take advantage of the experience and depth we have around the world. In our product development and quality functions, we're now doing all of our audits of the U.S. business down in Australia. Product development, our work comp product, there's a lot of similarities around the world in terms of how a work comp claim is handled. Our product development function is a global capability. Another thing that's going on is our leadership position in technology and analytics.
I mentioned in the past, a number of things that we've introduced into the marketplace, our RMIS type capability, Luminos, which is powered by Origami. We've got a number of decision support tools. What a resolution manager does all day long is make decisions. We're leveraging the vast data stores that we have to help people make better decisions by bringing that of the power and experience of the entire organization. That set of tools is branded as Waypoint. It helps people, our resolution managers, with reserving, initial assignment, determination around litigation, and the use of clinical resources. Over the last couple of years, we've focused a lot of energy around trying to make sure that There was a point about three or four years ago where a resolution manager and adjuster of ours could handle a claim for a captive, maybe a carrier.
They would have a diverse book of business and a risk management client. We've concentrated all of those operations now by segment. We've got a dedicated captive operation, we've got dedicated carrier operations, and we've got dedicated risk management operations. That has enabled us to be far more efficient, and it's also bringing a level of depth and expertise. Now the individual is a carrier only person, a captive only person, and that brings far deeper experience and expertise to each and every claim. The last thing I'll mention is just security and data privacy. This is a big deal for us, just given the nature of the information that we're handling on behalf of our clients, on behalf of carriers. We've made significant investments to ensure that we are properly protecting the interest of not only our organization, but the clients that we work with.
I think almost any test that we've had with any large client, one more recently with Halliburton, they come in and try to test our security, and it matches up with anybody. That is a key buying factor in terms of people's expectations of what Gallagher Bassett is bringing to the table. Culture. Like everybody inside Gallagher, I think it's an important differentiator for us. We've got a tremendous workforce. The work ethic inside the organization is phenomenal. If you walk inside one of Gallagher Bassett's offices, you know it. People have a tremendous amount of pride, and that distinguishes ourselves in terms of being able to attract more people. Just the quality of work and the lifestyle and so forth that people are living here, it makes a difference.
One of the things that we've also tried to do more recently, it's kind of shift the thinking. It's around the whole claims business. If you look at kind of the perception of the insurance space, in some cases, claim handling, it's a little bit of an adversarial type business. To be fairly blunt with it, sometimes people think that the claims adjuster is trying to screw them out of some money. The fact of the matter is what we do is we put people's lives back together. We're right there to help them each and every day, try to get back to a productive lifestyle, get back to work, kind of reclaim the position in life that they had before some incident took place.
We're working very hard culturally to bring those stories to life, where we are recognized as an organization that makes a difference in people's lives. It is making a difference as we rebrand the organization in that manner, not just a claims company, but an organization that puts people's lives back together. People want to work for an organization like that. It helps us in terms of attracting people, and it makes people feel good about what they're doing day in and day out. The last thing I mentioned that I'll say how we differentiate ourselves in the marketplace. I'll list five things here. First off, I mentioned that the ultimate differentiator in our business is a better claim outcome. We're getting better and better each and every day to be able to prove that our outcomes are better.
It's not an easy thing to do because nobody claims, whether it's McDonald's comparing to another fast food franchise, they don't exactly look the same, but we're building some good science behind how to draw the conclusion that our claim handling is better. I believe that we've been able to prove time and time again that we do have superior outcomes. Another important differentiator is the willingness and ability to customize our claim handling to a client's requirements. Oftentimes, they have an opinion, they have a perspective on the best way to do things within their culture, within their environment. We're willing to do that. Not all of our competitors are. I do hear time and time again that we get high marks for a willingness to listen and work side by side with our clients.
We talked about the brand and the focus on care and compassion versus thinking about this as a transactional business. We're in the business of putting people's lives back together. We're getting out there with that way of thinking, branding the company that way, and that does make a difference. The strength of our relationship with Gallagher is extremely important to us. Interestingly, on the risk management side, probably upwards towards 80%-90% of our business comes from some other broker. When you start talking about carriers, MGAs, and a lot of the captive operations, we're joined at the hip with Gallagher, and the connection to the Gallagher organization as we're having conversations with large insurance carriers, given the Gallagher relationship with those carriers helps us out tremendously in the course of those conversations. Then the last thing we're trying to do is leverage our global footprint.
It does matter that we can handle claims everywhere. A lot of our clients, they prefer not to have to call on many service providers to give them the total solution for around the globe. The fact that we can handle claims in most countries around the world, even though we don't have people there, that puts us in a pretty unique position and helps us from a selling standpoint. That's the story. Hopefully, that fit within the 20 minutes.
You have two minutes.
Two minutes left. Two questions. Greg, how are you doing?
I'm fine. How are you?
I'm well.
You look good.
Thank you.
Given everything that's changed over the last couple of years with the growth, can you give us an update on just the overall structure of the business? Because there's the old footprint of life of claim versus life of contract. Is that still relevant as we think about your business? Just provide some perspective on that.
It is. What Greg's referring to is how we price the business. We still have a significant share of the book of business that's priced per claim. A lot of the risk management business here, we prefer probably more life of partnership than life of claim. A lot of clients here in the U.S. still buy that way. The carriers, some of them think that way, but as we move into the carrier space, the preference is that we're selling kind of dedicated teams on a cost-plus basis. You should see some shift in that direction. As our captive business continues to grow, that's primarily on a % of premium basis.
In the cost plus-
Yeah.
That's the life of claim sort of prospect, right?
Well, it's not life of claim. It's basically, they're buying a essentially, we'll have a team of 20, 30, 40 resolution managers dedicated to a client, and then in essence, we mark that up on some sort of multiplier. Essentially, if there's more claims coming in, we'll add resources at the agreement of the client, and when that relationship's over, they would take that somewhere else if that were indeed to happen. We don't own those claims in that sort of model beyond the life of our relationship. It's probably more akin to a life of partnership type model on the per claim side. We're seeing a shift. I've got Jim Bond, our CFO, in the back. I would still say the majority that there's still a high % of our business is on as a per claim basis, though.
I think over time you'll see that in terms of if the majority of our business over time would maybe move in the direction of carriers, you could see where the pricing and underlying economics of it might be a little bit different.
Thanks.
Yeah.
In 2015, 2014, 2013
Sorry, 2013 through 2015, this is a high single digit to low double digit organic business. We dropped off that pace a little bit in 2016.
Yep.
Have recovered a little bit recently. With all the initiatives that you have undergoing on the organic side, is that the type of level that you're targeting to get back to? If so, how soon do we see that?
Absolutely. We've seen a pickup already this year. I think the expectations as we move into the second quarter, around 3% to 4%, maybe even plus percent growth. We are seeing an uptick in the business. There was a few things that were providing some downward pressure. We had some challenges with a client in Australia, with a law change, that was probably hurting in the neighborhood of one point or so on a quarter-to-quarter basis. Yeah, our expectation is to get back up into the mid-single digit range, probably within the 12 to 18 month horizon. It's been slowly ticking up almost every month this year, and we see it continuing to strengthen. Good?
Sure. Thank you, Scott.
Thanks, guys.
As we do the mic change over again, once again. Next up will be Doug Howell, who's going to be talking about clean energy and also give a brief overview, financial discussion, give you an update, and probably walk you through a little bit. We've handed out that new CFO commentary document, I'm assuming he's probably going to have some comments on that for you as well. Doug, the next 25, 30 minutes are yours.
All right. Great. Thanks. Can you hear me all right?
Yes.
It's nice to follow a good-looking Scott Hudson.
You get all the questions.
Listen, I've got about five minutes of things I just want to walk around the world a little bit on and give you some thoughts from my standpoint as a CFO, kind of bring together some of the comments that were made earlier today. Echoing Pat's commentary on the front end, this year feels a lot like last year, so that's good. In our opinion, we think that that's good. I think that echoing what Tom said in terms of margin improvement opportunities, we still see that there's opportunities in the U.K. and certain portions of the Canadian operation, and then the Australian side of the operation, that if you aggregate all those, maybe there's $30 million-$40 million worth of additional EBITDA through margin expansion in those locales.
From the other areas, Bill Ziebell's area on the benefit side, Jim Gault and Mike Pesch's area on the U.S. retail side, our London specialty business, certain areas of Canada, certainly New Zealand, and the RPS side, we're pretty happy with the margins there in the upper 20s. We think that that's good. As I look out on our second quarter, if you look at last year, just to bring it a little bit closer. First quarter, we expanded margins about 120 basis points in the brokerage segment. Second quarter, we posted 30.3% of margin in the second quarter last year. I doubt that we'll top that this quarter. When you look out last year, we expanded margins about 50 basis points in total on about 3.5% organic growth. If this year repeats itself, we already had 120 basis points of expansion in the first quarter.
If we match in the second quarter, that kind of averages around 50 basis points so far year-to-date. Maybe if we hit that margin in the second quarter, and it's a big if. June, there's a lot of businesses get sold between now and the end of the month, so we'll see how that works. Again, I see this year ending up a lot like last year. That would be in the mid 3% organic range, and maybe we'll have 50 basis points of margin expansion for the year. One of the things I got to be careful about is when we say it feels a lot like last year. Last year, first quarter, 4.8% organic. First quarter was around a little less than 3%. Second quarter last year was only 2.2%, I think, organic growth. I think we'll do better than that.
Overall, for the year, I see us between 3% and 4%, which is pretty good in this environment when you're losing about a point to rate. We're not having much loss on exposure. In terms of organic, pulling all those things together, it all hangs together on that. When I look at other things on the productivity and quality standpoint, we have really hit the stride right now where the rest of the world can follow the hard work that was done in the U.S. on the retail space, that we're starting to copy what we've done there. What took us a decade to do in the U.S., we see that it'll be better than a half-life on that. I think we can replicate it in three years in other places in our retail business.
Jim Gault's leadership through the U.S. transformation from being kind of a franchise model to a centralized, consistent model was tremendous over his. He took over that role when I came in, and I've just really had a terrific time working with Jim over the last 13 years to make that evolution happen. We don't have to create a new path. We just have to follow the same path, and I think that we're getting some. I'll be in London starting next week for two weeks, and we're really getting terrific take-up in our retail space in London now that the acquisition's integrated to follow the same path that we're doing throughout the U.K. on using our offshore centers of excellence and our standardized processes and procedures. Gallagher Bassett, you heard Scott talk about that our risk management segment, the organic growth continues to climb back. That's good.
I see the margins above 17%, so that 17%-17.5% range, I still feel comfortable with that.
On the culture side, I can't say it enough. While we're talking about 250 interns here, I think we have a total of maybe 500 around the world. I can speak to this up as we have close to 40 finance interns alone that aren't included in those numbers. We're bringing young people into the business. It is a competition for talent out there. We're building tremendous folks. I think that we've got eight or 10 young folks that are on the CFA tracks internally. We're building a lot of really good capabilities, and people find our environment a great spot to come and work. The culture is working well there. We talked on margins, we talked on organic, we talked on culture, we talked on productivity. Those are the things. I want to talk a little bit about modeling.
I think the thing that, in my earnings conference call, we spend a lot of time talking about how to model revenues. In our CFO supplement, I just want to make sure you take a look, the rollover revenues from M&A, we've updated that on page five, and it says right now we put in our revenue we'll get from the second quarter acquisitions about $43 million. That's the way we sit today at mid-June. It'd be pretty hard for that number to change too terribly much in the second quarter, in the last two weeks there. Even if we bought something, we would get one 24th of it in this month. It's not going to have that big of an impact. Take a look at modeling on that FX kind of bouncing around.
We see it, FX in the quarter probably having about $25 million of impact on our revenues, and that's a little different than April 27th because the pound has actually weakened a little bit in the last 60 days there. Just a smidge. It popped up a little bit and then come down. Integration. I'm excited about going to London. This will be probably one of my first trips in three years in London where we haven't been talking about integration. We're basically done with that Australia, New Zealand, Canada, all well behind us. In London, maybe we'll have a penny or two a quarter this, and we've got a system that we're working through on the wholesale business over there that we're putting in that will drag out for the little bit of the year. We're basically done there.
When I look at cash generation, cash generation is strong. Two users of cash in the past have been integration and building the new home office building that you're in. Those are behind us. They're done. Our cash flows are improving there. M&A outlook, some discussions on pricing. It's very competitive on talking to people on joining us. When we ultimately settle, we're still being able to buy at fair prices in that seven to eight range. If you get up a little bit, get into bigger ones, maybe you're having to pay closer to nine, but we still have a nice arbitrage compared to our trading multiple. It's competitive on talking to join us, but on the pricing, there's still a lot of folks there that are willing to take a fair price, and here's why.
Think about when Jim walked around the U.S. right now, the number of young folks that I shouldn't say young, they're in their 40s. They're leading businesses that are $100 million businesses, that they came from our internship program, or they came through M&A. Now, interestingly, what he didn't say is that Scott Firestone on the West Coast and Dan Tropp, they came through M&A, yes, but they were children of people that we bought. We basically bought their parents' agency. When you talk about they were interns of their own parents. We have the ability to attract those type of merger partners to join Gallagher that will have a career path, and that sells. It doesn't sell to everybody, but we're not trying to buy everybody. We're trying to buy 50 to 70 a year and have them join us.
I'm not excited at all about doing a large deal. I'm not looking at any, I'll tell you that right now. I'm not excited about buying out roll-ups. We bought roll-up in the U.K., and we needed that in order to get into the retail space there. By and large, the New Zealand business, and to a lesser extent, the Australian business, were one brick at a time type businesses. Canada was basically six of them that came together as one. We have platforms there now, we don't need to do that. Internationally, I like doing smaller deals there where they're going to trade with us. If you see us making an announcement in Singapore or Peru or Norway or Sweden or something like that, it's usually because they're trading in our construction or our marine business in through London.
Typically, on those deals, we like local management to continue to own 20%-30% of the franchise, and we probably will have little interest in moving quickly to 100%, if ever, on that. We think it makes a better sense for local management to have an ownership piece in those countries because of the unique nature of their own countries. I think we got plenty of cash this year and debt. You saw that we just announced that we did another private placement for about $600 million. I think that we did a nice job on the rates on that, and there was great demand for it, we feel good about that we'll fund that here in two weeks, the rest of it in August.
We had a $300 million tranche that was coming due in August, that half will be used for that, and the other half will be used really to pay down our line that we've been using. Good rates out there, good appetite, nice favorable receptivity to our private placement offer. We think that between cash and debt, we have the opportunity to fund our M&A program this year and clearly next year too on that. If we have to use some stock, we'll buy it back in the marketplace, generally, by and large. We should be able to match up. I think we're a little ahead on that. I think we pre-bought back in last year, I think we might have a few hundred thousand shares that we can put out yet and still meet our buyback. Those are my comments.
Let's talk about the brokerage business, and then maybe I'll have some comments on clean energy that might come up in a question. I'll shut up for a few minutes and take some questions.
In your updated CFO commentary, you have a slide about the pro forma impact of lower federal income taxes on the corporate segment. Can you just sort of walk us through this table here?
Sure. Thanks.
You know which one I'm talking about, right?
Yes, I do, and I'm a little disappointed that you're not saying I'm looking good too, Greg.
Thanks.
Let me talk about that table. This is a repeat. This is the third time we've shown this to you. What we've done is we've just basically said, based on kind of a single step rate change type differential, what does it do to the different segments? Not only do we show what it does on the corporate segment, we show what it does on the brokerage and the Risk Management segment. It would say that you can compute the deltas on what these would mean, the brokerage segment 16 would go from $1.98 at 35% of EPS to $2.32 at 25%. Risk Management goes from $0.32 to $0.39. Risk Management comes down.
The reason why is that the value of the deductions that it takes to produce clean energy credits, the credits don't change, but the value of those deductions decrease, so therefore it's not quite as economical, even though it's still infinite. Our cost to create these things, our total cash in is less than the output, so it's almost an infinite return on it. By and large, what it's saying here is that if you just pro forma net, we would stand to have maybe a 10%-15% increase in total EPS for the company. Important sidebar on that when it comes to clean energy. Remember, the credit doesn't go away. So a dollar applied against a 35% tax rate is just as beneficial as a dollar applied against a 25% tax rate. Right?
Remember, we're using our tax credits to lower our tax rate from about 35% down to about 10%, because there's an AMT element in there. If you just take that. Whether we use it to take it from 25% to zero or 35% to 10, it's still a benefit to the organization that reduces the cash that will flow out. So tax reform is good, regardless of what rate it goes to. I don't believe that if there is tax reform, that I think that these credits will survive. I don't believe they'll take them away from us, and I don't believe because they sunset in 2021, the ability to generate them, I don't think they will get rid of that benefit because it affects solar, it affects wind, and coal equally. So I think that we're good. We're trying to generate tax credits between now and 2021.
We have a $500 million balance sheet right now. Probably close the year with a $600 million receivable on it. So we think that our cash taxes paid, regardless, will be low through the mid maybe 2025 through 2028. So we see a lower tax rate. Now, if tax reform doesn't happen, that's okay from Gallagher's standpoint because we have all these tax credits. Right? So regardless of what happens, we might go through the credits a little faster if there's no tax reform, or if there's tax reform, we get them a little bit longer. By and large, it doesn't impact us. It also helps us with repatriation. Yes, I like paying 20% income tax in the U.K., but if I had to bring money back and pay the extra 15% on it, taking it from 20% rate to 35%, it does produce a GAAP impact.
From a cash standpoint, we just use the credits faster. So I'm not paying any more income tax on it. It just has this GAAP impact of marking up that money to a 35% rate, and then we use our taxes. So I like the position that we're in. We can repatriate money. We can intercompany strategies, which sometimes cross-border strategies can get some scrutiny by the taxing authorities a little bit. I'm not so worried about those because we have the tax credits. So we're really in a terrific position compared to even three years ago on it. So in answer to your question, Greg, we think it's a big benefit to us regardless of what happens in the rates. If rates come down, I think we all win out of that. Question over here.
How do you feel about completing the $800 million of acquisitions, that target that you set out for this year? In first quarter, you guys mentioned that you had done a couple of specialty acquisitions at a higher multiple.
Do you prefer to do more of those, or do you prefer to do more vanilla tuck-ins at the regular like 7x-8x multiple?
Well, let's talk about here, I got to be careful about adjectives. Higher multiples, when I'm saying that, okay, we paid 8.5x. I'm not paying 12 or 13 or 14 on the specialty ones. That does move the average up a little bit. Also, we exclude some of these book gains. One of the reasons that Bill said they've done 17 deals this year, I think on the, and Ray, you can correct me wrong, some of those are so small that they're just book tuck in. When we say we did 20 this quarter, there might've been five or six of these small book acquisitions that don't come in. Just if you are trying to understand the counts, the operating folks look at those as each individual as a transaction. We, from the corporate standpoint, don't really measure those.
In fact, we don't even really count them in the cash flow going out because we buy them at such low multiples. It's kind of an earn-out basis or a pay-as-you-go basis. The answer to it is, I would rather do something that's specialized versus general. The reason why specialized is you got to think about it from the client standpoint. Why are they buying insurance from that person? If it's just purely a relationship, fine. Will that survive with us? Is that person going to stay in the business? Fine. If they're really coming to us for specialization, we like that because then we can replicate that throughout our entire franchise. We talked through a couple illustrations that were given about why somebody joins us, then we can take that elsewhere. I'll just use Australia, for example.
We're the best in higher ed in the business. As soon as we bought the Australian operation, John McLaughlin jumped on a plane, I think we've written six or eight higher ed institutions in Australia, maybe that many in New Zealand now. We really weren't trading with any of the governmental entities in New Zealand. Our public entity practice lead jumps on a plane, goes to New Zealand, and now we're an approved provider of insurance for the various New Zealand governments. Those things, I like specialty businesses that will come in that we can replicate across the franchise. Now, because of our having common systems, common way of doing it, long ago, we went to this niche practice model where we have niche practice leaders. It's easy for us to replicate business around the world. Brian Cooper runs our construction practice.
It is on fire. I ran into him in London. He's out talking to somebody in London about business. You can go to 1 million restaurants in London. I happen to run into him there. These folks get out, they spread the word of what they can provide, and it takes off. It really does.
The $800-
Yeah, the $800 million target. I look at that each month. I think that we're on target for that. I don't worry about it. If it's 750, if it's 850, it's not going to be a lot off that number.
As the cash flow generation of the business improves just with growth and with the lack of the integration costs and things like that, is it fair to think that as you consider acquisitions, there's not going to be a lot of share issuance? Could you even be in a position where you would consider using some excess cash if multiples get too high to buy back your stock?
Yes, yes, and yes. The answer to it is, if we have more cash than we can do deals, we're not going to sit on cash. We like our debt somewhere on a covenant basis around 2.5-2.6. That's kind of where we are right now. I would say that we would wade into the market, and we would buy shares back if we didn't have M&A appetite. Also, I want to make sure you understand. When Jim Gault says he's got a budget of $100 million of acquisitions, we don't really budget acquisitions. He has a goal in mind, and he sees a pipeline, so he kind of regulates it. We're not forcing our folks to go do bad deals in order to make a budget. I'd rather buy shares back than do a bad deal all day long.
Now, on the other hand, I don't mind giving shares out to folks too that, especially if they're tax-free exchange, we'll use it, and we'll give them shares, then we'll buy it back in the market, either pre-buy it or post-buy it on it. If we actually got to a point where there were deals that we really liked that we could buy at fair multiples, I don't mind putting out a couple million shares. I don't see us doing a big secondary offering in order to go acquire. We don't need to do that. We've got plenty of cash flow. If organic growth goes 3%-4% over the next few years, it's a substantial amount of cash that we're going to have to deal with going forward, and that would be a good thing to have happen.
Doug, I'd like to just step back on M&A. Whenever we talk to other participants in the marketplace, the rhetoric around higher multiples from private equity vehicles or other entities is the drumbeat is loud. Yet you're considering continuing to do transactions and just trying to reconcile what we know is going on in the private equity side versus what you're saying because you're continuing to do deals. Then secondly, you said you're not currently working on any large deals, I assume if there's a bank that's willing to consider a spin-off of their brokerage operation, you're not going to be interested in that.
Let me answer the second one first. Correct. Let me go back to the first one now and answer that in terms of why would there be a different appetite? I'll just say from my personal experience. If I owned something that I had spent my entire life on, and I didn't want to change, I was maybe interested in exiting. If I didn't want to use common resources, if you couldn't do anything for me, the only thing you've got to offer me is money, I'm going to expect more money. There's no question about it. If you don't have capabilities, if you don't have resources, if you're not going to help me be a better broker, then you're going to pay me more for the franchise. Right?
If, on the other hand, I want to land my clients in the right spot, I want to land my employees in the right spot, I want to take on an increased responsibility inside of an organization, I want to continue to sell insurance, I'm not interested in retiring, I like the capabilities that you bring, I'm willing to take less cash upfront today because I know that over the long term, I'm going to be in a better situation for me and my family as we merge our families together. It makes 100% sense while those without capabilities have to pay more to get franchises. To me, it is the most logical game theory question that there could be. It seems to have a reverse mentality that when I stand in front of many on Wall Street, that doesn't seem to compute with them.
If I can go someplace, and I'm in my 40s or 50s or 60s, and I can toil in a business that I love for the rest of my life, and I can come into an organization that's got capabilities and niche leaders and systems and service areas, I would much rather take a slightly less price for that than I would just to take the cash and run. I think it stands to reason that we should be paying less for deals. I think the reason why you're hearing that multiples are up from others is because they can't offer what we're offering, or they've lost their culture, or they've lost the scent. It's also people just have changed in what they want in life. Some are going to want cash.
The nice thing about it, there's 30,000 of them, however you want to count it. We're just looking for 60 that think the same way that we do.
You're also making your own adjustments. When you give us the multiple on your M&A is an adjusted EBITDA, correct? You're pulling out country club things and.
Yeah. Here's the thing, though. Most small deals, small mergers, there is not a lot of difference between actual results and pro forma results. The only difference that might be there is that the owner might have been working for a dollar and taking out all the cash at the end of the year. What we do is we reset their compensation to be if that person sells to us and becomes a branch manager of a $3 million branch, we reset their compensation to be to the level that a $3 million branch manager would make. That's what we do. You can take a branch manager that's been with us forever or a branch manager who's selling this to a comp, it's largely the same, if it's a $3 million shop, a $6 million shop, or a $10 million or a $20 million shop.
There isn't a lot of stuff, Greg, that happens between their numbers and our numbers. That's the problem you have in larger deals, is the trumped up pro forma. Sorry to use the word trump. I didn't mean that. I got to change that. Fabricated EBITDAs comes together pretty well on an Excel spreadsheet, and we have to be very careful about that on any larger deal. Looking at the pro forma adjustments is something, but we don't have them in the small tuck-in acquisitions. It's not that tough. When we give you a multiple, it's on trailing, but pro forma, but there's not a lot of difference between it other than this owner's comp issue.
The investment income and other line in the fourth quarter in the brokerage segment was $18.5 million. It moved down to $12.1 million in the first quarter. Can you talk through why that moved down? If there's any seasonality to that number and how we should think about that going forward, particularly in the context of Fed rate hikes?
Yeah. Something I think that we might have given, I don't know if we still do. Remember, that's our premium funding business in Australia and New Zealand that came with the Wesfarmers deal. What you'll have is that you'll have a like amount of premium funding expenses someplace else. It's escaping me on the geography. I think that's the rate decrease that you're seeing on the premium funding business, but there'll be a corresponding expense decrease. It's not investment income the way you think it is as being our float money's reinvested like we used to have. When short-term rates were 6%, we were making $20 million on that. Now it would be $100 million, right? Just on monies that the float that we have between the client and the carrier. That's not what that number is. The decrease, it's not seasonal.
I have a feeling it's a difference between rate change in Australia, just the drop of the rate.
What's the balance that's exposed to the cash balance that's exposed to Fed rates?
Well, I think the cash balance is probably $1 billion or $1.5 billion on our balance sheet all the time. Something like that.
Is it fair to think whatever trajectory you have for Fed rate hikes, like that would kind of fall down to the bottom line?
Yeah. Sure. Yeah, 100%. If that float happens, yeah, it would.
Okay.
I don't know if we'll ever see that in my life again, but that's all right. We'll see.
All right.
One of the things that keeps popping up on your SEC documents, the 10-Ks, the 10-Qs, et cetera, is this IRS outstanding review of your captive program.
Yep.
It never ends. Can you give us an update on what's going on with that? Is there any sort of resolution that's coming down the pathway here that we can see?
Here's the thing is, first and foremost, I don't have any new information today than what we wrote in the 10-K and the 10-Q. The matter just deals with about is a captive duly formed. It's not a big part of our business, that actual sell. I think we give the dimension of it in the 10-K. It's a few million bucks a year, $4 or $5 million a year of EBITDA, I think, for us. It's not a big part of it. I wish Walt were here as our general counsel. He could probably explain more. Just anytime the IRS, and I'll say it across the board, anytime there's any type of structure that's formed, whether it's clean energy, whether it's cross-border strategies, whether it's captive structure, the IRS can always disagree with congressional or legislatively allowed structures. That's one thing.
If the IRS doesn't like what Congress has approved as a law, they can get difficult during the audit process or whatever, because they just don't like it. These are not loophole exploiting ventures. The 831s are congressionally approved structures. Clean energy credits are legislatively approved. We're not out there being a promoter of exotic loophole exploitation type structures. It's going to be there. We put it in there. It's so small that probably is immaterial for, by far, in my view. I think that we just think write it up. I wouldn't read too terribly much into it, but it will go on forever.
You don't have that same type of language as relates to the clean coal energy investments, so it's still sitting.
We don't have any ongoing audits that I'm aware of any material nature or significant nature in terms of that on our clean energy side that would require that. If we got into an audit situation of it, and they were taking exception with what we've done, then we'd probably disclose it. Yeah. The nice thing about the clean energy is that you get to see exactly what it is. It's there everywhere, and we say that they could always get cranky about it, and so you can quantify. You wouldn't have that level of knowledge because the captive business is just buried inside of our brokerage business. We break that out and give you the dimensions for it. If we had a whole segment just on captive of what?
$11 million of revenues and $3 million of profit, we probably would just say, yeah, the IRS can get cranky on some of these things from time to time.
Thanks.
Do you have any initial thoughts on how you're going to deal with the new revenue recognition plan changes?
Yes, I do. Revenue recognition is coming for the brokers, and we're still feeling our way through it. In a nutshell, what will end up happening for By a show of hands in this room, how many of you follow insurance companies? All right, pretty good number. We'll end up with some type of an unearned premium reserve, and we'll end up with some type of DAC on our books. No more or less complicated than that on the surface. Lot of work going on. We're spending $1 million or $2 million a quarter on it and getting it implemented. It's basically going to change, because right now most brokers, there isn't really an accounting standard for brokers. Most brokers have adopted something that they follow consistently.
Ours happens to be, we recognize, in most cases, our revenue on the later of the billed date or the effective date of the policy. The effective date, if you got something that's annual pay, we might recognize it all upon billing, right? If it's a 12-month pay, we might recognize one twelfth of it along the way. A lot of times, that stuff doesn't move from year to year. On big liability lines, the premium a lot of times is an annual pay, and the clients pay it up front. Smaller commercial business and certain lines, it's a monthly pay with some audits on it. What's going to happen is, we're going to pull some revenues forward that were on monthly pay, and we'll set an unearned revenue up, and then we'll recognize it.
By and large, unlike an insurance carrier that recognize one twelfth a month, we'll end up recognizing We're in a working group. In fact, the other brokers are going to be here at the end of the week that we've been working on with the public accountants. By and large, you're going to probably end up recognizing 85% of your annual written commission up front, and then 15% will be amortized over at about 90 days over the service period. The idea is to recognize the service cost against the revenues that come after the fact. It's going to be a pain. It's going to cause you to pull out your hair. It's going to be something that we're going to work very hard in the fall to try to educate you the best as we possibly can.
I've talked to a few of the IR folks, as Ray has, at a couple of the other brokers, they understand that maybe there needs to be some type of joint discussion. I don't know if we can get ourselves together that, just sheer schedules. You're going to need to spend some time in October and November to best understand this. I don't know if it's really going to change the actual bottom line answer. As you may true up the balance sheet and stuff that we previously recognized is now deferred, and stuff that we would have recognized later might be pulled forward. I don't know if it's going to change the actual bottom line on a year-by-year basis, but it will put up a big number on the balance sheet called DAC.
Actually, probably work in process is what will be, or it's cost to fulfill a contract, origination or something. I forget the name of it. It's going to be a pain. Get ready. I don't know what it's going to do. I actually kind of like the basis that we have right now. Organic will be something that'll be interesting. We'll have to figure out how we report that. Do we have to do a annualized written premium or equivalent type organic? I don't know. We'll have to figure it out.
We were laughing the other day because we were talking about how much time is this going to take for us to get ready for the streets. We were saying we're in the meeting. I said, "Well, gee, I think it could be 800 to 1,000 hours." Everybody said, "No, no." We started talking about it. I said, "You're right. I'm wrong. 1,500 hours. Get ready. Here it comes." Other questions? While you're thinking, I'll look through my notes of things that I wanted to make sure. Talked about integration, talked about FX. I think really take a hard look at rollover revenues. I think we're at the end of the quarter. That's an easier number for you to get. Applying organic to the FX adjusted prior year number is helpful. Talked about shares.
Clean energy, we didn't really modify our guidance too terribly much. I do like it very hot out. I was looking at the weather forecast in certain areas for our plants. Let's let it be a really hot end of June. We'd like that. Talked about our debt offering that I think went very well. Tax rates I think we've hit what was on my list. Probably the deal pipeline. We've got about $250 million of revenue for 40 term sheets that are in some stage of processing. We won't close all of those. We think that we can fill out to the end of the year pretty well. Revenue recognition, we got to that too. All right. I think that's it. What other questions are there, Paul?
The revenue rec changes. Paul, is it the revenue rec changes and the account changes, does that have any effect on the account on M&A?
Yeah. Here's the thing is, I'll tell you right now, I think this will mostly be. The answer is no. I think that because we're basically buying off of cash right now, regardless of what the small broker would have, we will go back and adjust to more of. We buy off of EBITDA, and so EBITDA will change a little bit under this. Just so you know, we're not intending on changing our branch level financials. I don't want to try to explain to a branch manager who we really want to come out of the sales organization how to manage his operation or her operations based on work in process and on deferred revenues. Managing on cash works very well at the branch level, and that's really what all the smaller M&A guys are doing, too.
Private folks don't have to implement this until 2019, and I don't think the small guys will. I don't know if they ever will, to be honest. If I owned a branch or a small agent, I would never implement it. Sorry. Economic conditions, we didn't talk about that. Feeling good on my feel. We do a survey about this time of year, and we usually announce that in July during our conference call. I think economically, we're seeing some nice pickup around. I'm really kind of surprised. I'm really looking forward to being in the U.K., where we're seeing some nice economic activity in the U.K. and rate actions in the U.K. also. That seems to be good for us. Australia and New Zealand seem to be doing pretty well.
There's a law change in New Zealand that could. I think they're adding some type of premium tax that will go on the premium. I think that our folks in New Zealand are working very hard to try to explain to the customer that we're not bringing you a 10% rate increase. I just hope that there isn't a shock there that causes people to not buy as much insurance. That's the one thing that's going on there. It's happening. We'll see. It's a big month for us. All right. Anyone else? I don't have a watch, and I don't know what time it is.
11:31.
What's that?
One minute over.
You did a good job.
Clay can run now.
All right. Well, thank you everyone on the webcast, and thank you everyone here in Rolling Meadows. We appreciate your time, and that's it. We are timing out.
Thanks.