Good morning, everybody, and welcome to our investor meeting with our management. My name is Marsha Akin. I am Director of Investor Relations, and we want to welcome everybody here attending live and those of you on our webcast. Just to run through the agenda here briefly, we will start right after my opening announcements. Pat Gallagher will be starting at 8:45 A.M. Jim Gault will be on 9:45 A.M. We have a change in the agenda. Rick Strader will be doing the employee benefit consulting piece in place of Jim Durkin. Dave McGurn will be at 10:30 A.M. Scott Hudson, 11:00 A.M. We will have a working lunch session with Doug Howell at 11:45 A.M. through until the main Q&A session at the end. Just to go over a few things, this is an informal meeting structure. Those of you who have been to these meetings before understand how that works.
Basically, we will have short presentations by our speakers, then we will open it up to Q&A. Anybody attending here will be able to ask any questions. Okay, lastly, just got to go through our forward-looking statement. It is important to note that some of the comments made today by Arthur J. Gallagher & Co. and our speakers may constitute forward-looking statements within the meaning of the securities laws and are subject to certain factors and risks described in our filings with the Securities and Exchange Commission, which may cause actual results to differ materially from those expected. Having said that, I will turn the meeting over to Pat Gallagher, our Chairman, President, and CEO. Pat, the floor is yours.
Thank you, Marsha. Can everybody hear me? Good. Thank you very much for taking your time this morning to join us. We appreciate you coming out, as Marsha said, we will try to keep it pretty informal. I will make a few comments, then I would like to move to the questions and what have you that you would like to ask pretty quickly. 2014, as you all know, was a pretty seminal year for Gallagher. We did a number of acquisitions extending our global footprint. I thought I would kind of start by talking about those, where are we, how are they working, what have you. In the last number of months, I have literally been almost to all of our retail operations around the world.
I have been to Birmingham, England for a branch managers meeting, Melbourne, Australia for a branch managers meeting, Auckland, New Zealand just last week, San Francisco, Los Angeles. Today, I will spend some time in our New York office. The good news from my perspective is that as you travel around the globe, the Gallagher culture truly does hang together. When I am in Melbourne and we are talking the same language about what we are trying to sell as we are talking in Chicago with different ways we are looking at our client base, et cetera, it is the same when I get to Birmingham, England, I feel really good about that. Let me just kind of go around the globe a little bit, I have made some notes so that I touch on just about everything. U.S., Bermuda, about $2.5 billion of our $4 billion is in the United States and Bermuda.
This is a very stable platform, very solid margins. If you look at our investor presentation on the website, you'll see that our margins have improved substantially over the last four or five years. The business is stable. The pipeline is very strong. We are paying this year on average about 7.5x EBITDA for the acquisitions that we're doing, and we see that continuing. An awful lot of smaller bolt-on type of acquisitions. We'll probably do 27 to 35 of them or so in the United States this year. Literally, knock on wood, I don't have one that's at the top of the list where I'm going, "Oh my goodness, we've got a problem." Organic growth in the United States is getting a little harder to come by. We are seeing rates decrease something on the order. It depends on the size of the account.
The larger the account, the softer the market is kind of becoming. By that, I would say 5 to 10 off. I'm not talking 25 and 30 off. You can see some of those larger decreases still on the property portfolios. It's been a pretty benign catastrophe season. By and large, low single-digit organic growth is probably pretty good work in this account. We're getting a little bit of relief from the economy. The economy is improving a bit with the exception, of course, that anything that has to do with the oil patch. Anything that has to do with oil services, our Houston office, Dallas office, Calgary office, and some of our London specialty stuff is under pressure with natural resources and oil. As I said, the mergers and acquisitions are looking really good.
I think the thing about our domestic operations that I'm pleased with is that they are working as a really well-oiled machine. I mean, this is our home space, every single one of our divisions is working with our center of excellence in India. As I said, margins are solid, growth is good. Our internship will come around this summer. We'll probably have 300 kids in the internship this summer. Things are working really, really well here in Bermuda. Let me move to Canada. Canadian operations are outstanding. As you'll recall, that was the Noraxis acquisition. We bought Noraxis, which was about seven brands from RSA just a little over a year ago. Organic growth is solid up there, low single digits. We've literally consolidated six systems now. We've extricated them from RSA.
We're moving them onto the same agency platform that we use in the United States called Epic. That should occur during 2016, should be finalized. I would say for all intents and purposes, in terms of integrating, Canada is almost done. The branding is not done. That'll go a little slower. We bought seven separate brands up there. Some are more comfortable moving more quickly to Gallagher than others, and we're okay with that. We want to trade under the name that is best to trade with. New Zealand is about $150 million business. Rock stars. This small country, we have by far the largest share of that market, and it's just considered integrated. I mean, they're part of Gallagher. We trade as Crombie Lockwood, but it says, "A division of Gallagher." Our niche marketing is working extremely well there.
They're tapped into the resources, they're growing in a market that is very soft. New Zealand and Australia are very soft markets right now. Low single-digit organic growth in New Zealand is good work, those guys are doing just a great job. Australia, we've talked about before, was probably an area that we knew we needed the most remedial action. Australia, high teens margin, lots of opportunities to improve that. The first year of that effort was really spending a lot of time extricating the Australian operation from Wesfarmers. That is by and large, complete. We're on our own platform, et cetera. There's just a tremendous amount of opportunity.
Being there in September, being at a branch managers meeting in Australia, seeing the work that they're doing, recognizing where they have opportunities to sell more product, at the same time to improve efficiencies, we haven't had a chance to do much in the way of bringing our Indian service center into Australia. We'll be doing that. I think we'll see some good margin opportunities there. In both Australia and New Zealand, you'll recall, when we did these acquisitions, one of the things we told you was we did those because we wanted to have a credible platform to do bolt-on acquisitions. We were in Australia, probably had about $50 million of brokerage revenue, a very solid Gallagher Bassett claims organization. When we're trying to fight with Austbrokers and others for acquisitions, it was tough. We just didn't have a credible platform.
Same was true in Canada. We'd keep getting good small opportunities in Canada. We couldn't get them done. We couldn't get them across the line. Canada, great acquisition pipeline, nice bolt-on acquisitions that we're looking at. We've done four of them up there. New Zealand, we closed one just about two weeks ago. We've got another number of them. Again, small bolt-on acquisitions. Australia, again, a great pipeline. We'll probably be closing one in December, we're hopeful. That'll be a nice one to have across the line. Australia, New Zealand, margin improvement opportunities in Australia, soft market, we're working on that. U.K., about a $750 million business. $400 million of that is retail now. You'll recall we did Heath and two other acquisitions to build that platform. There's still integration work there.
I think when we talk, you could ask Doug specifically about the numbers we have, he can give you some guidance. In terms of probably one more year of having to do some real work on bringing the team together. Very happy with those acquisitions. Again, a nice pipeline of small deals, right now the focus in the U.K. is integrating that retail business. Our wholesale business, our specialty business in London is on fire. I think we've built out probably the best specialty business in the city, it's fantastic. Of course, our Gallagher Bassett business in the U.K. is very, very strong as well. You're going to hear today from, as Marsha said, all of our division operating heads.
I think that those of you that are familiar with how we do this recognize, as Marsha said, it's pretty darn informal. We like to keep it that way. Something I did want to talk about, I was very excited last week. Hopefully, you all saw this. Last week, I wrote to all of our employees worldwide. We've gone through an awful lot of growth over the past decade, but we remind ourselves every single day that the real game is making sure we take care of clients, that every single day we got to concentrate on the four things we're trying to do. Organic growth. You start organic growth by not losing business. If you put a hole in the bucket, it's just about impossible to fill it up.
Every single day, we got to get out and get after taking care of clients' needs. We're getting better and better and better at that every single day. Then we got to add new clients. We're a sales and marketing company. We go after new business hard every day. The second thing we're trying to do, as you all know, is mergers and acquisitions. It's very competitive out there right now. It's expensive in some instances. We're not going to chase the price. We're going to find people that want to join us at a reasonable price, or we will sit it out. We are looking to do acquisitions every day. The third thing is to become better from a productivity and quality standpoint. We want to do everything we can to be the best at issuing certificates, to be the best at doing proposals.
We believe we're getting there. Then the last thing we work on all the time, our senior management team, is our culture. Hopefully you noticed it, just a week ago, J.D. Power released a study, and we were ranked, Arthur J. Gallagher was ranked as the number one service provider in the brokerage space for large customers. Really just a credit to the team. When I wrote that note out to this group, I reminded them that this year in particular has been an unbelievable year for recognition. We were given the Forbes magazine's one of the country's best employers. We got the Ethisphere Institute's World's Most Ethical, and just in the last month, Strategic Risk in the U.K. named Gallagher as the U.K. Corporate Insurance Buyer Survey leader.
The reason I bring this up is. I think we all like recognition. We all like to win awards. What I'm really proud of is I can get up in front of you and talk about the investment and talk about the opportunity to grow with us to succeed in terms of stock price, et cetera, over the long haul. None of that really matters if we're not taking care of the clients. It resonates with our people. They understand it. They get it. When I'm done with you this morning, I'll go over to our office on Park Avenue and have a chance to address those troops as well and simply thank them for the good work that they do taking care of clients. I'm proud of where we've come from.
I am really, really pleased with the progress we have made in 2015, integrating the efforts that we did in 2014. As you will notice, I did not mention this. We have also invested in smaller operations throughout Latin America. We own about 21% of our Mexican partner. We have got small operations in Lima, Santiago. We are the largest broker in the Caribbean. We actually have no very large deals in our pipeline at all right now. The largest transaction this year was William Gallagher up in New England, in Boston. It is a $50 million shop. What I like is now with these global platforms, our pipeline can be substantially enhanced globally, and we still do not have to do any major big deal. There is not one on the sheet right now. With that, I will turn it over to you for questions and hopefully some answers.
If there is any area you would like me to address, I would be glad to do it. Charles?
I guess on that M&A front.
Let us get you a mic. This is the first time we have webcast this, we are going to mic you.
Chuck Sebaski at BMO Capital Markets. I guess on the M&A front, given your early commentary on organic growth, the likely challenges there, the soft market pricing that's underway, should we not expect pricing on potential deals to come down? You talk about 7.5 times, 7.5 times forward EBITDA into a soft market. How do you have confidence that that 7.5 times is going to be able to materialize, and what kind of discount do you look to get on the concern on market conditions there?
Yeah, the question is, do we think prices are going to come down? Unfortunately, this is cyclical in our business as well. The last time I saw something like this was when the banks decided that insurance broking is a business they had to be in, right? They pushed multiples to levels that were probably unsustainable, and in the end, they were unsustainable. Private equity right now, insurance broking is the flavor of the month. There's no question about it. They view this business as a business that can be highly levered. I'll share with you, it's interesting. Not all those deals work out. Now, some work out spectacularly, but not all those deals work out. When you lever a business like ours 8, 9 times, you better not slip, right?
When you get to a decent size shop, a William Gallagher, as an example, which was a gem of a property, no question about it. It was a jewel in the crown. If you want, you can have 25 bidders, depending on the process. Now, that's not what Phil and his team wanted to do. They didn't run the process that way. If you wanted to, you can get 25 bidders. Part of this, Charles, yes, I would say, market's softening a bit, interest rates ticking up a bit, currency's not so great. You'd think that some of this, but it's a competitive marketplace. People will ask me, okay, the stock is not its strongest peak. Why would you spend your cash on insurance brokers instead of maybe buying your stock back, right? It's kind of dear.
Why would you ever use stock if you need to in a transaction? My answer is very simple. You could take a pass on the William Gallagher agency in the Northeast, and it'll be sold, and you will never have that chance again. That is an unbelievable platform for us. It's proved out this year. They're just hitting the ball out of the park. They're fantastic. If you're going to decide you're in and out of the game, that's not going to work for you long term. I think we're doing a good job even being able to stand in front of you and say, on average this year, we're probably still around 7.5, when I will tell you, sometimes now we'll see pricing at 13, 14 times, and we'll just back off. It's like that's not our game.
We don't dilute. It doesn't always just follow logic. Yeah, Ryan?
Yeah.
Joe.
Thanks.
It's on.
Ryan Tunis, Credit Suisse.
Go ahead, Ryan.
Ryan Tunis, Credit Suisse. Just, Pat, listening to your commentary on the pricing environment, negative rate, I think you said down 5%-10% for larger-
On the larger accounts, yeah.
Just thinking about what's a realistic organic growth expectation headed into next year, because thus far, I think organic growth has actually been pretty resilient, even against a softening environment over the last year and a half. What's really different headed into next year, what's a realistic expectation for organic?
I'd probably say something on the order of one and a half. The question was, given the rate environment, what's kind of a realistic look at organic growth? I'm very proud of the fact. If you look at our investor information again, you can do that on our website, we have one slide that shows what we've done in terms of organic versus what the market rates have done. If you take a look at literally quarter after quarter after quarter for probably the last 28 quarters or more, we've ranked number 1 or number 2 in organic growth literally every quarter. Our team's out doing a good job of holding on to clients and selling new ones. A year ago, we were sort of four and a half-ish.
We're not seeing that now. I'm thinking for next year, probably more like 1.5%-2%. I have not seen. We've only had two years, if I recall correctly, in my career where we had negative organic, and I think that was 2008, 2009, maybe 2010 as well. Yes, Elyse?
Hi, thank you. Just going to the 1.5%-2% organic growth comment, I guess how would you break that out U.S. versus international? Then of the components, rate and exposure also versus potential new business and retention levels?
We're pretty darn good at mitigating rate. We do get a little bit of benefit from some economic expansion. It's interesting, even through the cycle, you can look at rate and economic activity. Doesn't usually impact our quarters by a percentage point one way or another. Our team does a pretty good job of if rates are going down, we tend to sell a little more, expand what we're doing for our clients. If rates are going up, we tend to push hard to keep underwriters from extending those prices. If you think about that organic 1%, 1.5%, you've just got to sort of say, all right, look, maybe we're going to on a trailing revenue basis, if we can write 10%, 11%. Take a $10 million branch.
If they can book $1.1 million up to $1.2 million of new, they're going to have some rate decreases, and they're going to lose some business. Typically, our lost business runs between 5% and 7%. If you see us, let's say we're down 1.5 points for rate. Let's say we're down six points for lost business. There's 7.5. If I did 10 trailing, I'm somewhere on the order of up 2.5. Believe me, that's a complete swag. It varies. When you've got 100-plus outlets around the world, some are knocking the ball out of the park doing 15%, 20% of trailing revenues. Some are starting off behind the eight ball. When you average it all out, it kind of gets to where I was. Brian?
Can you talk a little bit about the strategic opportunities and challenges with one of your partners now merging with one of your competitors?
With my partners merging with my competitors? Oh. Yeah, I think the large acquisition in the brokerage and benefits space, it looks like it makes a lot of sense on paper. I couldn't keep track of whether or not the pricing was right. It really doesn't impact us to speak of at all. As you know, we do partner with Liazon as our platform for our Gallagher exchange. Tower spent a lot of money for that platform, and they want to make it something that a lot of brokers and agents and whatever you're using. We've been assured that our relationship in that regard will be unchanged. In our business, that's very typical. It's not unusual at all for us to trade. If you take a look at Gallagher Bassett's business, Scott Hudson will be up in a little while.
90% of that business comes to Gallagher Bassett from brokers other than Gallagher. We do what we need to do for our clients. They're going to do the same. I have every confidence that that partnership will continue to work out. I think when the two of them get together, they'll be a good, tough, strong competitor, which is really what they both are now anyway. It's just two of them getting together. Paul?
Just a quick one. When you refer to the organic growth of 1.5% to 2%, are you just talking about the brokerage operation-
Yes. Yes. Thank you.
Maybe you're talking just about Gallagher-.
Gallagher Bassett.
Bassett, pardon me. Just so we have both pieces.
Yeah. Okay. The risk management segment, which is Gallagher Bassett Services, Scott will get up and give you a lot more detail. Really a unique offering in the marketplace, in my opinion, that we stand in a place that is, I think, different than literally anybody. What we're trying to be able to tell our clients and the insurance carriers is that if you hire Gallagher Bassett, the outcomes in terms of your claims will be better. Simply put, if you have a workers' compensation claim in the U.S. and Gallagher Bassett's adjusting that claim versus the XYZ insurance company, we believe that we will end up getting that claim settled properly for the client, properly for the claimant, but at a price that's better than is going on in the marketplace. Organic growth at Gallagher Bassett has been outstanding.
Our global platform there has been expanding very nicely. We're really strong in Australia, very strong in the U.K., of course, incredibly strong in the U.S. See great opportunities to continue to expand that. People have asked me many times, "Why are you in that business?" Our larger competitors, by the way, over the last 30 years, were in that business and got out. Why would we stay there? My answer has always been very simple. If there's something on the order of $1.5 trillion-$2 trillion of property casualty premium That floats around the globe spreading risk, right? Those numbers come from the Insurance Information Institute. The real cost of insurance is the claims, right? $0.60 of every dollar of premium ultimately turns into a claim somewhere.
If you're going to be really good at helping your clients mitigate costs, you better be really good at where all the money is, and that's in the claims. We really like that space. We're committed to it. We think it's great. I'll tell you, one of the things that's really been a great twist for us is that one of the fastest aspects of what Gallagher Bassett does is insurance company outsourcing. We'll take the claim work for an insurance company that wants to come onshore from Bermuda. They don't have to build out infrastructure. They can hire us, go get an underwriting team that they like, turn that underwriting team loose, and know that they've got infrastructure on the backside in terms of claim work, and those partnerships are growing extremely well.
I believe organic growth will be stronger as it has been the last two years at Gallagher Bassett in 2016 as well. Bob?
That's going to be stronger than 2015 or stronger than.
Stronger than the brokerage business.
You've got clean energy as a tax rate mitigator for the intermediate term. You're competing against Aon and Willis that have sort of a long-term tax advantage. Marsh is saying it's got to start thinking about what that means tactically. You're in a high tax state, in a high tax country. Are you going to let your successor worry about that issue, maybe years down the road? Or is.
Am I looking a little gray here today, Bob? Maybe the two of us could get. We're the oldest guys in the room, we ought to get a picture.
Is this something you're thinking about long term as to how you manage through it? Is there anything that-
The question's all about the tax advantage to investing in clean energy. We have 2009 plants and 2011 plants, so we have till 2019 and 2021 till those plants will no longer be able to generate the credits. At this point in time, we don't have any plans afoot to figure something else out. Now, if in fact our investment in ChemMod and their product is something that the federal government decides and the legislature decides they want to continue to have Everybody talks about renewable energy, but you're going to burn coal. It's not going away in the next 20 years. We know that this product makes coal cleaner, so we'll just have to see whether or not any of this is renewed or not.
We've been doing this now for almost 20 years because the first set of laws that we were able to do this under expired, Congress changed the rules a bit but extended it for another decade. We'll just have to see what happens. At this point, we don't have any plans to do something out of the ordinary. Did I answer your question more or less?
That'll do for now.
That's it. Yeah.
Kai Pan with Morgan Stanley. Do you see the merger acquisition on the carrier side impact your business?
The question is, do I see the carrier side acquisitions? Sure, it's going to impact our business. I'm hoping it's for the better, especially when you take Chubb and ACE, two of our best trading partners coming together. We know those management teams extremely well, and we've got very strong trading relationships with them. It makes us a stronger partner in a sense because you're putting two of our big trading partners together. That premium income that we now have with the successor company is literally twice as strong as it was before. Makes us twice as important a client to that management team in many respects, and that does help our clients. By the way, that does make a difference.
If you've got a solid trading relationship with the insurance carriers, and you have a problem on a client, and this is one of the things about Gallagher that I like. You're going to see Jim Gault in a minute. You'll see Dave McGurn. We're brokers. When someone from the field calls and says, "I just don't think the client's getting the right treatment here. Would you mind making a phone call?" Those phone calls get returned, right? The top of the organization will respond to us because we are a solid, large, good trading partner. Yes, it's going to impact us, I hope for the better, and we'll have to see where it leads, Kai. The question is too, now that you see one or two of these big deals happen, and look at the benefit side. The benefit side is unbelievable.
Do we think that there'll be others? Well, I can't look into my crystal ball, at the same time, if it does, and it continues to make us stronger with those carriers, I think that's a good thing for our clients. We're being told that a lot of the methodology of how we trade won't change. We'll see. Yeah.
Hey, Pat. Can you talk about your ability to and your commitment to utilizing the strong cash flow that the business is generating to keep the share count flat in 2016?
We hope to. Yeah. We've talked about this 100 times. You know my sentiment. I think we've generated a tremendous amount of cash. We don't have any huge deals on the boil. When we get to a point where we need to use stock to do acquisitions, I'm not going to back off from doing that. Just as we project out, Doug's right behind me, you can get into the numbers with Doug when he's up. We think we probably have sufficient cash to do the deals we want to do in 2016. I'll keep talking a little bit. We've got about 15 minutes of my time, just stop me anyplace along the way and put your hand up if you've got any questions at all.
When I look out in my crystal ball and I say, okay, Gallagher made these moves in 2014 to get the global platform that we have. Now what? Where's this thing going? We should do something on the order of $4.5 billion of revenue next year. That is really a strong position to play from. Interestingly enough, we know this now because we're able to get a lot more data than we ever have in the past. When we compete in the marketplace, 92%-93% of the time, we compete with a broker that's smaller than we are. It's only 7%-8% of the time that we're competing with Marsh, Aon, or Willis. When you think about that and you kind of look at, okay, what's all this mean, right? Sort of put this in the back of your mind.
Read an article two years ago in The Wall Street Journal that said, in the U.S. over the next decade, 70% of the companies in America will have an equity event. The baby boomers are retiring. They're going to sell it to their kids. They're going to move it to somebody. Right now, when we go out in the field, and I truly believe this, when our people go out to compete on an account, I think we should win 100% of the time. I think we've got the talent. I think we've got the knowledge. I know we've got the insurance company relationships, okay, 100% of the time is pie in the sky. We don't. We don't win it. Maybe we didn't have the right deal. Maybe the deal wasn't right. Maybe the market we picked wasn't right.
Most of the time, we're really good at that. Why is it that we don't make that client our client? Literally 99% of the time, it's because of the relationship. This is a relationship business. When I come in to take your insurance, you have to actively fire somebody else. I heard a great analogy, which I stole from a guy on a panel. He said, the difficulty about being an insurance broker competing is it's like going to a party of happily married couples and trying to pick up girls. They picked. You got to go convince them they picked wrong, right? What I see happening over the next decade or so is that these relationships are going to begin to sever a bit.
As the senior people that are in that account are handing these businesses over to the younger people, that relationship doesn't just carry on. If you're a good broker, you're smart enough to sense that, and you do everything you can to make it carry on. The simple fact is, if I played golf with your dad every weekend for the last 25 years, and you're now taking over the business, that's not what matters to you. What matters to you is whether or not your company is getting the kind of service and quality that you need. You couple that with what we've built in terms of our capabilities on the niche front.
When you take a look at the 32 areas or so in the property casualty world that we say we believe we're the best, construction, religious, not-for-profit, public sector, et cetera, et cetera, real estate, higher ed, I could keep going. Directors and officers cover those types of things. We bring resources to these efforts of competition that literally none of the smaller players have. That's one of the reasons our acquisition activity is so strong. One of the things we do is bring those partners in and say, look at this candy store. If you had all this to sell, do you think you could double your business faster with us than on your own?
When we get that right, when we get an entrepreneur that joins us that gets excited about that, we do in fact double that business faster than he or she, we would double without each other. I look out and I go, all right, here we are bringing 300 young people into our business this summer to teach them about what we believe is the greatest business on the planet. Now, they won't all join us, but let's take maybe 100 a year and keep putting them into the system. Keep doing the nice bolt-on acquisitions, there will be a larger one from time to time that will come along. Continue to build the platform and give the tools necessary so that, with electronic capabilities today, literally teams can form around the world.
You can have our best public sector person involved in a team and producing a public sector client outside of Auckland, New Zealand, that's happening. I look out there and I go, you've got aging baby boomers. You've got equity events with our clients. Those relationships are breaking down. Our capabilities are getting stronger. Our ability to take those capabilities and get them to the point of sale gets better every month. Shouldn't we be the long-term winner here? Shouldn't we be one of the few? Then you take a look at an industry with, if you add benefits, again, according to the Insurance Information Institute, there's something like $5 trillion of premium globally. That's all life, health, everything. If the global economy expands 2%, you get another $100 billion or so of premium that has to be generated. That's an incredible industry.
Nobody can do anything without insurance. You never get put out of business. I was very lucky just a week ago. I'm a member of a group called G100, and we were able to spend time with the people from Apple Computer in Silicon Valley. We had access to Really top talent. Tim Cook spent an hour and a half with us, and we had their head of operations, what have you. I'll tell you what, that's one impressive company. I mean, that is an impressive company. The scale that they have to deal with is mind-boggling. I've never had to worry about supply chains and things like that. It was a really good educational day. It was just a question and answer session. It was really, really good.
What I came away from that thinking is, my gosh, this is the most valuable company, if I'm not mistaken, in the history of companies. They just generate cash like crazy. They produce great products, but on a scale that is just unbelievable. Then I came away thinking, you know what? This is one of the most unbelievable companies ever in the history of people being organized companies. Yet it's all focused on just that computing product, right? I mean, it's just they have to get better and better at that with the watch, with the laptop, I mean, it just has to. Where does that go? I don't know. In our business, what I know is that economic activity is going to create premium, and premium is going to create opportunities. We had a great day.
Thanks, Pat. I think you've talked about in the past, trying to put in some efforts to get paid for services, get more consistency across the platform with commission levels, particularly now that you're a bigger global organization, could you update us on those sort of ongoing efforts?
Yeah. Jim Gault's up next. He can do it probably even better than I. I think one of the things with the data warehouse capabilities that we're building, now we're able to do some things and being on one agency system in the U.S., but also that data warehouse capability, we're sucking data from around the world in. Now we can do things like run a report for a branch that says, "By the way, the benchmark in trading with these people in general liability is 15% commission and you're averaging 12.
Go get your other two and a half points." Some of that is just traders being lazy that when I got into a bind, I cut my commission from 15 to 12, and I've just never gone back and said, "Hey, I need to get that extra three points." Lots of efforts going on in that regard. Lots of efforts. Another thing that we've done, Jim can talk about this, is we were kind of late to the party, I think we did it in a reasonable way, and that is looking at our data and selling it to insurance companies. That's getting really good traction.
If I could just sneak in one more. You touched on efficiency efforts. I was wondering if you could maybe expand a little bit more on some things that you might be trying to think about on the cost side to try and get more efficient, particularly if the environment continues to get tougher.
When you take a look at what our margin's done, and again, Doug can hit on the specific numbers, but when you look at what our margin's done over the last four years, I'm really proud of a couple things. The first is, if you look at where our margin expansion has come from and you look at our comp ratio, our comp ratio hasn't changed. We're still spending about $0.60 of every revenue dollar on our people. We've gotten more efficient. We have had layoffs in the past and what have you. When we've had to tighten our belt, we've done that. We're not taking that margin out of our people's hands. That expense ratio has been pretty steady. Where we've made the improvement has been all the other operating expenses.
We've gotten much better at managing our rent and our purchasing and what have you. We've gotten much better at space utilization. We've gotten just a tremendously amount better in our errors and omissions area. We were watching our E&O claims, that's our professional liability, this is about a decade ago, rising faster than revenue and headcount and earnings. We were just pulling our hair out. What is causing this increase? We got some help from some very smart outsized consultants, and it really kind of boiled down to the fact that we weren't doing a good job of checking our policies. Unfortunately, policies need to be checked because lots of times there's errors in them, and we just weren't doing a good job.
You'd get out in the field, and the location wasn't on the policy, and now you've got to fight with the insurance company, right? We have moved that effort to check policies to our center of excellence in India. Then following that, certificates of insurance, billings, blah, blah, blah, blah, this whole host of services, right? That has helped us drive down those other operating expenses. When I look out and I see, okay, it's a little bit tougher operating environment, we're going to have to be very cautious with what we do on the headcount side and the comp side, and we got to just keep getting better and better at what we're doing in terms of managing our own expenses on the operating side. To be honest, we're pretty much there.
I think our margins are literally second to none these days, and I'm proud of that. Yes, Sarah?
Sorry to interrupt. Maybe one more, Ken.
Hold on, Sarah. Get a mic.
I think previously you said that it'd be tough to expand brokerage margins if organic growth was less than 3%. If you have 1.5%-2% organic growth next year, would that imply margin contraction, or are there things you can do on expenses to keep it stable?
We're going to do everything we can to keep it stable. I don't want to see margin contraction. I don't see any margin expansion at 1.5%. We're going to fight like wounded eagles not to have it go backwards. Kai?
This is a large picture question. Do you see your business model on the broker side have been very stable for decades? Do you see challenges coming from either customer behavior or technology could disrupt your business model, something we observe on the personal side, especially for small commercial business? In the near term, are you making any significant investments in project technology or business model that could anticipating any changes that's coming?
Yeah. Jim Gault is up in one minute, and he can probably address that better than I. I'll just do it real quickly. We've changed our business model substantially over the last four years. Substantially. When you used to sell to Gallagher, the adage was, "Join us and just keep doing what you're doing. We don't really want to change a lot." Today, when people say, "If I join Gallagher, what changes?" We have to be honest and say everything. You are going to use our systems, you're going to be on Epic. You are going to use India. You're going to do things, we like to say it's a little bit like Burger King. When you get on the other side of the counter, the fries go in for five minutes, the burgers cooked this way, boom.
When you get to the front of the counter, you sell what you need to sell locally, right? We want those outlets to trade where they need to trade, but behind the scenes, we've spent a tremendous amount of money, time, and effort in changing how we do things. That does apply to small accounts as well. We are doing a whole bunch of efforts. We're building out our affinity space, that we hired a gentleman to come and help us buy into the affinity space. We're looking at affinity and small business as to how to do that more efficiently and to do it very profitably. Essentially take it out of the day in, day out operations of the branches that are doing upper middle market. Thank you all for being here today, and really appreciate your time.
Hopefully, you get some answers today and I hope everybody has just a wonderful holiday. Thank you for being with us. Thanks.
Thanks, Pat. Next we have Jim Gault, who is the head of our retail property casualty brokerage operations, and you'll have him for about 45 minutes. Same drill. Thank you very much, and I'll turn it over to Jim.
Thanks, Marsha. Good morning, everybody. I always sit in my room before I come down, and I jot down what I'm going to talk about. I was going to talk about the USA and Canada, New Zealand, Australia, the U.K. I was going to touch on some of the recognition that Forbes and J.D. Power and the Ethisphere, then I was going to talk about how we compete against, 85% of the time we're competing against brokers that don't have the bandwidth and the power that we do. I was going to talk about market softness and organic growth. Pat took care of all of that. I've been following Pat for 40 years, I should have known better.
Let me give you just a couple of things, maybe a little bit of, Pat alluded to it, a little bit more detail on what he just about went through on what we try to do to improve efficiency, because I think it's important. We're really proud of where our franchise has come over the last 10 to 12 years. We were in around 2002, 2003, 2004, our message was to acquisitions, and we had become more of a company made up of acquisitions than of original Gallagher offices. When we went public, we had about a dozen Gallagher offices that were homegrown as a private company. When we went public from 1984 till the early 2000s, we had flipped the company upside down, and the distribution on the P&C side was driven way more by acquisitions. Our message was, keep doing what you're doing. It worked.
It worked for a long time. It worked up until we realized that at that time, we were about a $400 million operation, with a margin in the high teens. We realized that there was no way to get to the $1 billion, $2 billion, $4 billion if everybody was going to be allowed to do what they want to do, how they want to do it, when they want to do it, and I think Pat touched on it. One of the things that came to the forefront first was our errors and omissions was a big problem. It was growing way faster than revenues. It needed to be attacked. It needed more standardization, and we needed to have an actual way to manage it. That was kind of the genesis of taking a look at our entire operating model.
Over the last some 11, 12 years, we have done everything we can to revamp the entire operating model from top to bottom. I can tell you that now 12 years later, when you look at where we were and where we are today, the results I think are pretty impressive. I gave a presentation to our U.K. branch managers a month ago, and this is exactly what I talked about was because they're going to be dealing with the same thing. In the U.K., it's a combination of three or four large brokers that we put together, that were doing things the way they always did it, and many have made up of acquisitions. We know exactly where they are. Ironically, their size of them and the number of employees, locations, is almost identical to where we were 12 years ago.
Tom Gallagher asked me to talk to them about what we had done to reorganize and get more efficient in the print we're going to use. We're rolling out in Australia, as well as Canada to a certain degree. Canada's a little bit better organized, even though they are several acquisitions. Of course, New Zealand would be last of the four major international locations where we would roll out this operating model. Just to give you an example, on the IT side, everybody had an IT guy in their office. They had to have someone there because if their computer broke, I had to have my IT guy come and fix my computer. There was no one connecting the dots. There was no consistency at all in how we were doing things in IT in the field. We, if you may, nationalized that.
We took out half of the number of people in the field and managed it better with a national group, which was just the start of it. We built a document management system, an electronic file cabinet. We were doing acquisitions right after 2000, 2001, 2002. Acquisitions were already paperless, and we had paper all over the place. We still have paper, but not as much paper as we used to. They were saying, "Wait a second, I don't want to go backwards. I like doing things without paper." We recognized that we were going to have to figure out how to become more electronic, and we created an electronic filing cabinet, which is the first part of it. We went to a single agency system a couple of years ago, which has made a huge difference.
That's why we can now build the data warehouse that Pat was talking about before. We know more about every insurance carrier and what we're doing with them than we ever did before. We used to be in a position where we'd go to a meeting with a carrier, they would supply us with the information because we didn't have a simple way to roll up what our premiums were, what our average commissions were, where we were placing the business. It was a very laborsome task because we had to go to location to location to location. Now having everything on Epic gives us, if you may, a one-push-the-button, one-stop shopping to get all the information that we need, it's become a very powerful way for us to work with the insurance carriers. We've developed a workflow tool.
This workflow tool is used by our middle office. What it does is It's like a highway where all the files can be electronically viewed, worked on, and left in a spot where someone can look at them. This is important because we have over 1,000 employees in India that do a lot of our backroom work, anywhere from checking policies, which is where it started, to now they do loss ratifications, they set up submissions, they help with marketing, they take the quotations, and they'll load those into a pre-designed proposal, and they'll issue a proposal on behalf of the producer. All of this is because we built this workflow tool, which is minimizing the number of touches, and it also has certainly ramped up the quality because of the minimizing the number of touches and people that work on files.
On the finance side, again, we've expanded what we're doing in India to support our finance group, doing all the transactional accounting that we can now take out of the branches. We created a national accounting center, where we now do all of our billing and all of our national accounting. Again, that removed a lot of headcount, but at the same time, made us much more efficient and gave us one set of standards to build a platform to now be the billion-dollar-plus organization that we are and to be $2 billion in the next five to seven years and $4 billion again and again and again because we now have the right platform. In the middle office, we didn't have the same titles and job responsibilities because of the way we did acquisitions. There were all kinds of different titles.
There were hundreds of different titles for the same job, and people in offices did essentially the same thing with a different title. The pay scales were completely different. Over the last three or four years, we've embarked on, and I've talked about this before in these sessions about what we call CSO, which is customer service organization, is our project to get the middle office on one platform in terms of titles, in terms of job descriptions, in terms of what they do, what they give off to India, what they keep, and it's showing great progress over the last couple of years in terms of efficiency and utilizing the electronic tools and our agency system that I just discussed. Small accounts, we pulled all the small accounts out of our branches, which tended to get as much service as the big accounts.
We now have those centralized in 13 locations, which we will eventually collapse into one to two, and we have one leader for that group. We are working with the insurance carriers to use their select centers better than before. They don't always take everything that's in those, so we're also working on ways to find placement for the stuff that's got a little bit of hair, even though it's a small account. We're going to make a lot of progress on managing that small account business much better, which tended to be very labor-intensive and with a margin drag. On the production side, we launched salesforce.com about four years ago as our CRM. It's getting more and more traction with our staff in terms of utilization and for reports for us, but let alone helping producers produce more business.
We've added a bunch of tools onto Salesforce that help them do marketing campaigns and to stay in touch with prospects and clients. It's given them much more visibility and on-time, real-time connection with their clients and prospects. Salesforce has been a real good add for them and for us in terms of understanding our business and knowing what's in the pipeline. Finally, because we've done a lot of this stuff, I came up as a branch manager in Gallagher, and all of those things pretty much fell on me as a leader to make sure they got done, whether it was the accounting side. We had an accountant, but I had to watch over that. I had to watch over more over the support staff and the production staff, and if the receptionist didn't show up one day.
What we have tried to do over the last 10 years is to take all of these things, as I've listed them, and create national centers and excellence and ways to standardize it so that the branch manager gets more time now to do what they're good at, because almost every one of our branch managers came out of the sales ranks and still sells every day. What we want them to do is spend 75% of their time working with their production staff on retaining their clients and finding new clients, and I think we're making some progress there. We've also added some, and Pat alluded to this as well, we've added some tools and some things to help them market their business better. We are selling data to insurance carriers, a handful of them. It's increased their hit ratio.
We're finding better matches with our clients that are renewing. We also, and we think we're the only ones that are doing this, at least we're being told so, in the last three or four months, we've built a front end, what I call front end, out of Salesforce. I think our bigger competitors have sold and are selling renewal data like we are, but I don't think anybody is selling or is showing new prospect data to insurance markets to get a match. As I said, it's new in the last three or four months, and we're going to be right at the time where we'll be able to see how much success we've had with that.
I'm pretty excited about it simply because I believe that if you help a producer write a piece of business by being the market that really wants it and comes through with the right pricing and terms, you're going to get that same producer next time he has or she has an account that's tagged on a renewal, instead of saying, "I don't know if I want to move this," is going to say, "Wait a second, I got to show this to this market because they helped me out on this new piece of business." There's a lot of things we're doing. As I said before, all those things we're doing, we're going to transplant the same sort of ideas and systems to the U.K., to Australia. Those two need it the most. Also in Canada, and eventually New Zealand will get some of it.
New Zealand, it's a very well-run operation, we're not going to mess with success. What we're going to try to do is make sure that they're utilizing the things that they can. Let me just give you how well this has worked, then I'll open it up to questions. When we started this back in 2000, I think I said 2004, and remember, during that, from 2004 till today, we also had the side circus of Eliot Spitzer and the regulators that were on us, which made us internally focused. We also had the recession for a couple of years. We managed to fight our way through all of this and all of those things and get them done. If you look at where we are today, just 10, 12 years later, our revenues are up 2.6 times. Our EBITDAC is up almost four times.
Our margin is up nine points. We've less than doubled our employees, 1.7 times on employees, and we've got three times as many locations. We're pretty proud of what we've been able to accomplish. Fortunately, we had 10 years to do it, and the other guys don't. We're going to try and push them to do it in a lot less time. Pat didn't cover all that, so at least I got to tell you something he didn't tell you. With that, I'll open it up to any questions anybody might have. Yeah.
Pat talked about rates being down 5%, 10% on large accounts. Would you be able to further delineate that? Is most of the weakness maybe in the oil and gas sectors? I know construction's still a big line for you. Is that getting actually stronger with a lot of the activity that's happened both in housing and non-res?
Well, I'll answer it this way. According to the Insurance Information Institute as of this week, property, umbrella, BI, GL, work comp, and surety, they've all gone negative. Now, not significantly, but for the last nine months, they have been flat. Now they've dipped a little bit below. Where it goes, who knows? Rather than do it by industry, those covers are becoming competitive. On the flip side, D&O, employment practices, and auto are getting increases. I guess a different way to answer it simply is it's a mixed market right now. I would stand with, I would support what Pat said. Of course, it's always good to support what the boss says. I agree that we're going to see good risks that if they're in the market, they're going to get some reduction.
Of course, we have what we call a soft market playbook, which is to find ways to help the clients through the improvement of the soft market. Also, a lot of them gave up cover or limits or haven't paid attention to developing risks like cyber and things. When they see a reduction, we're saying, "Listen, let's have a discussion about you used to have $100 million on your umbrella, you only have $50 million. Do you want to go back? What about cyber? We've talked about cyber. You have a cyber exposure." We could be moderately successful in terms of expanding the portfolio that we have with our clients to mitigate some of the reduction. On top of that, and Pat also mentioned it, the analytics we have now on what we're making per policy, it's kind of powerful stuff.
We know what the high water mark is with every carrier, each policy. We know what a branch is getting. We know it down to the producer. We can engage the producer well in advance of the renewal to say, "Hey, the average commission on this account has been 11%." This market pays on average 15%. Why is that? What the producer generally will say is, "Well, in order to get the account, I had to cut my commission a little bit." You say, "Well, that was five years ago. You've been going for five years this way. Let's see what we can do about getting it up to the right level." I think we're having some good success with that as well.
These are all tactics you use during the soft market to make sure that you try to hold and continue to build your revenues.
Thanks. Charles Sebaski at BMO.
Thank you.
I guess the question is, you talked about a lot of standardization methods here that you've used to improve the core operations of the business, and you've got large international acquisitions you look to get onto this. How much runway is there? If the entire platform was fully utilizing all of the standardization methods, the centers of excellence, et cetera, what's the best-case scenario of what that is on a margin perspective? It seems like you're kind of part of the way there, and now you've got these new parts of the business that might still need to be integrated. If I looked at 2015 margins are X, and at 2017, 100% of the organization is fully implementing all of these methodologies, what does that mean for the business margin?
Well, I'll answer this way. 2017 is too soon. We wouldn't get it done by then. For example, in Australia, we just revamped the entire leadership group. There's a lot of work to be done there. In the U.K., they're probably a little bit better, a little bit further ahead, but there's a lot of work to do there as well. Not so much at all in New Zealand. You've got two of the four pieces. Canada's margins are pretty good, too. They could be tweaked up a little bit. I would say that in the next three to five years, it took us 10. It's going to take three to five years to work our way through each of these to see how well they adapt.
I wouldn't see leaps and bounds, but I would say that we should have some steady improvement over the next several years in those areas. Where we are now in the States, quite honestly, I don't want to push it any further because our competitor that has a margin that's as high as ours, if not higher, we believe doesn't invest in what it takes to fully service your clients, and we don't want that to happen. We're very comfortable where we are in the States. Yeah.
In hindsight, could you talk a bit more about the integration in U.K. retail segments? What kind of challenge you're facing there, and what sort of action plan there is that can improve the operation there?
The question was, could I talk about the U.K. integration? I would say that the U.K. integration, it depends on how you define that. The management team is together. They know what they have to do. Our CEO of the business is Stuart Reid, and what's Michael's last name? Michael Rea is our COO. Both guys come out of the brokerage business with some significant past experience in running businesses. I've met both of them. I like both of them. I think they're going to do a really good job for us. I met them both in November, and Stuart had been on board for probably two weeks, and Michael had been on board for probably two months. It was very neat to see how they already knew all the issues.
Each of the management teams came in and made a presentation to Pat and Doug and me on their budget for 2016, and it was really good to see what a handle they had on it. They know exactly where they are in such a short period of time. I feel real good about that, which is why, again, presenting this whole operating model to them and the management team was perfect timing because they're coming together, and then we gave them sort of the blueprint as to, here's what your future is going to look like. I feel good about it.
Can-
Yeah.
Could we just get your thoughts on the trend of contingent and supplemental commissions next year?
I would say that what's interesting is the trend right now is that we're doing pretty well on the contingents. The supplementals are, I would say, fair. The reason I say fair is that they're not changing in terms of the agreements we've had. One of the first signs I saw that the market was changing was earlier this year, where some of our business was moving out of supplemental carriers, high-paying supplementals to ones that don't pay as much, which told me that there's obviously some pricing issues that are going on. I think that trend may continue. I don't see any fall off a cliff or anything like that. I think our supplementals and contingents will be strong again next year. We'll see. If pricing goes softer than we think.
Contingents will go down, but that'll be a year or two down the road, and supplementals they may go back up again. I don't see any major change in that, so either way. Anybody? Yeah, Charles.
What's the market size for you or potential on selling data to carriers from your book, from your data warehousing pricing? You talked about doing it for prospects as opposed to bound covered. Maybe not just 2016, but conceptually, is that something that continues to grow, or is that just obviously not the large part of your business, but is it meaningful?
It's very meaningful. I think that there's a lot more runway. I will tell you, Charles, we're being very careful about this because, first of all, there's a lot of runway because when we meet with the top management of the carriers every year. You take Travelers, for example, right? Travelers is one of our largest markets, and they are heavily involved in the placement of business in probably 15 offices. We've got 120 throughout the U.S., right? Factor in some of the other offices as they could be. Getting someone, and I'm not talking about Travelers, just using it size-wise and the potential that's out there, a market like Travelers, if they wanted to get involved in this, would love to get into another 15 offices. That's not a single story. There are dozens of stories like that.
We've got carriers that really aren't well represented with us, that are represented with us outside the U.S. that want in because they know us well. They have significant books in Australia, New Zealand, and the U.K. that want to have a shot at looking at the renewal side of our business. I think that there's real potential. The thing that we want to be careful with is that we don't want to cannibalize our supplementals and contingents, because you can do that. If you get too aggressive with it, we want to make sure that we're treating the carriers right, and respecting the relationships that we have. Then if they're buying the data, we want to make sure they match up well, and the offices that they get into, they have a legitimate shot.
One of the things we're doing that I think the others that sell data are not doing is we actually have an accountable system. We don't just show them the list, they tag it, then you go back to the branch and see what happens. What we do is we actually have a liaison that works with the market, works with the branch, tries to understand, was this an opportunity? If it was, great. If it wasn't, why not? We've added a layer there that the other guys don't. We think that if we're going to partner with them, we have to be able to explain why something happened or didn't happen. We're a little bit more plotting in how we're doing this.
I think the bottom line is, yes, there's a lot more potential as long as we continue to manage the process right. Yeah.
You had mentioned cyber as a growing opportunity. I guess, in terms of how much that could potentially add for Gallagher, and just in general in the industry, how big are you seeing that as the market evolves, I guess if you want to put some numbers on the cyber market today? Is there another example outside of cyber where you see some type of emerging risks, and an opportunity to place additional coverage in the industry?
Good question. I think that cyber right now is probably the biggest single opportunity out there. Again, I might get this wrong, but I think I'm right about this. Current premiums projected for 2015 in the U.S. P&C industry will be about $2 billion in cyber. In five years, it'll be $7.5 billion. If you think about it, cyber's been around for, gosh, 10, 15 years, and it's taken that long to get to the $2 billion. To grow by $5.5 billion in the next five years tells you that the world is waking up to the exposure of cyber. Clearly, I think that's the single biggest product line out there that insurance buyers are beginning to recognize and have to deal with. As for others, I don't think there's anything. There are, but nothing comes to mind as quickly as cyber. Anybody else?
Well, really coffee hour? I don't know. It's like, anybody got any other questions?
Well, let's talk a little bit more about gains we're making in our niche market.
Okay. Well, Pat touched on the fact that 90% of the time we're competing against, which we know out of Salesforce, we're competing against brokers that are regional or local brokers. This goes back 15 years ago, more than that, 16 years ago. We built our niche practice groups clearly with that as a differentiator for us. It's simply is this, we've connected now throughout the world. The best people at whatever the industry group is or the product line is. For example, energy. Over the last 15 years, 10, probably less than that, because we really weren't big in energy until probably 10 years ago.
Between our London capabilities, our folks in Calgary, our folks in Houston, and Midland, Texas, in New Orleans, and as you would imagine, where the hubs of energy are, we've connected those people so that we can have the best people at the point of attack. We've got about 20 different practice groups, 22 different practice groups. Most of them are industry-based. It's healthcare, real estate, public entity, higher ed. What else? I said transportation. Then you've got product lines like D&O or executive lines, property, and large casualty.
The whole idea is that when a producer has an opportunity that fits into either the product line or the industry group is to either be an active person in that group, which is more often than not the case, or to raise their hand and say, 'I need some help on this.' We get the best people there. It's very easy to do today with technology and with webcasts and video conferencing, and that doesn't mean we don't get on a plane to a large prospect and see if we can put a team together. We just, for example, wrote a big chunk of a U.K. bus company in Chicago. The U.K. guys had a prospect, transportation guys got together with some of our folks in Chicago that are good at transportation.
They collaborated together, worked on the prospect, and landed a prospect that five years ago, 10 years ago, well before we did this, we adopted the niche practice groups we probably never would have written. It's really a cornerstone of what we do. 80% of our clients, we can identify them as attached to some niche practice group. We believe that that expertise is greater than any of the smaller or regional brokers behind us. As Pat said earlier, we think that we've got the edge by having the intellectual capital in the middle market and upper middle market that the average competitor doesn't have. Over here? Where?
Thanks. Just based on the additional products and the revenue synergies that you would bring to an acquisition, I know there's no average, but if you could talk and just frame it somehow, the additional value, if you look at an acquisition and it's worth 100, after you add in revenue synergies, better ways to do things, how much value do you guys add?
I'm not sure how to answer that. Let me answer it this way. First of all, when we do a deal, we expect them to have a strong margin to begin with. We want them to adopt our ways of doing things, but we don't get that or expect much margin pickup when you talk about efficiencies on an acquisition. We don't do deals that have single-digit margins. I will tell you on the flip side, where we get real leverage is on the utilization of our expertise. I probably told this story before, but it bears telling again. We did an acquisition two years ago right now in San Diego, the G. S. Levine Agency, and Gary Levine is the principal there. It was a nice size shop, good margin, but Gary was and is really the leader of the operation and the real key salesperson.
He joined us, and within the first six months, he'd written a construction account, a not-for-profit, and I think a healthcare account. By the end of his first year, he told me he had produced $600,000 of revenue that he would have never produced if he'd stayed as G. S. Levine. That's not a unique story. There's a lot of stories like that, and that's utilizing our services. He tapped into each of those niche practice groups. One was in Chicago, one was in San Francisco, one was in L.A., and he's in San Diego. That was his first year. His second year, he did an extra $600,000 that he said he would have not ever produced if he stayed at G. S. Levine.
When I asked him, he and I were out one day, and I said, "You're obviously pretty excited." He brought his son-in-law in the business and all that, and he said, "Yeah, I came down to Gallagher and another acquirer you all know." He said, "Their pitch to us was, 'Well, Gallagher's going to give you a playbook. They're going to make you do things. We're not going to make you change.'" He looked at me and he goes, "I needed a playbook. I wanted to change. I knew I'd taken this thing as far as I could, and I wasn't going to take it any further. I needed a Gallagher to give me the support and the expertise to take it to the next level." I think there's a lot of entrepreneurial brokers out there that are at that same sort of level.
I think when we see them, they tend to go to a peak, and they got to reinvent themselves in some ways or find another or just join somebody. I think we're a great choice for that. Hopefully I answered your question. Yeah.
I was wondering if you could talk a little bit more about your outlook for organic growth. You've talked about pricing outlook, but maybe some of the underlying assumptions that you think are going to be driving it, economy exposures, then any other color you can give us around areas by account size, if areas are weaker or stronger, or by a particular geography in the U.S. or something like that. A little more color around sort of the outlook would be great.
I don't know if I can go account size or whatnot. I would say that in general, any account that has got good loss experience, that hasn't been in the market for the last several years, that does test the market, is likely to see some price reduction. I did put some numbers here together on economies. I thought it was kind of interesting that it appears to me that you got kind of flattish economies in the major areas where we practice or where we are located. The U.S. will be 2%-2.5% next year GDP. So will the U.K., so will Canada, so will New Zealand, so will Australia. All within that range. They're all fighting headwinds of low. They're not headwinds necessarily. They're all got low energy prices.
In some cases, you've got, for example, in Australia, there's been a slowdown in the exports to China, same thing with New Zealand. I think the Chinese economy is still going to grow at 7% or 8%, so comparatively speaking, it's down, but it's still okay compared to what we would like to see, or what they would like to see. I think when you look at that, you look at inflation, you look at unemployment, we're all kind of in the same boat. I think that no matter where you are in the world, and it's a generalization in the areas where we are, I think the conditions are going to be pretty much the same next year.
I think that there's going to be a softening in the market, a mild headwind. Yet there are a lot of things we can do to fight that headwind and continue to grow the business. I mean, we do have a soft market playbook. Yeah.
Do you see more retail presence in Latin America, South America? Is there a playbook for expectation of expansion geographically there?
Okay. The question was in Latin America expansion. Yes, there is a playbook, but it's one that's going to play out slowly. We've got a good foothold there in Latin America. We've got some good partners down there. We're looking to slowly continue to build. Quite honestly, we've got a lot to do in terms of integrating those other large acquisitions we've done in the last couple of years, I think we've made great progress on that to the point now where we're, as I started my talk, is that we're now to the point where we got them set up to start actually converting to all the real Gallagher operating things that we do to drive a better margin and build the business better. We got a lot to do with that.
You'll still see us probably do a deal or two down there, as we continue to mature with those new ones that we've done, you'll probably see us do more and more. As Pat likes to say, we're a company of evolution, not necessarily revolution. Okay. That's about it.
Any more questions at all for Jim?
Hope you all have a Merry Christmas and a Happy New Year. Thanks.
All right. Thanks, Jim. We're going to make a little adjustment to the agenda at this point in time. We're going to have Dave McGurn up here next. He's going to be speaking with you for the next half hour or so. Dave McGurn is the head of our wholesale brokerage area, he's making his way up here now, and I will just turn the floor over to him. Thanks, Dave.
Thanks, Marcia. Good morning, everyone. As Marcia said, I am responsible for our domestic wholesale operation. Doug has asked me last evening to kind of do a two or three-minute overview of one of our other operations. I will start there, then I'll start talking about RPS. I'll try to give you an overview like I've done in the past then open it up to questions, whether it would regard RPS, the wholesale marketplace, or the rate environment that's taking place in the E&S side of the business. Let me start with, excuse me, an operation that within Gallagher we call Artex. Pat mentioned this morning in his opening about Bermuda, and Artex is based in Bermuda, only because the leadership is in Bermuda.
It is in fact a captive manager that has been getting high single digit, low double-digit organic growth over the last five or six years. Most of that growth, interestingly enough, coming from onshore captives as opposed to offshore captives that you might find in Bermuda, in the Cayman Islands. The reason that growth has taken place, in my view, is what we specialize in Artex is taking small to medium accounts that traditionally can't find alternative risk placements in the marketplace that we normally trade in, taking those accounts and putting together in either a group captive or a homogeneous captive to allow them to utilize larger deductibles, larger SIRs. Most of the businesses that fall into those categories are run by very highly successful entrepreneurial type people who want to do something different than trade dollars to dollars with an insurance company.
They look to form these smaller captives, these association captives, to find a long-term solution to whatever their insurance needs may be. It's been highly successful. Artex has grown to be the third-largest captive manager in the world, behind Aon and Marsh, but you won't find us in a large single parent. We have a couple large single parent captives, but most of our work, as I say, is in the association and the micro captives that operate day in and day out today. We end up, I think if you aggregate everything, we have about 1,000 clients in captives, and the growth potential, even in a soft market, as I say, because of the buying attitudes of these entrepreneurs, is outstanding. I'll leave Artex and turn to RPS, which I know a little bit more about.
When we get to the question and answer period, I already told you what I already know about captives. If you have questions, I will promise to get answers from you from somebody else, or I will make it up as we go along. RPS, Risk Placement Services, is Gallagher's wholly owned wholesale intermediary in the U.S. We have been operating since 1997. We are the fourth-largest wholesaler and the largest MGA in the U.S. We do business with over 13,000 brokers in the U.S., including Arthur J. Gallagher. Arthur J. Gallagher is our largest client, but almost 77% of our business comes from people other than Gallagher. Most of what we do for Gallagher is on our brokerage side of the business, which is the hard-to-place individual accounts, and more appropriately with our business relations with Jim's team is the catastrophic property.
We do a lot of catastrophic property in conjunction with Jim's team. RPS does four things. The first one is traditional E&S business. This is where we help retail brokers in the U.S. find a home for a risk that might have a little bit more hair on it than the traditional risk, whether that be product liability, catastrophic property, products recall, pharmaceutical manufacturers. Those type of risk, my people find solutions for retail brokers in the U.S. The second thing we do is what I will serve as the underwriter. Some insurance carrier has downloaded all the responsibilities to underwrite, quote, bind, and issue policies, and coordinate claims on the street for that insurance carrier. We do everything the insurance carrier would do except for one thing. We do not take risk. We do not take any underwriting risk.
We take the responsibility from the carrier and work day to day with retail brokers throughout the U.S. For that, we are rewarded with higher commissions, of which we download to the retail broker, keep some for ourselves. The real caveat and the money-making organization at the end of the rainbow is to do profitable underwriting. If you do profitable underwriting, you are rewarded by these carriers with some very lucrative profit-sharing agreements. My underwriting team on the MGA side, which is pretty large, walks that thin rope every day, that rope of production on the left hand and underwriting on the right hand, making sure that they don't throw away their underwriting criteria to put something on the books so that we can maintain our contingent liabilities or our profit-sharing liabilities on a day-to-day basis. The third thing that we do is program management.
Very similar to what MGA and binding is, but it is normally done on a specific class or type of business. For example, one of our offices in Washington State does nothing but bicycles. Anything related to bicycles, whether that is bicycle manufacturing, bicycle accessories, bicycle road trips, bicycle camping trips. If there is a bike involved, they have one, two, or three different programs that they underwrite on behalf of carriers to solve the bike manufacturing insurance problems. The fourth thing we do, and we do this on a much smaller scale, is what I will call standard lines aggregation. Many of you have heard me say this in the past. Starting about 10 years ago, the insurance industry started to cancel the contract of small, independent rural agents throughout the United States.
If you were in Bangor, Maine, and you owned an agency that had maybe $4 million in premium, and you had eight insurance carriers, today you may have one insurance carrier because seven of them have canceled your contract because your volume wasn't big enough for them to provide the work necessary on a cost-efficient basis. Those type of small agents have come to our office in New York, and we have taken their small personal lines and their small commercial accounts, brought them together, and we now market and underwrite on the behalf of the Travelers, the AIGs, the Hartford insurance companies. We take these standard line accounts, and we provide market for these small agents. Very profitable business. There are a lot of aggregators throughout the United States. It is a tough business to get into.
We have been lucky enough through mergers and acquisitions on the Trevor side to pick up a very to expand that in other parts of the country. Our RPS is actively involved in mergers and acquisitions. We will do about four this year, probably around $25 million or so in annualized revenues. The wholesale marketplace, similar to the retail marketplace, has been getting more expensive over the last couple of months or so on the M&A basis. We are very careful to keep our opportunities at the same multiple levels between 7%-7.5% as we do the deals. If it gets too high, we as well walk away from those opportunities. All of our mergers and acquisitions come in the MGA, binding, and program business.
Very few of them will come out of what we call the brokerage business because the brokerage business is so geared to individual producers that it is very difficult to tie all individual producers into the book of business owned by the seller at that point in time. That is a quick overview of the operations. From a market standpoint, and when I say these market conditions, please mental note in your notes that I am talking about the excess and surplus lines marketplace and not the traditional marketplace that Jim Gault's people run in. However, having said that, the market conditions are somewhat similar. Property is down, and when I say property, I mean catastrophic property or property that is located on the coast that may be small in nature but still has coastal exposures, was down in 2000 and, where are we? 2015, probably 10%-15%.
We do not think it'll be down that much going into 2016 for two reasons. We believe that consumers, buyers will buy, as Jim was talking about earlier, a higher limit going forward than they did. They've gotten rate reductions the last two years. Their budget constraints are loosened a little bit, so they will probably buy more limits moving forward. They're all extremely nervous that we haven't had the wind blow for almost eight years in many jurisdictions in the part of the country. They want to make sure they're adequately insured going forward while it's still quasi-inexpensive. The casualty side of the business, the traditional general liability, the umbrella basis, I call it static. If you got a good risk, it's down five. If you got a bad risk, it's up 10. It's all about individual accounts.
The D&O, the E&O side is very consistent with what Jim discussed earlier in his marketplace. Our transportation business, there are more people driving trucks than there were a year and a half ago because there's more widgets being manufactured. There are more trucks on the road. There are also some very large losses that have occurred in the trucking business over the last two years, so we do see some rate movement and carrier extraction in that business. The one thing I'll point out, and many in this room have heard me say this, before I turn it over to questions, is our largest operation is the MGA binding side of the business, and I'm really robust on what I see in 2016 and 2017. Not because I see huge rate increases, but I see a pretty good economy.
The reason that helps my business on the MGA side of the business is a fair share of the business in our MGA and binding business is what I call new business, new business. That is new business starts. Back in 2008, 2009, our organic growth pretty much disappeared because there were no new businesses starting in the United States, and we were losing business in our MGA after a three to five year period. Let me stop there. Why does that occur? Traditionally, when you start a new business, if you open a pizza parlor in the strip mall down the street, you have no experience in running that business according to the standard lines markets. The big carriers, The Hartford, Chubb, AIG, will not underwrite unless you've been in business for three years.
Those new businesses turn to the E&S community and the MGA binding community where they can have their coverage placed as they get that management experience. Traditionally, after three to five years, we will see X% of that business turn to the standard lines. Some of it will stay, particularly if it's a bar or a restaurant, will stay in the E&S business. As that business turns out, we hope to have double that turning in as a new business start. In a good economy that happens, it's happening today, we see a lot more new business starts in the last two years than we did in the five years prior. That will help the MGA side of the business. With that, I'll open up to questions.
If we fall with questions not coming to place, I'll give you a good example of what we're doing to provide cyber liability coverages to our clientele that I think you might find fascinating. With questions, anybody. Brian?
You mentioned about you're seeing growth because there's an increase in new businesses, are you seeing any headwinds in your business with more of the admitted carriers taking some, not admitted business usually?
Yeah.
I mean, this usually happens at this point in the cycle when things soften. Are you seeing that history repeat?
Yeah, seeing some. Here's an interesting phenomenon, it was probably like this when most of us met two or three months ago. The market is still what I will call unpredictable. The insurance agent that's out there are making submissions to their standard line carriers and to the E&S business because they don't know who's going to win because it's so unpredictable. Our submission flow is up, our hit ratio is down a little bit. Nothing to be concerned about. The answer to your question is, we see some movement to regional carriers, but that's very geographically pocketed. Somebody in Ohio might be competitive, and we lose 5% business there, where we write 10% new business in Illinois for some reason. It's very pocketed in that regard. It's December 15th. We have two weeks left to go.
I hope I don't kill this, but we're having a very good year from organic growth, a very good year from a retention standpoint, and I think that will hold up for the end of this year. That's traditionally, as you said, Brian, the last quarter is the one you always get frightened about because people try to get market share to carry them on, and we're maintaining that. All right. While you're thinking of questions, let me share with you, because there was interest with cyber liability. Part of the job of a wholesale intermediary is to somehow develop vehicles that make insurance agents' life easier out in the street. Having been an insurance retailer for years, one of the common threads we all have is we're lazy. smarter and better for them to serve their clients.
About a year ago at this time, we started an endeavor to build a cyber liability platform that was quick, easy, and simple. Jim mentioned earlier that it was $2 billion in cyber liability premiums on an annual basis, that have generated as a result of the last 10 or 15 years. The reason that liability premium is so low compared to what goes on in the world is because it was too cumbersome to buy cyber liability. If you had a client that wanted to buy cyber liability and you provided him a quote and he said, "Bind that for me," he would then get a 15 or 20-page additional application that he would have to complete in order to bind coverage. We took that antiquated side and moved into the technology realm and said, "How do we make this easier?
More importantly, how do we make it better for our retailers to sell this product every. Large risks have cyber exposure, but so does the florist down the street, so does the pizza parlor. Some of those small little businesses, if they have a cyber attack, probably most of them, if they don't have protection, will be out of business because the rules and regulations will make it so costly and so cumbersome for them to communicate to their clients and change what they're doing for the betterment of their clients, that they won't last. What we did, we had a very clever man that works for us that went out to the marketplace and got a number of carriers to agree to a cyber liability platform, that all you needed was four questions answered.
This program or this platform is being used with our 13,000 brokers across the U.S., and in nine months, we've bound 2,500 policies. Now, are these huge policies? No. People are now buying the right coverage for their businesses. It's all done for us electronically. Nobody touches it. An agent comes to the website, an agent or a broker comes to the website, fills out the four questions for his risk. He quotes, gets a quote, delivers that quote either in person or electronically to his client. His client says, "Bind it." He goes back, he presses the button, he gets his policy in less than a day, normally within less than two hours. The thing is bound, delivered, and out the door, and human hands other than the brokers have not touched it. We believe, from our business standpoint, this might be a game changer.
Why do we say that? What we try to do is to get more opportunities from our brokers on a day-to-day basis. We have a number of brokers out there that we do one or two risks with. If we can make that four, make that eight, make that 12, you know the old Doublemint mint gum commercial. If we can keep getting more business from the same source, our business will grow exponentially. Yes.
Hi. I'm curious, what are the four questions, and who are the carriers that are participating in this?
Because we're out in the street today, I prefer not to answer that question, but they are all A-rated carriers that we have put together on a line slip.
The four questions, you don't want to tell me?
I'm sorry?
The four questions that are part of the.
Hold on. I don't know. If that's important to you, I can get that to you somehow, but they're very simple questions.
No, I just.
Like what their turnover is, what their location is, what they're using from a systems standpoint. They're very simplistic things. I mean, at the end of the day, a florist exposure is taking credit card numbers from you when you order your flowers for your wife on your anniversary. You don't need to know much more. It doesn't matter whether they assume those credit card information is left out on a desk at night, because they probably are, so they take that into consideration. Yes, Mike?
In the press, there is a large wholesaler potential for sale. Are you guys would be interested in terms of your price range?
Yes. The answer to your question is yes. There is a large one for sale now. If I told you if we were interested, I'd have to kill you. I can't answer that question other than to say that the interview process was with New York last week, and we weren't there.
Okay.
Okay? That was because of the risk of the purchase on that group of business, not in general. We are in the wholesale business. We would love to do a larger risk, but our sweet spot is that $5 million-$10 million in retained revenues, and we pretty much have stayed there in the past.
Okay. Follow up on that, in terms of size, do you think there's scale benefit getting bigger for your wholesale business from here, much bigger from here?
I see our business growing. Are you talking about our business or the M&A bit? Our business? I see our business growing in similar fashion that it has in the past, we've been reasonably successful. Got to remember, we started our wholesale business in 1997, so we're only 17 years old. I would say from growing from nothing to being the largest MGA and the fourth largest wholesaler, we've done a pretty good job in that vein. As Gallagher, as Jim's team becomes more acquisitive, that helps my business because he's my largest client. Not that we get business as a laydown from Jim. We sometimes have to work twice as hard to get the business from Jim, but at least we're in the same family. We do business with 13,000 brokers.
Even though there's consolidation going in the marketplace, I don't see that changing a lot, because every time you see four or five of the small guys come together, there's a producer or two that don't want to make that move together, and they stay by themselves and form a new retailer in Bangor, Maine, as I used the example before. It's still a source of business for us. Does that answer your questions?
Yes.
Yes.
Traditionally, the wholesale business has been most vibrant when there's discipline in the commercial lines marketplace. When the discipline starts to wane and commercial underwriters expand their risk that they're willing to accept, the wholesale market contracts. I mean, Pat was giving us a sign that contingents are going up, which suggests that the commercial underwriters are a little bit hungrier for business-
Yeah
may be expanding their business. Your outlook was pretty optimistic and didn't seem to allow for concerns that the overall market may contract at this point in the cycle.
Yeah
traditionally. Does the old cycle dynamics still hold true or are we in a new paradigm?
I'm not sure they do. I should say they do to a smaller degree than they used to. This is why I'll say this, Bob. For us, most of our clients, i.e., our retailers, are smaller in nature out of the top 25. Those are the individuals that have had market contractual losses that need solution for their clients. I think if I look at a wholesaler today compared to what it was 20 years ago, we're not as traditional E&S as it used to be.
It used to be you went to a wholesaler because they got you to markets that you might not be able to get to, where today you go to a wholesaler based upon his relationship with a market, whether it's program or MGA or open brokerage, where they have a better relationship than you and can get something done with the market or something of that nature. I think the wholesale business isn't as cut and dry as it was 20 years ago. It's more of a mismatch of opportunities to bring buyers and sellers together, if that makes sense.
Yep. That's one side of the trade. You work two sides of a trade. You need demand and supply.
Yeah.
What's happening to the carrier, the Excess and Surplus carrier market? Is it growing, expanding? Is it easier to place tough risks into this market?
Yeah.
Maybe you could talk about how that's changed in the last five to 10 years.
Yeah. I will have to answer the question this way, Bob. On the MGA side of the business, there's probably five to 10, probably leaning towards the 10 side, that are really good at giving a pen to MGAs and doing the business. I believe that those people are traditional E&S carriers, but their appetite for risk has expanded over the time, and they're probably as close to becoming to a standard line carrier as possible, other than you have to do Surplus Lines taxes.
You don't have to work quite as hard to place these.
Oh, no, I wouldn't say that. I think my commissions keep.
You always have to work very hard.
going up because I work so hard.
Just on the market.
It's not a question of hard. It's a question of building the better relationship or building the better platform. The goal is to build, as I said earlier, a platform or a business that you want to be the one-stop shop for that retailer in Poughkeepsie, New York. That if he doesn't have a market solution with his two markets, we want him to come to RPS, and we will get the job done for him, whether it's in our open brokerage, our MGA, our program side of the business. We will take the responsibility to get your account placed if you give us the marketplace to get it done.
Thank you.
You mentioned that your biggest client is Jim, just the P&C brokerage. I'm curious, what percentage of Jim's business that goes to the wholesale market goes through RPS, and to what extent is that a growth opportunity?
It's a massive growth opportunity. I'm making round numbers because I don't know the specific. I think we probably get from Jim's operation maybe 40%-45% of what they place in the wholesale marketplace. There's still a 65% that's available. As I said, as Jim becomes more acquisitive, that potential grows every year. A side story that'll make you laugh. In 1997, when Joel Cavaness was president of RPS, and I decided to start the wholesaler, one of the main reasons we started and decided, we looked at Gallagher's data at that point in time, or lack thereof, I will say, and we had about $250 million placed with other wholesalers that at the time were owned by larger retailers.
We just said, "That's stupid." Why are we placing all our business through an Aon wholesaler or Marsh wholesaler so they can take our money, reinvest in their company so they can kick our ass out in the street? We decided to change that and build our own wholesaler. Today, I do a lot more business than that $200 million, but there's still 10 times the potential of getting business from Jim in that same area. I expect that we will gradually grow in that vein, but it's a tough row. There are people who have wholesale relationships for 10 or 15 years. If I was back on the retail side of the business, there were wholesalers that took my butt out of the fire by solving problems for me with my clients that I would not leave, and you have to understand that.
There's a lot of reasons to use a wholesaler. It's just not because you're family-orientated. You have to provide services that provide client solutions, and when a client has a claim, the wherewithal to help settle that claim better than the wholesaler next door. Does that answer your question? Yes.
A competitor of yours, Aon, has done a large line slip in the London market, a 20% deal. Does that change the competitive dynamic at all of your business in terms of your relative ability to bring solutions to clients compared to what they're doing?
Yes. First let me say, Aon is a competitor of Gallagher. Aon is not a competitor of RPS.
They-
because they're not in the wholesale business.
Well, they are-
I know where you're going. Yeah.
Aon Wholesale is in London.
The answer to that question is, could. That's a two-sided coin. On the positive side for the clients, you now control one-fifth of a placement, so you can hopefully get better coverage and better terms and conditions. On the other side of it, you pissed off 20% of the markets that were participating. If it doesn't work out for you on the good side, are those markets going to be willing to come back in and participate on the back side? The answer is probably yes, but you don't know. I guess here's how I'd answer the question as it relates to Gallagher, and I know that you can do a lot of things with reinsurance and everything else, okay? History will show us that a lot of retail brokers who took risk, it didn't turn out for them favorably in the long term.
I don't foresee us doing it. Is it an advantage or a disadvantage? I don't know at this point in time. I know if we were to do it as RPS, I would have to disclose that to Jim, and Jim would have to disclose that to his clients because that's the way we operate in full disclosure, that somebody within the Gallagher family is participating on a risk-taking in that involved. And again, they're probably laying all the reinsurance off of that. They're just trying to grab a little bit of control. We'll see if it works. Anybody else? All right. Like everybody else before me, thank you for your time. Happy holidays and safe travels back to wherever that may be today. Thank you.
Thanks, Dave. Appreciate it. Next up, we have our benefits consulting area. We've had a little bit of an agenda change with this. Jim Durkin's flight did not make it in last night. In his absence, we have Mr. Rick Strader, who is a divisional vice president of that area, and he's going to be discussing the Employee Benefits Consulting and Brokerage operations, as well as some information on insurance exchanges. Having said that, Rick, I'm going to turn it over to you. You have the next 45 minutes or so.
Thank you so much. Good morning. I know Jim Durkin would like to be here. When he and I spoke late last night, he had spent six hours at O'Hare trying to get here. For all of us who have had that pleasure, the prospect of not showing up and not being here after that investment in time, I know was frustrating to him. Gallagher Benefit Services is a full service benefits brokerage and consulting firm. We have over 3,500 employees in more than 180 locations in the U.S., in Canada, and in the U.K. The primary focus for GBS is mid-market, and mid-market defined broadly as 100 to roughly 5,000 employees, albeit we have a lot of clients that are significantly larger than that, some in the hundreds of thousands, and we certainly have a lot of clients that are below 100.
The business is a very profitable business. The EBITDAC is north of 25%, but we are focused on growth, not continuing to increase the margin itself. That growth focus is twofold. One certainly is M&A, and the second is organic growth. From an M&A standpoint, we had another strong year in 2015 with 18 mergers for north of $100 million, both tactical and strategic mergers. Examples would be solid benefit guidance out of New Jersey, which has a strong pharma background. That's a key area of interest and concern for many of our larger clients because it's an enormous expense. Integrated Healthcare Strategies, which is focused on HR and compensation consulting for healthcare. Healthcare is a major practice for us, and Integrated Healthcare Strategies does business with a number of hospitals and large physician groups around the country.
Burns-Fazzi, Brock out of Charlotte, which is focused on executive benefits, non-qualified deferred compensation. Just as some examples of some of the strategic mergers that we made in 2015. From an organic standpoint, there are two things that are really a focus. One is continuing to aggressively look for talent, and to grow the organization from that standpoint, as well as strategic thought leadership. We recently released our 2015 benchmarking survey. This is the third year for that survey, and we are now the largest employee benefits survey in the marketplace, with over 3,000 participants. That survey, not surprisingly, showed that among the key concerns for employers is cost control and attracting and retaining talent. Which is a nice segue to talk about the exchange business, which is a key part of that organic growth strategy.
If we ask an employee how much healthcare costs, what medical insurance costs, the typical response is, well, whatever their portion of the premium is, right? If we ask an employee, how much does it cost to go to the doctor, the response is typically what their co-pay is. There's a complete lack of understanding and a complete lack of appreciation for the cost of employee benefits certainly for healthcare. Kaiser Permanente earlier this year reported that the average cost of medical insurance in the U.S. today for a family is over $17,000. At current trend in the next 10 years, that could be in the mid-30s. Average household income in the U.S. this past year is $53,500. Now, that's not employee income, that is household income, and it's been flat to declining for the last four years. What's wrong with this picture?
We have an issue that cannot be addressed by adjusting co-pays and deductibles. The only thing that is going to really help us control these costs is to engage employees more in the process and to be fully transparent with them so that they do understand what the cost of insurance coverage is. That's part of the key focus behind the private exchange, and that's why we continue to talk about exchanging the way people think about benefits. We have seen good growth this year. We have 87 clients on the Gallagher Marketplace, and certainly a very strong pipeline for 2017 already. We are seeing significant interest because employers can control their costs. Employees, when given full access to a broader array of coverage and the tools to make the elections that are right for them and their families, enjoy the process. They appreciate their benefits far more.
Frankly, we end up making more money in the process because we see that employees, on average, will buy down about 4.3% from an actuarial value standpoint. There's about a 2-to-1 relationship between premium and actuarial value. So it's an 8%-9% reduction on a premium basis. The average employee is buying down coverage. Some buy up, others buy down. But on average, there's about an 8%-9% reduction on a premium basis. Those dollars then are being reallocated by employees to purchase other benefits, ancillary and voluntary benefits that are appropriate for them. Because of the decrements that are baked into medical coverage and the fact that the ancillary and voluntary benefits are flat from a compensation standpoint, there's a boost in revenue for the broker and the consultant. This is a win for all constituents.
That's one of the reasons why we're so excited about the private exchange. Liazon continues to be a key partner for us from a private exchange standpoint. In fact, we signed an agreement to extend our prior agreement with Liazon. It gives us greater flexibility of creating a more customized platform for us. We're very pleased with that. However, we've been very transparent with Liazon as well, and we have acknowledged that we will provide additional options other than the Liazon open enrollment engine on our platform in 2016. In fact, Alan Cohen and I. Alan was also one of the founders for Liazon. Alan and I were doing a seminar in New Jersey, and the last question that came up was, do we have to use Liazon?
We have said that a primary reason for opting to work with Liazon is because they have great, smart people, they have tremendous experience, and we believe that they have the most sophisticated, best decision support in the industry. They are not always going to be the right solution. We're going to provide alternative open enrollment engines to our clients. Those engines will range anywhere from BenAdmin, lower cost, lighter decision support, to a Liazon type of a platform and in between. That will allow us to tailor our solutions for our clients based upon our clients' needs, which is consistent with what we're telling our clients that they need to be doing relative to the benefits with their employees. There is certainly a significant shift that is taking place. We believe marketplace relative to the definition of exchange.
That definition is going to broaden and broaden fairly significantly. We're moving from exchange to consumerism. We're moving from employer-based programs to B2B2C. We are moving from group platforms to e-commerce. As all of this evolves, I think we're going to find that we can more effectively continue to address the needs of consumers, both through the employer and outside of that employer relationship with products and services that are not necessarily linked to open enrollment itself. You will see the development of a front end for the Gallagher Marketplace and again, a much broader definition of a private exchange for us. In keeping with that, we have just recently signed an agreement with GoHealth. GoHealth will provide benefits for those who are part-time employees, 1099, pre and post 65 retirees.
It will give us an end-to-end solution to be able to provide services to all of our clients. I think the other point that I would make, and then I'll stop for questions, is that as we continue to look at this space in terms of human capital management, and we talk about the expanding of the definition of what is an exchange and what are we providing to clients, we're going to find that there will be an increased emphasis on integrating other services such as payroll, talent acquisition and management, and employee education. I think the message is view the concept of an exchange much more broadly than the narrow definition that we heard originally. I've heard people say recently that the concept of an exchange is old news.
I wish it were. If it were truly old news, then we would be at that point where everybody said, "Okay, I need to be doing this." We're getting there, and it's starting to happen very quickly. As we continue to evolve the definition of exchanges and continue to broaden the offering of the exchanges, I think we have an exciting time ahead of us, certainly for our clients as well as for us. Let me stop at that point. Yes, sir.
Thanks. Sean Dargan from Macquarie. If the Cadillac tax is repealed, what do you see as the impact on the demand side of the equation for the shift to private exchanges?
McKinsey said, about a year and a half ago, that they believe that the shift to exchanges would occur in three tranches. The first would be based upon financial duress for the client. The second, interestingly, was predicated upon a need to attract and retain talent. I think that's an important concept because it's suggesting that we have to begin to treat people differently, so I love that piece of it. The third was Cadillac tax. Frankly, if the Cadillac tax is either repealed or deferred, I'm not sure that it's going to make a dramatic difference on demand. It may affect timing. This is not something that's going away. This is the world according to Rick, which doesn't make it right. I cannot imagine that this is suddenly going to disappear. The math that we talked about earlier still is there, regardless of the Cadillac tax.
It may impact timing a bit. I laugh when I hear people talk about, well, is it going to be 20%, 30%, 40% of the market that eventually migrates to an exchange? I think that's the wrong question. I think the issue is I don't know what the timing is. I don't know anybody who has a crystal ball that can tell you, okay, it's going to be by such and such a date. I find it inconceivable that at some point, and I'm not talking about 2030, that we won't see 90% of the market shift to it because of the fact that it's not working unless we engage and involve employees in the process and impact trends. Yes, sir.
On that concept, on the basis of the exchange business, and as you've said here, the first one being financial duress, it seemed like conceptually one of the thoughts in managing this expense was managing the construct from a defined benefit to a defined contribution standpoint. As you laid out before, the escalation of cost, that doesn't really solve the problem, right? If everyone goes to an exchange and goes to a defined contribution, it doesn't solve it. It doesn't get there. If everyone goes to an exchange, doesn't there have to be something done with the system? Is there really a difference if it's an exchange solution or a traditional benefit solution here?
At some level, without a broader industry change, I guess I don't see where the solution is at some level besides at the margin of getting some companies to be able to just theoretically cap expense at some point.
Yeah. It's a great question. The potential challenge with defined contribution, particularly with a company that's under financial duress, is it can become a pure cost and risk shift to the employee. If that happens, I think that's a failure because keep in mind that you still have to attract and retain talent, right? How do we keep it from being a pure cost shift and a pure risk shift to the employees? Making certain that we provide full transparency, first of all. This is what things cost. People are always shocked when they go on COBRA, and they say, "What are you doing to me?" The employer's not doing anything. Those are unsubsidized rates. Full transparency so people understand what things cost. Far greater choice.
It's not one or two plans or maybe three plans, it's a half a dozen, 10 plans, 15 plans, and then the decision tools so that you can make the choices that are right for you and for your family. If we went around this room and went through that process, I can assure you that we will have 50 different solutions because your solution and my solution may be very different. That becomes important because now I'm more engaged in that process. The reason that we're seeing an average reduction year one, this is first year plan migration of 8%-9% on a premium basis, is because some people are saying, "I want to buy that more expensive plan," and other people are saying, "No, I want to buy down the coverage." Think of it as car insurance. Once upon a time, we had $100 deductibles.
Remember those days? You may not. Today, very few people have those low deductibles, but you have the flexibility of doing that. That's the value of the exchange. As we go through this process and we engage employees more in that, we're adding advocacy. We baked that into our platform. We did so on purpose because we wanted to make sure that you not only could buy the benefits that are appropriate for you, but you can actually utilize them. You can use them the way they're intended to be used. You can become a better consumer. We baked in cost and quality transparency. We announced an agreement with Healthcare Bluebook to do that. Healthcare Bluebook was a great choice because we can not only handle self-insured, but we can handle fully insured, and many of the other solutions don't handle the fully insured option.
As a consumer now, you have tools that will help you make intelligent decisions. You've got to go have an MRI, and it could be $350 or $3,500. If you're engaged in the process and you have the tools and the MRI is identical, you're more likely to say, "Well, I'm going to opt for this $350 MRI as opposed to the $3,500 one." I'm losing my battery pack. As a result of that, we believe that we'll impact trend. If I can prove, and when I can prove that I can impact trend, I can go back to the carriers and say, "Now, here's my book of business off the exchange. Here's my book of business on the exchange. I have X% differential from a trend standpoint.
I want a lower baseline for all of my clients that are on the exchange platform." One more point. We did some very simplistic modeling. It gets far too sophisticated very quickly if we try and account for all variables. I took an example of a 500-life firm with an average premium per employee of $10,700, which is about what the average is in the U.S. today. We assumed an 8% trend on the medical, the premiums are increasing 8% per year. We assumed a 5% increase in employer contribution each year. There's a 3% shift to the employees, right? We assume no improvement in trends, the only thing that we assumed in year 1 was an 8% reduction in premium because of plan migration. Does that make sense?
My actuaries actually were suggesting that we assume 9%, the sales guy is saying, "No, I only want to assume 8." What we found was that over a 5-year period, if nothing else changed, that there's a $5 million savings, a cumulative $5 million savings. $1.3 million of that accrued to the employees, the balance accrued to the employer as a result of that. By the end of year 5, the employees were back to where they would be from a premium standpoint if we had not had this plan migration, but they would have, on a cumulative basis, saved $1.3 million. There is a significant opportunity for us. The brass ring here is engagement of the employees. That's really what we're shooting for.
It seems like the cost driver there, though, that you're expecting is the employee finding the $300-
The $350 MRI versus the $3,000 MRI in your scenario because the broad context of medical costs hasn't changed. The only thing that's changed is the consumer advocacy where you expect the employee to find the cheapest option because it's their dollar. Is that conceptually correct? Is that really where the dollar savings would be in the medical cost trend to the carrier that gets them to engage in this? That's a key part of that. Again, it's consumer engagement. Begin to think more as a consumer, right? Make those intelligent purchase decisions. That then has an impact on trend. Keep in mind, in the analysis that I just described, we didn't assume any improvement in trend. We didn't take into account any of those potential savings.
That's the 8% in the migration to the new plan.
Yeah.
Where did that 8% come from if it wasn't from the consumer advocacy?
The 8% comes from the fact that some people will buy more expensive plans, other people will buy less expensive plans. People will tend to buy plans then that are tailored to their specific needs. The value of the decision support is, sans of the decision support, people will either tend to do one of two things, buy the lowest cost plan or the lowest deductible plan, right? Neither of those may be accurate or appropriate. I could make the argument that if you have a chronic illness, serious expenses that you're going to incur, you actually may be better off to buy the lowest cost plan, even though you have the greatest exposure from a claim standpoint because of your stop-loss. You're going to hit the stop-loss anyhow. Lower your premium costs. You're going to hit your out-of-pocket max, and you're better off.
That's where the decision support tools come in, and by wrapping voluntary benefits around it. I know people tend to think of voluntary benefits as something that's unimportant. Frankly, you may be better off as a consumer, I may be better off as a consumer by assuming a higher deductible and theoretically more risk exposure in my medical plan and offsetting that risk with selective voluntary benefits. If I have a family history of heart attack, cancer, stroke, I can buy a critical illness policy and help offset that risk. If I have young kids that are very active and constantly getting hurt, I can buy an accident policy and offset that risk exposure at a much lower cost than taking that low deductible on the medical plan. Does that make sense? Yes, sir.
Two questions. First one is, could you talk about the volume of consulting projects you did for your clients in anticipation of the adoption of private exchange over the last few years, and if that volume is going to drop down, if the adoption rate is going to slow down in near future?
I'm sorry. Say the first part of that again.
Assuming you're doing a lot of consulting projects for your clients, right? Anticipating helping them to make decision to switch or not switch.
Okay.
I just wonder if the project will be slowing down.
Okay. Good question. The fascinating thing for us, when I originally modeled the exchange business, I assumed 20% new clients, new names, and 80% existing clients, because you can obviously reach out to your existing clients much more quickly and more easily than you can the new opportunities. To date, about a third of our business are new names to the firm. We have an enormous opportunity to continue to reach out to our customer base, and to certainly work with BSD to fill in the white space as a firm. I don't think there is any kind of a risk in the foreseeable future that we'll run out of opportunities with our customer base.
Okay. Second question. Do you see any competition from the technology startups such as Zenefits?
Zenefits is really in a totally different space. I wouldn't necessarily look at Zenefits as a competitor. They're certainly focused on the small end of the market. They'd like to go upscale. You'll have to talk to Zenefits about their business model. Will there be challenges from others for this space? I think so. I think everybody's going to continue to look at this and say, "How do I get involved, and how do I get engaged in this space?" This is not just about selling a technology solution. It's not about selling a transactional product. It's about a very consultative process. Frankly, I don't think many firms can handle that well. I don't want to be naive and bury my head in the sand, but I'm not terribly concerned about a technology solution being or supplanting us. Yes, sir.
We talked about some headwinds in the insurance brokerage business, when you think about the benefits business and the growth profile in 2016 versus 2015, it sounds like pretty steady, or can we even see some improvements there?
Well, I'm bullish about the opportunity vis-a-vis the exchange because the exchange creates an opportunity for me to get out and talk to existing clients and talk to prospects. When we talk about the exchange, because of the fact that we're not talking about just a product, but about a broad process to bring in our team to do consulting around defined contribution, to bring in our actuarial team, because particularly on a self-insured account, if you don't have us work with you to make sure your plans are priced correctly, you could be very disappointed, very unhappy, right? There's an opportunity to do that. There's a tremendous opportunity to do communication consulting. I look at the fact that there seems to be a genuine awakening now. I mentioned we have 87 clients. We have those 87 clients in 31 of our offices.
We're beginning to see a broader penetration of our internal staff, and I think a greater awareness for our clients. I'm very bullish based upon the direction that I see the exchange taking us.
Outside of the exchange, how do you see the growth trends?
To some extent, that's going to be dependent as it always has been upon employment in the U.S. As we continue to see people being put back to work, certainly full-time employees, then there's an opportunity to expand the benefits business. With the individual platform, as I mentioned, with GoHealth, certainly those employees who are not eligible for the group medical suddenly are a terrific opportunity for us as well.
Thanks.
You bet. Yes, sir.
I understand the exchanges. Kai asked about technological tech new entrants. What about carriers? Are carriers thinking about vertically integrating this?
Yeah. One of the impediments initially to the exchange business was the carriers themselves. The carriers were not terribly excited about, instead of offering one or two plans, offering a broad array of plans. For the most part, they've gotten their heads around that now. They understand that we price for the risk. That's really not a barrier, albeit there is somewhat of an artificial barrier that's in place with some of the carriers who understandably, and if I were putting on a carrier hat, I would try and set up my own platform as well. The business is going to be very sticky, and I think the margins will be very good for those carriers as a result of that.
As a broker, I'm looking at it and saying, "Why do I want to necessarily tie my client to you as that particular carrier?" I don't want it to be so painful when I have to move my client away from carrier A to carrier B. The front-end platform that we're in the process of building could give me the flexibility of actually utilizing some of those carrier platforms, it could conceivably further expand our opportunity to work with a variety of carriers in ways that will be very positive from their standpoint as well as for ours.
Do you see carriers having a platform that they open to other carriers? For example, we see that in asset management where some asset managers have mutual funds platform.
Yeah
there are third-party funds too in that platform.
Yeah, it's a great question. I'm hard pressed to see the carriers saying, "Hey, I'm Aetna UHC, come onto my platform." I can't see it. When you talk to the carriers about their platforms, they all want all of their ancillary lines on their platforms. They don't want anybody else's ancillary lines. There's some movement on the ancillary, but on the medical, I don't think that's going to happen.
Can you talk a little bit about your thoughts on cross-selling? How much, if any, cross-selling goes on between your benefits business and the brokerage segment and retail brokerage clients?
Yeah. Not enough. This is not unique to Gallagher, frankly, it's not unique to the insurance business. Cross-selling is a big nut. In fact, I think vis-a-vis the exchange concept, that's frankly one of the reasons why exchange adoption has been slower than any of us would like, because in effect, it represents a cross-sell. There are three impediments to cross-sell, whether we're talking about insurance or whatever. One is, if I'm being asked to sell something that's outside of my area of expertise, it's outside of my comfort zone, I'm reticent to talk about it. Number two is because of the fact that I'm not an expert in that particular area, I need a subject matter expert that I trust that is going to be able to address those issues.
The third is that if I'm going to cross-sell, I'm a fairly rational person from a business standpoint, what's my upside risk from a comp standpoint versus my downside risk, or my opportunity rather, versus my downside risk if I lose that block of business or that piece of business because the cross-sell didn't go as it should have? That being said, we have continued to work on education. We will continue to have those conversations. Wally Brice, who's in charge of sales for BSD, we just had a phone call this past week, again, talking about our strategy for cross-selling with BSD. We're going to continue to do that. We continue to make investments in subject matter experts, and we've added some additional incentives to people to make certain that those cross-sells are taking place. All right. Well, thank you very much. I appreciate it.
Like everyone else, I will wish you happy holidays. Thank you.
Thanks, Rick. We're running a little ahead of schedule, and we'll just keep moving along. Next up will be Mr. Scott Hudson, who is the head of our third party claims administration, et cetera, business called Gallagher Bassett. You'll have the next 45 minutes, Scott, so I'll turn the floor over to you.
Fantastic.
Thank you.
Thanks, Marcia. Morning, everybody. Gallagher Bassett. What I'll do here is take you through just a little bit of a primer on who we are, what we do, what's going on in the market, what we're seeing from the competition, and then some of our major initiatives. Like everybody else, I'll turn it back to you guys for questions. I do just want to quickly mention two guys I have with me today. One of the things we've been doing over the last couple of years is bringing in a new complement of leaders into the organization. Dave Gordon, our Global Chief Marketing Officer, is here, and we also have the head of our U.S. operation who took over just this past summer, Jay Sinha. Gallagher Bassett. Let me go through a couple of things on the financials. We're approaching $750 million.
That's about 75% here in the U.S., 25% outside. If you translate that into the number of people, we're just now probably passing about 5,000 folks. Still a fair number of offices. The way the people break down, the people out there handling claims, roughly the same in terms of the breakdown
For the revenue, probably 3,700 of those are in the U.S. Outside the U.S., we probably got close to 1,400 people. The majority of those are in Australia and New Zealand. We do have a sizable group in the U.K. that's growing, and a small operation up in Canada. In addition, like everybody else inside Gallagher, we've got roughly 150, maybe to 200 people that are dedicated to Gallagher Bassett in our India service center. We're in the claims management business. We don't take risk. We're in the business on behalf of our clients, whether they be a risk management client or a carrier, providing claims service and taking a fee for that. In terms of the type of claims, 65% still remains workers' compensation. The rest of it is in the general liability space, probably evenly split across the variety of liability lines.
We do a nominal share of commercial property. Not big, but it's something that I think as we look into the future, that could potentially grow. I always like to just share a few statistics in terms of the number of claims that we handle. We will bring in a typical year, this past year, and we're growing, probably close to 850,000 claims, pay out maybe in the neighborhood of about $9 billion in losses. If you were to go back and talk to any of the carriers, you would find very few in the U.S., in particular, that have an operation of that scale. We're a big deal in terms of the size of the operation, of which, and we can talk in a few minutes, that brings a fair number of advantages. Scale does bring advantages in the claims business.
In terms of who we serve, think of it as we've got really four distinct markets. Kind of the bread and butter, the long-standing clients of GB have been the large commercial entities with risk-sensitive programs. Big companies, Whole Foods, McDonald's, United Airlines, UPS, Waste Management, are the type of companies that we serve there. We also serve public sector clients, State of Connecticut, Miami-Dade Public Schools, smaller municipalities. Those entities have somewhat unique needs, but it's still a prominent part of who we are. Insurance carriers is the third group. Pat mentioned it earlier today. That's probably one of the faster-growing parts of our business. This is when we walk in the front door of a carrier and say, "We believe that we can help you out in a way of providing a quality claims service, potentially that provides flexibility beyond what you have today.
In some respects, we think we actually provide a better overall experience for your client, your insured, in combination with driving down the overall loss experience." The fourth segment would be alternative market type clients. Dave McGurn was talking about MGAs. We actually have a very sizable captive book of business, which actually has been growing significantly over this past year. When I talk about each of these businesses, this has been a significant shift that's underway inside the organization. If you go back three or four years ago, we may have a single individual serving different types of clients. Today, we're building distinct operations for our commercial entities, for our carriers, for our captive clients, believing that that will put us in a far better position to be able to deliver quality service to them.
A lot of times people ask me about who our competition is. It depends on where we are in the world. Here in the U.S., there are independent, strong TPAs by the likes of Broadspire, Sedgwick, York. Some smaller regional TPAs that we compete with, oftentimes with the public entity business. Some of the carriers have TPA subsidiaries. You've got ESIS underneath kind of ACE Chubb. Constitution States under Travelers. Liberty has Helmsman. Probably one of the staunchest competitors is we're just trying to, in a lot of cases, convince clients to use us on an unbundled basis, so we're competing directly with the carriers and the value proposition that they provide. If you move to the U.K., go across the pond, you'll see more often that we're competing directly with carriers.
Law firms oftentimes over there actually handle claims, so we find ourselves going head to head with them as well as some smallish TPAs. If you go down to Australia, the TPA marketplace, organizations like ours really isn't that well established. We're going head to head primarily with the insurance carriers that do handle claims on an unbundled basis. There's a couple of smaller TPAs. Xchanging does have an operation down there. There's a company by the name of EML that also has an operation. For the most part, when it comes to the TPA space, we're in some respects kind of the only game in town. Our business model. Let me just take you through four steps here. The selling process. Most of the deals that we're doing are fairly complicated in size and scale.
Our average size client is in the neighborhood of probably $350,000-$400,000, but they may go up to here in the U.S., $10 million when you get into the carrier business. Some of those clients are much larger than that, and our large public entities down in Australia are considerably larger than that. When you think about the selling process, it usually is elongated relative to maybe other types of businesses. We may see a process that is as short as three months. In some cases, it may be 9-12 months, usually involving some large RFP that we get in, we're putting some sort of response together. There's usually some sort of sales presentation. Lots of times people want to come and kick the tires on our operations. They'll visit AJ's branches and see what's going on within the operation themselves.
If we win the deal, there is a significant implementation effort. If we do the claim handling on a go-forward basis, it's a bit easier. If they take the historic claims and move them over to us, there's a data conversion that needs to take place, and that could last anywhere up to 2-3 months to do that. We're operating. We've turned it over to our claims operations. You may see, if you walk into our operations teams of five, 10, 15, 20, 30 people dedicated to a single client. In some cases, adjusters are handling claims for multiple clients, so they tend to be a little bit smaller. The cycle starts all over again with a renewal towards the tail end of that period. Our contracts, some of them are one year, some of them 2-3.
They tend to be relatively sticky relationships, most of our clients are not moving these programs on a year-to-year basis. Hopefully, they stick around much longer than that. Trends going on in our industry, just kind of what's going on within our marketplace. Key trends. The claim volume activity, if you just look at the growth as it relates to claims, it's probably very low single digits. I think I've mentioned to you over the last year or so, probably the high-water mark in terms of claim count growth would have been a year ago, the fall of 2014. I think we saw probably upwards towards over a 12-month rolling average, maybe close to 4%, 3.5%, 4%. It's gone on a little bit of a decline over this past year. Right now, we're hovering probably in the neighborhood of about 2%.
It's there, it just isn't quite as strong as it's been over the last year. As we look forward, I would say all indications, at least for the foreseeable future, our book of business really mimics the economy in a lot of respects. I would expect somewhere in the neighborhood of 1.5% to 2.5% growth in claim counts. Another important trend is the managed care offering, especially obviously on the comp side, continues to grow in prominence. The medical cost versus the indemnity cost has flipped over compared to 20 years ago. The share of the cost of a work comp claim that is related to medical costs continues to creep up 60%-65%. Therefore, the clients are looking for us to be fairly innovative around ways to control the medical cost. Methods of pricing. Those are changing to some extent as well.
Our typical client here in the U.S., we're pricing those on a per-claim basis. Sometimes it's for the life of the contract, sometimes it's for the life of the claim. We do some percent of premium pricing with our captive book of business and some of our carrier clients. Then if we got a larger client where the team is dedicated to that client, it may be a cost-plus type relationship. The thing that's changing is rather than just a fee for service, more and more our clients want to be talking to us about how to drive our fee off the results of our performance, which is something we're very comfortable doing.
I think clients and the broker marketplace, which tends to be the intermediary between us and our client, is still getting comfortable with exactly how to do that, I think that's going to continue to evolve over time as well. Also on the pricing is just increased transparency. Clients want to know how we're making money. To some extent that's predominantly in the managed care space, understanding what the individual component cost of what we're doing. Time and time again, we're finding ourselves trying to be real clear in terms of the economic of our business. Another thing that's happening through the broader marketplace is an increased interest in us handling their claims outside the U.S. Many of our clients, if you look at who they are, they are global firms, whether they be the carriers, the risk management clients. They do have activity outside the U.S.
Historically, our business has not been to serve them. We're finding more and more where we're getting into dialogue with our clients and talking about how we can be of service outside the U.S. Some of those are via partnerships we have. Some of it is putting our people on the ground, potentially in different companies. Just recently, actually just last week, we had conversations with a number of our clients around expanded operations in Europe, helping them up in Finland, Iceland. There's been talks about China, into the Far East. The point being is, I think we have tremendous opportunity when you look at us being predominantly a U.S.-based business, but with clients who have operations across the globe to go with them as they move into other parts of the world. Another thing that's happening with our business is procurement departments.
If you just look at the cost of our service over the last 10-15 years has skyrocketed inside most of the companies. Historically, there's been a risk manager or a claims type person inside those companies that has been our buyer, somebody who understands our business. More often nowadays, there's a procurement department involved. Not that they don't entirely understand it, but it's a different dynamic. Increasingly, we're finding more senior people inside those organizations, whether it be a CFO, General Counsel, Chief Operating Officer, which we're interacting with and trying to explain what we do, and just the nature of that conversation, it's different.
They are less probably inclined to talk about the specifics of how we handle a claim, and more interested in talking about the overall economics of how they can drive their loss experience down, what's the nature of our relationship, the length of the contract, the nature of the terms and conditions. We're finding ourselves having to pivot off of maybe what we historically did and change the dialogue with them. Lastly, as I just mentioned, is it's new buyers entering the mix, in terms of the type of people that we're talking about. Client demands. What are they asking us to do for them? Increasingly, it's actually a fairly simple equation.
Historically, once again, it was almost a guy that had lived in a TPA that was buying our services and coming in and trying to prescribe to us how they wanted us to handle their claim, and then we were trying to do that according to that set of instructions, and they would come in and audit. Today, it's basically, "You know what? You guys are the experts. You, Gallagher Bassett, are the experts. We're turning it over to you. Let's talk about how we're going to see our total cost to risk be driven down over time." They want to see ongoing product innovation, specifically in the managed care space.
A lot of things with how we intervene in the course of a claim and alter the direction of that claim in a way that's both beneficial to the injured worker, as well as beneficial to the overall cost or the experience of that claim. Clients are wanting us to stay out in front on technology. Technology is an integral part of what we do. You can think about that probably in three pieces. There's our worker, and their worker, our adjuster, and the tools that we have to provide them in order to be effective at doing what we're asking them to do. There's a fair amount of advancement going on there. The second area is with the person we're interacting with, mobile technology. We just recently rolled out our definition of mobile capabilities for injured workers, for the claimants that we're interacting with. It's called GB GO.
They want to be able to readily get information on the status of their claim. When and has a payment been made? There's a fair amount of things going on in terms of our ability to interact more effectively with the claimant themselves. The third piece is being able to look at the data, in ways that provide additional insight on how we may alter our practices or change the direction and way in which we're handling a claim. One of the products that we put out recently, is our RMIS tool. It is branded as Luminos. I think we've made significant advancements there.
The expectations are that we have a team that we're working in collaboration with our clients, to kind of look back at historical claim information, look across the industry, benchmark it against different perspectives, that then will provide us insights in terms of how we may, as an organization, want to think about claim handling practices going forward, or even more specifically for that given client, given the nature of their operation, how we might want to alter the way in which we're handling claims for them. Probably the last thing that is going on just kind of within the industry itself is, we're a people business. One of the things I talk a fair amount about is there are aspects of what we do that will be automated over time, and we'll continue to strive to do that.
The nature of the claims that we're handling are not the ones that get processed fully in an automated way. We're going to have an individual, the majority of the time, sitting between the injured worker and our organization. We've got to continue to figure out new ways to recruit and develop those individuals. We're making significant investments in the business to do exactly that. Like a lot of workforces, ours is aging. We need to find the next generation of people that are coming into this business. We need to excite them, and want them to be part of an organization that we're pretty darn excited about. Performance highlights, just real quickly. You guys are familiar with this. You heard Pat talking about it. Our organic growth has been quite strong.
We've been, for the better part of probably the last year, close to, if not above 10%, and we would anticipate that continuing. It's really happening across all segments, whether it be our carriers, I talk about our captives, our risk management clients, whether it's in the U.S. or internationally, growth has been quite strong. Pat also mentioned the importance of keeping the ones you got, keep the clients you have. Our renewal activity has been quite strong. The competition is far stiffer here in the U.S., so it's something we pay particularly close attention to. Renewal activity on a client basis has been in the neighborhood of 90%. If you look at renewal activity in terms of the overall revenue of that client going forward, we've actually been above 100%. Margins, we've inched those up a little bit over the last couple of years.
We're in the neighborhood of 17, and would anticipate staying in that neighborhood. A few other highlights. Advisen, I mentioned this too, I think the last time we got together, was ranking TPAs for claim handling service. They were talking to the clients themselves. Number one in the industry was Gallagher Bassett, with clients that are over $1 million in revenue. I've mentioned that we've been introducing new products. We got to stay out in front as it relates to innovation. A couple of names that won't mean as much to you but are becoming recognized in the industry, Waypoint. It's a new reserving tool that we've put out. Luminos is our new risk management information system tool. I mentioned our mobile applications as far as GB Go. I mentioned the Luminos product. There was a report issued a few months back, Advisen also did this.
It was Dave Tweedy, He rated our product the second-best in the industry. I think that's interesting from the standpoint that at the time that he did it hadn't even been launched yet. He had a sneak peek into what we were building. My expectation is, once we have a chance to get it fully rolled out into our client community, we'll be at the top of the list in fairly short order. We're bringing new capabilities to bear in our U.K. operation. We actually bought a company earlier this year that gave us first notice of loss and a repair network facility to better handle motor business in the U.K. We bought a leading TPA in New Zealand. I was just down there about a month ago. That is growing substantially, and I think there's a lot of excitement.
Pat mentioned, it's not the largest country, but our growth rate down there is actually phenomenal, and Craig Furness and the team are doing a wonderful job. We launched a new capability in our South Australia operation down in Adelaide. Interestingly, we're going back on the road. We're actually taking our adjusters, and they're going out and interviewing injured workers. Reason why I bring that up again, it's an example of where we're trying to kind of push the state-of-the-art and find ways in which we can work in combination with our clients, to drive down overall loss experience. Once again, as the scoring system comes out in Victoria, we are the top agent in that scheme. We have been for a while. Jon Winsbury and team continue to do an absolutely phenomenal job down there. We're continuing to bring in talent.
I mentioned AJ and Dave Gordon. One of the things that I think is extremely important is that we have the best folks in the industry, in all parts of our operation. Our teams are out looking for new talent on a day-to-day basis, both in the leadership ranks as well as down further in the organization to make sure that we've got the caliber of people that can do all the things that I've been describing and really continue to keep us in a leadership position throughout the industry. I'll mention one last set of things here, major initiatives that we have underway.
We've got a product development team that is continuing every day to research and consider ways in which we can advance the state of the art on our medical product, whether it be intervention with nurses, whether it be analytical capabilities, whether it be new network alternatives. A lot of interesting things going on there. Our chief client officer here in the U.S., Mike Hessling, is working with his team to continue to make them more consultative. At the end of the day, I was mentioning a few minutes ago, this business grew up as being a business that the client came and told us what to do, then we tried very hard to make sure that we did exactly what they asked us to do.
Today, it is moving in a place where, simply put, the expectation is we're the expert, and we need to be able to provide to the client a game plan, a road map for where they should take their program, to better serve their employees to drive down their overall loss experience. Mike Hessling is making sure we've got the people and the tools in order to be able to do that. As it relates to the carriers, we're working very hard to capitalize on what we think are a lot of opportunities to get more outsourced carrier clients into the mix. We do have a unique relationship, that is Gallagher. You've been hearing all morning about what goes on in the brokerage segment. We are the only TPA. As Pat mentioned, there was a day when a lot of brokers owned TPAs.
We're the only one owned by a broker. Whereas 90% of our risk management business comes from outside Gallagher, I think the relationships we have with the carriers are quite unique. It creates a lot of interesting discussions and audiences that we can leverage I think into a number of future opportunities there. We are looking to expand the footprint. I mentioned the fact that a lot of our clients, whether they be the risk management clients or the carriers, they do have global operations. They would love to do business with us outside the U.S. We need to have the wherewithal to handle their claims anywhere. That is going to mean that we need to be pushing into other geographies. We may choose to do that through acquisition. We may choose to do that through partnership.
One of the differences with us, maybe versus the brokerage business, before we're going to set up a claim operation that's dedicated that we own, we've got to have some sense that there's sufficient scale in terms of volume coming in for us. We can't go in and handle a few claims in the country. We need to be able to see our way towards thousands of claims. Otherwise, we would probably tend to partner with other organizations that may have a footprint there. Lastly, the culture. Pat mentioned one of the things that's extremely important to us is the culture that we have maintained for years and are continuing to evolve. I think we hold a fairly unique position, and it really is the thing that enables us to really do two things, attract the talent that we need in this business.
One of the things in my time here, I've been here now close to six years Is I've been amazed. I knew it coming in, but I've really been excited how compelling of a story we can put together in terms of attracting top talent, whether it be Dave Gordon to Ajay Sinha or the other tens of maybe hundreds of people that we're bringing into GB every day. They see this as an exciting place to work, not necessarily a place they would've thought about three years ago, five years ago. Some of the things that we've got going on are very exciting, and that's all driven by the culture and the type of organization that we're a part of. The other aspect of the culture that's extremely important to us is, we're also trying to kind of shift the thinking around the claim experience.
At the end of the day, we're trying to take care of people, get them back to a productive lifestyle. That requires you got to be a caring and compassionate person to do that. I think in the past, oftentimes the perception of claims organizations, whether it be inside an insurance carrier or a TPA, is that we're not necessarily trying to help somebody out. The reality is that's exactly what we're doing. Our people every day are making a difference in people's lives and trying to bring that to the forefront and market that as an important part of who we are. That is our brand. That we're a caring and compassionate organization is something that we're going to be carrying forward and making more prominent in the years ahead as well. With that, I've covered a lot of stuff.
I'll turn it to you guys and be happy to answer any questions you might have. Yeah.
Thanks. Jay Gelb from Barclays. Pat at the beginning talked about $4.5 billion of revenue for the overall company, my guess is that's insurance brokerage plus risk management. Where do you think risk management comes in next year?
Next year? I'll tell you this year we're going to end up right around probably $750 million. I don't see any reason. Our conversations have been that we've been seeing high single and low double-digit growth over the last couple of years. That is for us, it's primarily organic. I mentioned buying things, we haven't bought a lot of stuff. It probably will tail off a little bit because, as I mentioned, claim count activity has waned a little bit over this past year. We'll probably see in the neighborhood of mid to higher single digit growth going forward. To the extent we start buying stuff in areas to expand our footprint geographically or like we did in the U.K. to get into other product lines, that could accelerate that somewhat. We remain pretty bullish in terms of the growth potential. We're winning more than we're losing.
I would put it probably in that context.
Is that $750 in 2015 for the whole risk management segment?
Yeah.
That would seem to imply a big Q4.
What's that?
A big fourth quarter for 2015.
You know what? I'll hold off on that. The growth rate hasn't really changed much throughout the year. I'm rounding and estimating, say, in the neighborhood of $750 million .
The top line growths have been very strong, I just wonder if you look at the guidance for 2016 for the margin side, looks like pretty stable for 2015. I just wonder, can you talk about detail about your operating leverage? Is that just there's not much leverage in the system, or you have been making big investments in the system that we could see that go through?
I guess a couple of parts to the answer. One is, over time, there will be leverage. Scale does make a difference to some extent. I think we've been fairly consistent in describing we are making meaningful investments in the business. I talk a lot about the things on the technology side in terms of freeing people, bringing in new talent. I think we've been consistently talking about the margin staying in the neighborhood of 17%. I think over the long haul, you will see where there is greater leverage, and that will probably start creeping up. At the moment, I think given the scale of the investments, when we start moving into new operations internationally, I mentioned New Zealand, so forth, some of those things don't start out quite at the margin level as other parts of our business, that keeps us down a little bit.
At this moment, probably in the neighborhood of 17%.
Second question on the claim count. You mentioned coming down a bit, like 2% right now. I just wonder, is that correlated to the general economy in terms of workers' compensation claim? Do you see any trend or past experience if we were going into a slow or growth in terms of economy? Will the claim count in the workers' compensation go up or go down? You could argue both ways.
Our book of business is, I would say, a pretty good proxy for the economy. Especially in the U.S., just given the diversity that we have, the type of companies, we're not necessarily skewed into one sector of the economy or another. For that reason, I would say it's pretty close. As we kind of look out when we're budgeting for next year and the years ahead, we're trying to get a sense of even what the economy looks like to predict what claim count growth numbers might be. That's where I would say 1.5%-2%. If we're lucky, maybe it goes up to 2.25%-2.5%. That's what we've been seeing for a while here, the last maybe three to four to six months.
There isn't anything that, right now, given the maturity of our risk management book of business in the U.S., that we would be dramatically different. If that were to fall off, that is a meaningful contributor to our organic growth. For some reason, if that were to go negative, when I started a few years ago, we actually were negative, and we were fighting over the top of that. If that ticks up, if we get lucky and it ticks up to 3% or 4%, that's a good thing for us as well. Hey, Bob.
Just pushing Kai's question a little harder.
Yeah.
On the claim count, what lines of business are you seeing sort of anything changing? Specifically auto, you used to have fleets and rider type accounts that you were insuring. Are you seeing more trucks on the road than some of the commercial auto carriers are seeing frequency go up? Is that anything you see at all in that segment?
I would say if I were to draw a distinction at the comp versus liability side of our business, that the comp is probably a bit lower, maybe in the one and a half %, whereas the liability is a little bit higher. A lot of our liability is with the transportation companies when they got trucks on the road banging into things. It isn't meaningful. We're talking a tenth of a % or two % here. It's not like the liability is growing at three % or four %, and comp is less than that, or significantly less than that. It's averaging around two %. Liability may be just a nudge above that. Comp may be a little bit less. We're not as tied. When I talk about claim counts, our business in the U.S. is heavily dependent on claim activity. Somewhat less in Australia.
Obviously, if volumes were to go down significantly, we are connected to the work comp market down there as well. The nature of our relationships and the fee structures are a little less sensitive in the short term to that. We're not looking at our book of business and seeing any one part of it being significantly higher levels of growth than another at this stage.
Hi, on the carrier outsourcing-
Yeah
What % of the industry outsources their claims right now, and where do you see that headed over the long term?
I don't know what %, but I would say it's very low. Even in my time here, this is kind of a new game for us. I think maybe in the past, the carrier who was trying to stand up an insurance operation, new entrants into the business, they may have leaned on TPAs historically before they wanted to build their own claim operation. In a lot of respects, what we're doing is we're walking in and educating the senior executives of insurance companies as to this being a possibility that they didn't necessarily have before, something that they should be considering. It's uncharted territory in a lot of respects, and I think we've gotten off to a good start. We have a number of meaningful relationships. Those aren't just here in the U.S.
Some of the carriers we're working with, we have similar relationships with them in Australia, as in the U.K., but we're at the very, very beginning of this. I would anticipate, if you were to go way out into the future, that this should be a significant share of our business. Today, it's probably in the neighborhood of 10% of our overall operation. If you just look, I'll just go through a little math exercise. If you just take the U.S. P&C market, the share of that market that is the large commercial entities that historically have unbundled and used TPAs, my guess is it's probably 10% of the total P&C market. If you just look at the potential of what the rest of the industry has.
We're not going to handle all those claims, and every one of those insurance carriers that are handling those claims today aren't going to be interested in outsourcing. I think it presents a really exciting opportunity for us to be able to look and go convince and share our story with these organizations and say, "You know what? We're a darn good alternative if you're looking for flexibility." I'll just give you a couple of stories. If you're a small regional carrier sitting in Kansas City, sitting in St. Louis, and there's a lot of these that may have a 50 to 70 person claim operation, and you're trying to figure out how to recruit people. If you lose a few of your senior people, you're sitting here contemplating, do I want to go make a significant investment in buying a new system?
Those are big time decisions and challenges for those organizations. Let's sit down and have a chat, let's talk about how we can tailor. We can build an operation that looks and behaves just like your claim operation, but is not susceptible to if you lose four or five people to a competitor. Maybe you don't have to spend $10 million, $15 million, $20 million, $30 million on a new system. I think there's a lot of interesting possibilities that the senior executives of those insurance companies should be contemplating. The same thing holds true for a lot of the large carriers, that there's parts of their operation that may not be at a sufficient scale yet to warrant. We have carrier clients where it may be a given state that we handle their claims in. It may be a line of business that they're just growing into.
I think there's a lot of possibilities, but I don't think there's probably even a number today where you would say that the carriers have outsourced X amount. I think it's totally uncharted territory.
Just to follow up, I believe you do some of the outsourcing for Chubb, correct me if I'm wrong. Does the ACE acquisition change that relationship?
I would say it creates more opportunity for us. It's a bigger organization. As long as we're doing great work, we're doing good work for them today. We've got a good relationship with them. It creates a whole new set of interesting possibilities. Obviously, ACE owns ESIS, which is a competitor of ours. That probably raises some interesting questions, but I would probably take the positive outlook on that. I think we're doing great. It's an opportunity for other people, now the ACE organization, to see what we can do, in ways that they may not have seen before. Looking forward to a lot of discussions inside the organization as to what may be other possibilities.
I guess just looking at Gallagher Bassett, I think it's been an area where there's been consistently strong organic growth, high single digit, even 10%. Just weighing that against the message of stable margins on a go-forward base, I guess I'm a little bit surprised that that level of organic growth, even if it were to decelerate somewhat, wouldn't translate to margin expansion. If you could maybe just help me understand what level of organic growth do you need here, really, to get margins moving more toward 20%?
It's probably less about a level. I know on the brokerage business, Doug talks about, get to a 3% or 4% level, then you'll start seeing organic growth. I think in our case, it's a combination probably of two things. One is we're making up maybe for some under-investment in the business over the last 5 to 10 years. We are funneling a decent share of the earnings back into the business to make sure we've got good systems, we've got great people, we've got a good product to deliver. I would expect over time that we're never going to stop investing, but the level or rate of investing, once we get back to where we think we need to be in a leading position in the marketplace, that would slow a little bit, which would probably put us in a position to expand margins.
The other thing is we're expanding our operations. I mentioned the motor business that we've gotten into in the U.K. I mentioned our New Zealand operation. Most of these operations on day one don't have all the advantages of scale. There is a level of investment going on there as well within the operation. I think those two things as we get a little bit bigger, if you kind of look, I think back over the last couple of years, even if you look at making these investments, there has been some margin expansion. I just think we're a bit hesitant to get too far out in front of ourselves. I want to still reassure our clients that we're all about investing in operations that's going to deliver one hell of a claim count or one hell of a claim result for them.
I don't know that we feel like we're quite there, we don't want to get too far out in front of ourselves from that standpoint. There will be an opportunity, probably not too far down the road. I think it's more about the dynamics of the business as opposed to at a certain level of growth, in our case, where that will happen. It's like as we start shifting to maybe a little less investment, where we get a broader platform, where we round out our service offerings. As those things start to happen, I think you'll see margin expansion.
Any other questions? There's one.
If the vast majority of your business comes from outside of Gallagher, what's the real synergy or strategic benefit of sharing a platform with the brokerage business and vice versa?
I guess it's one definition of sharing the platform. I'll leave that conversation, in terms of our position inside Gallagher, for Doug and Pat to talk about. I think there's a few things that make a huge difference to us, though. I mentioned the culture and the ability to attract people. The Gallagher platform is one heck of a platform to bring people into. People want to work for this organization. I say Gallagher broadly, not just Gallagher Bassett. The reputation, the strong ethical reputation, the longstanding history of the organization, those things do make a difference to us and enable us to attract top talent into our business. The fact is, even though I say that a lot of our business comes from other brokers, there is opportunity with Gallagher brokers.
They're not going to make a decision to place a client's claim activity with us unless it's the right decision for that client. They talk about cross-selling between the benefits business and the P&C business. That same opportunity exists for us. Probably, if not one of the more prominent things when you talk about synergies, we're just talking about the whole carrier outsourcing opportunity. The fact that we're part of the Gallagher organization does put us in a very unique position. We can get an audience with most any carrier senior executive team in the world at any point in time. That doesn't necessarily translate into business right out of the gate for us. We still got to be able to put forth a compelling proposition to them that they see that it would be beneficial to work with us.
We are getting opportunities to have discussions and talk about who we are and what we could potentially do, that I think a lot of it is driven by the fact that we're part of the Gallagher organization. There are meaningful synergies, that go beyond just shared service type capabilities. There are strategic value, there are strategic benefits of being part of the organization. In some respects, you heard Pat, He likes to be in the business. Gallagher Bassett has been part of Gallagher since its inception in 1962. That history, and the journey that we've gone through, is a meaningful part of who we are and is kind of part of the fabric of the organization, and I don't think anybody sees that changing for a long time to come. Anything else? Have a great holiday, guys.
Appreciate the time. Travel safe. Marsha?
Thanks, Scott. Appreciate it.
Looks like Doug's coming up.
Yeah. Just to level set how we plan to run the agenda for the rest of the meeting. Doug Howell is going to speak next on clean energy. You can see that on your agenda, and he will be up here for at least a half an hour or more, depending on the questions. Once that's over, we'll take a short break for the luncheon out there, and then we'll be back, and he'll do the second part of his presentation till the end. Having said that, I'd like to introduce to you Doug Howell, our Chief Financial Officer. Doug?
Thanks, Marsha, hello, everyone. Like Marsha said, I thought what we'd do is spend some time today just talking about clean energy. Then we'll break a little bit, grab the boxed lunches, come back after a five or 10-minute break, then I'll do the CFO commentary going all across. There are some follow-ups. I've taken some notes, some items to clarify from each of the presentations or amplify upon. I really want to spend a little time talking about clean energy because it's a meaningful part of our cash flow story that I'll get to in the CFO commentary. It's a meaningful part of GAAP earnings, even though I feel that's of lesser importance, in terms of what clean energy is for. Clean energy for Gallagher, like Bob asked, I think earlier, is what are we doing to manage our tax rate?
We believe that tax rate, if you pay less in taxes, there's more for the shareholders, more things to do to invest in the business. It's been a philosophy of Gallagher going back to even before clean energy was around. There was low-income housing, there was biowaste to energy, then there was some solar, then there was coal. There's lots of different energy sources that the government has decided, or to provide a tax subsidy or a subsidy through a tax break if you invest in it and you do it right, and you meet the definition. As a result of that, our overall objective is that we're trying to manage our global cash taxes paid to be a number somewhere around 10% of our EBITDA.
For those of you that have listened to me speak before, I'm not a big fan of a cash flow statement for a broker because we have a lot of cash that's really client cash that's in our general accounts, and we have some that's in premium trust accounts. There is one number that's pretty good out of the bottom of a cash flow statement, or it's a footnote disclosure for some, is what's the cash taxes paid. If you go back and if you take a look at it, and you add up just do a 3-year average, divide it by EBITDA, you'll get to a number somewhere around 10% for Gallagher. If you look at others, if you take a typical just domestic broker that might be publicly traded, their cash taxes paid might be 22% or 23%.
If you look at a more global, international, couple publicly traded brokers, you might see numbers in the 12%, 13%, 15% cash taxes paid as a percentage of their EBITDA. The debt structures are by and large the same, so that kind of factors in the interest shield, et cetera. We do that by having clean energy credits. What we've done is we've made investments into these. They're small investments, relatively speaking, that produce a tax benefit that creates more cash for us. The operation is run by four or five people inside of Gallagher, out of our 25,000 people. It's not a big time suck by any means. For the other 24,000 and some folks, it's a pretty big responsibility for the four or five people that do it inside of Gallagher. It's something we've been doing.
We've created clean coal solutions that goes back now 20 years, something like that. I think the predecessor law was called Section 45. The current law is called Section 45. Or it's Section 29, and now the current law is called Section 45. What we did in 2012 is when we sat down to talk about this is we sat down, and we prepared a presentation, and that presentation actually still lives on the website. If you want to learn all about clean energy, how it works, the accounting and everything, it's still out there. Probably we'll update it this spring. I think that there's some more information that we might put on, but it's largely the same. What's the objective? The objective over the course of this program has been to create maybe $1 billion to $1.2 billion of additional free cash flows for the organization.
That means if we're doing about $1 billion of EBITDA and we're paying about 10% tax versus 20%-22%, something like that, maybe we're saving about $100 million a year. What you do is you take the $100 million. If you buy brokers at 7.5x, you have the ability to have a laddering effect where you create substantial amounts of cash flows. If you look at the program, we think maybe over the 10-year journey that we'll be on this, is that maybe that multiplicative effect will have the ability to generate free cash flows in the $1.8 billion to $2 billion range, something like that.
If you do the math, it'll pan out to that just because you're reinvesting the $1 billion you pay less in tax on, and then you invest that, and you can kind of double your money by buying brokers with it. The clean energy effort is no more or less than that. It's a complicated process, but for Gallagher shareholders, it's to create cash. We've been successful in it. We've survived audits in it. We've survived challenges, legislative changes. The issue that arises many times is, you're in the coal business, and you're dependent on the coal business in order for this to work. Let me give you some comfort on that. There's risk factors with it, but by and large, we have about 30 machines that are about the size of a semi tractor trailer that mix coal right out of the coal yard.
It puts a solution in it, then it mixes in the coal yard and goes up a conveyor belt, and it burns in the furnace. Every time we treat a ton of coal, what it does, it reduces mercury, it reduces chlorine, sulfur, NOx, et cetera. It removes some of the emissions, and there's a chemical formula that does that. I don't know how important it is. I can answer questions about it since we've got a half hour on the topic. By and large, every ton of coal that we treat, we get a $6.50 credit. Right? $6.50 for every ton. It costs us about $2 a ton after tax to do the process. For every ton we produce, we create about $4 of net earnings to Gallagher, by and large.
Some plants are a little different, some plants are a little more profitable, some are a little lower, depending on the chemistry you use. Over the course of a year, we can use 100% of those credits against our taxes, or if we produce more, we can create a receivable from the government. In the last four years, we've been using about $75 million worth of credits, and we've been putting on the balance sheet about $75 million. We're producing more than we can immediately use. They carry forward almost indefinitely. For the purposes of this audience, just assume it goes on forever.
What happens is, even though we can only generate credits through 2021, I think that we'll have a glide ratio that will allow us to have enough credits generated, put on the balance sheet, that we can create reduced cash taxes paid till 2023, 2024, 2025. Now, what can cause that to change? We could create more U.S. taxable income by buying more brokers in the U.S. We could repatriate funds from international and use the credits to pay the incremental tax rate that would happen. I don't worry about bringing cash back from overseas like maybe other brokers because, yes, I got to pay extra tax. I only pay 20% in the U.K. If I bring it back to the U.S., I got to pay the extra 15%. We have an abundance of credits that we can use to mitigate that repatriation risk.
For us, moving monies around the world, and Bob asking basically, is Pat going to move to London at some point? Although he does like London. It's just not something we need to do in order to do. We don't have to do an inversion. Actually, I feel fairly comfortable that some of the strategies that we're employing in using this legislatively allowed tax break, I think, is more sustainable necessarily than maybe some of the cross-border strategies that are getting a kind of a watch from some of the tax regulators on. I kind of like our tax strategy versus creating a lot of complex over-border or cross-border strategies.
For us, the idea is. There's some issues of GAAP earnings versus cash earnings, and I'll try to do a better job of that, of showing both of those numbers in 2016 when we get around to that point. We're still in the process of rolling out the remainder of our plants. We have about six of them that haven't been committed to location yet. We have the ability to put those in place and burn coal through 2021 to create. We still have a ramp-up of the number of plants. We've got maybe 25 of them in place now. It comes back to the basic question. If this is going to be generating cash, what's at risk? Well, there's lots of things at risk. The IRS could get cranky with it. These are all in the risk factors.
You have legislative changes that comes out of Congress. I don't really feel that there will be a Congressional challenge on it necessarily, because there's already a sunset in it. There isn't a lot of advantage for Congress to take away a sponsored program, especially since now, if you read what's happened in Paris, the industrial countries are going to kind of come up ways to kind of help emerging countries become less emitters, if that's such a word, of emissions. I don't see this necessarily as being a focus of the legislator to get rid of this tax benefit, except for it is in coal. The Senate's pretty stable on coal. The House doesn't like coal, never will. Right?
The question comes in, you get a lot of questions of, "Well, listen, aren't a lot of utilities" Reducing the amount of coal they burn, and they're using natural gas in order to fuel their plants. The answer is, yes, that's true. Our plants, remember, there's about 700 boilers out there in the U.S., utility boilers, and we're in about 20 of them, something like that. The plants that have historically displaced to natural gas, we're not in, never have been. The amount of plants that are displacing to natural gas, that slope has flattened out. There's just not as many plants, the coal-fired plants, that are shifting fuel to natural gas. Truthfully, every plant is gridded out by region on a dispatch curve, which plants first shut down when there's a startup or shutdown in a demand for electricity.
Just so you know, you can't store solar, and you can't store wind, and you can't store hydro. It either produces it, and you use it, or you produce it, and it goes to waste, or you shut it down, right? Coal plants can be turned on and off. Some plants run always. Some plants are way out on the dispatch curve that says only when it's 110 degrees in Des Moines, Iowa, in July, is that plant ever going to come online and produce. Most of our plants are early in the dispatch curve, meaning that they're going to be used more frequently. They're less likely to displace to natural gas because they've already done that. Frankly, we have, what I always say, a top-secret method of identifying what plants are going to be online through 2021. We ask the utilities.
They know, they have to file, and they tell us, "We're not shutting this plant down before 2021." Okay, would you like to use a clean energy facility? Finally, these facilities are about the size of a semi-tractor trailer, and if a plant does have a change in strategy, we can pick it up, and we can move it to another location and install it there. It's not as easy as hooking up your trailer for your camping trip, but it is possible to relocate them. We feel comfortable that the plants that we're in are not going to displace to natural gas. They're not going to be shut down. They're going to continue to run through 2021.
On the life cycle of planning for energy, most plants are thinking about what they're going to do in 2030 and 2040. 2021 is in a blink of an eye. This program, we feel little risk that the plants are going to shut down and not use. Don't have tax change, don't have legislative change, and we don't feel like there's a big risk of plants shutting down. There's a portfolio theory here, too. If we end up with 33 plants at probably 20 different locations, and some utilities have two conveyor belts that they move coal out of. We'll put two plants in. We'll put two machines in in that area. We feel that we're in better position plants on the power curve. We feel like that the program is well tested. It's been around for a long time.
It's survived challenges. We feel fairly comfortable with the cash flow that's generating off of the credit at this point. We think it's a meaningful way to manage our tax obligation. That's the tee up. Create $100 million of free cash a year, by and large, by managing our tax rate. Do it till 2021 to generate. After 2021 to 2023, 2024, 2025, continue to utilize. We think that we've got a 10-year glide ratio here that can keep our cash taxes paid down in that global area of about 10%. That's a 10 or 15-minute tee up on it. Let's open it up for a question or two, and maybe that'll cause me to think of some things that maybe others haven't thought about.
Go ahead and wait for the.
That's all right. I'll repeat it.
Sorry to go back to basics. Was the reason for this, and maybe you could give historical perspective, to manage cash flows on an annual basis so that when you were very rich in cash flows, it's really just spreading it out? Separate from that, if that's not the case, what's the NPV on that initial investment?
Great question. Great question. Why'd we get into it? What's the NPV on it?
Has the reason changed over the years?
Why'd we get into it is because we had a history, really, of being a private company until 1984, even though that seems like 30 years ago. There was a way to manage your taxes paid even before 1984 as a private company, and this was purely for exactly what I said. If you don't pay taxes, you have more free cash for shareholders, and you have more free cash to buy deals. I don't want to say it's used to pay a dividend, because that's not really this cash flow, is it? It's usually to invest in the business. That was the genesis of it. There was no more, no less. There was a do-good aspect of it when we first got into sponsoring low-income housing.
The returns on that were 16%, 18%, or probably more than that, but they were certainly much higher than just a risk-free rate of return. That kind of got marginalized. The margins on this business haven't been marginalized because it's not based on the amount of money that you invest, it's based on the amount of coal you produce. The returns on it, for us to build a plant, the machine, is probably $1 million. The cost to put it into the actual location might be another $5 million, and that's really to break the conveyor belt slide the machine in the conveyor belt, create a new conveyor belt out of it that some of that might be a half a mile away from the coal plant. We just put it someplace between the coal plant and the utility itself.
The investment on these is modest. If you have 33 of them, we might have $150 million in it pre-tax. You get to depreciate those, so after tax they cost you $100 million total, and we think that we might be able to make $1 billion to $1.2 billion off of it, maybe more than that. Right now, our outlook says that we could maybe make $130 million a year off of it if we get the rest of them, plus more on that. I think the return on it is pretty good, and the plants are relatively inexpensive to build. Does that answer it? Yeah, Brian?
On the balance sheet today, you have just under $490 million of deferred tax assets.
How much did you say?
$490 million.
$490 million deferred tax.
Is that all from the coal generation?
No, about $300 million of it's from coal generation.
Okay. That $300 million you'll be able to use to offset over future years once the operations stop.
Right.
That'll grow.
Right. The remainder of that deferred tax asset is the amortizable goodwill on asset deals. When you do a broker, you get to deduct the goodwill over a 15-year period. That's the difference in that.
Okay. Then on ChemMod itself, you had owned a portion of the international business and then a portion of the U.S. Do those have any value? I'm thinking more so on the international side and a lot of the pollution problems that China's having. Is there something that you think you can extract value out of that? Thanks.
Yeah. Good question. Remember, not only do we have these machines that do it, but we own 50% of the recipe card that makes the process work. There's a mechanical portion of it, and then there's the recipe card that's the chemical portion of it that we own 50% of. Yeah, I think there's value in that. The real question is how fast is the world going to go to mercury control standards that actually can be bought. Right now, a utility can create clean energy for next to nothing. They basically get clean energy for free by coming in early on these programs. When they actually have to turn around and pay money to create a cleaner fuel, they're not going to do that until there's a legislative requirement. That's coming up in 2016, I think thereabouts, maybe it's been pushed to 2017.
We could have some opportunity on that, Brian. Our first and foremost effort domestically is to get our plants rolled out. We're not in the business of owning this recipe card. If anybody wants to buy it, I'd sell it to you. It's out there. Internationally, I think there's much more interest in it. I think that mercury is a big problem in China. It's not because of the fresh-raised, the filtered water fish. It's the rice paddies that collect a lot of mercury in it. In fact, our team just landed from China on Monday, so I'm kind of interested in how it went when we were there. There's opportunity, but I wouldn't put it in the model anywhere. Sean?
Yeah. Is there any impact from the Clean Air Act that the administration proposed over the summer? Is that a negative, a positive for this long term?
Listen, the question was, what's the impact of legislative announcements with respect to clean air, et cetera? Most of the time, any type of Clean Air Act is not coal friendly. No matter how you slice and dice it, there is a target to fossil fuels. It's not just coal, natural gas. Everybody thinks natural gas is a pure burn. It's not a pure burn. It puts carbon in the air. It doesn't put mercury necessarily. I think that in our case, those type of standards, by the time they get around to 2030, I think the first measurement period in that act might be 2023, and it's a phase in till 2030. I don't see it having an impact on what we're doing here for this tax credit program between now and 2021.
I don't think there'll be any new coal plants built, and even if there were, I don't think you can get a new coal plant built in the U.S. in seven years. It'd take forever to get it built and permitted and all that. Putting them up international left to right. I'm still digesting what's coming out of Paris. There's an interesting aspect there is that carbon is certainly a big issue in countries like India and China. In fact, the team was in China when they had their first red alert for emissions or for pollution, and I think that there could be opportunities for not only our mercury product we talk about, we own also a low-carbon product that could work internationally on that. Again, this is five people. They're objective. Let's get the rest of these plants in place.
Let's make our $1 billion-plus in cash off the credits, and then we'll worry about saving the world after that. Brian, go ahead. I'll repeat.
The way you put it, I guess, and this is crude, but $2 billion or so of cash flow, if you think about what this generates, plus what you can do in terms of acquisitions.
No, that includes the acquisition.
Including the acquisition. I'm just wondering, what would be the complications of doing some kind of private market transaction with this that could potentially bring a lot of those cash flows forward and allow you to do the acquisitions today? What would be the complications of pursuing something like that in the near term?
Good question. What can we do in order to accelerate cash flow? Right? On this. Why do I have to wait to get the credit for the $25? There is a market for people that want to own a piece of our plants, all right? What we would do is we would sell Let's say we own a plant, and we'll sell off 40% of it or 60% of it to somebody else. They'll pay us kind of current cash. It's a little bit of a pay-as-you-go when you sell. It's like a lease on the plants, but we could convert credits into cash, right? The market's not very efficient on that. You leave about 40% of the economics on the table on that. That's not exactly right, but just indulge me on that.
There are things that you can do to make what they refer to as gold-plated credits, that maybe you only have a 20% vig that you got just by selling off. They've got to make a return by their investment into it. There are things that you can do, and we did that under Section 29. I'm just not ready to do that yet for one subtle reason. Any credits produced between the inception of the plant until really about today, until they've been in service for four years, have a special feature of that credit that we want to keep that credit. Just for purposes of it actually lets you get your U.S. taxes down to about 8%, 8.5%. New credits that are produced after today, for lack of a better word, bring your tax rate from 35% to 20%.
The sweet credits that we put on the balance sheet, you dip into those to further reduce your taxes from 20% to 8%. There is a finesse, and I haven't been in a big hurry to sell off pieces of the plant yet, but that will be a project in 2016. If we did that, we could accelerate the cash flow. That would be the way to do it. You'd recover the investment, get a down payment on it, that they may prepay for the credits they're going to give in the future. We're still working through some of that structure with the IRS. We want to make sure that we get the structure right on it before we jump in with that.
They have to have skin in the game in order to be an owner in the plant. Then you have to find the right people that are interested in the plants, active, passive. We have high-level experience. Maybe in 2016, I'll be able to announce something, we're working to bring those credits forward a little bit. By the way, some of you, based on your name tags, we're talking to your tax directors.
Oh, hey, Doug. Could you talk about seasonality of the tax credit as well as predictability of the tax credit? What gives you comfort that in 2016, we'll grow 15% from 2015?
Sorry. The question was, what's the accounting for it? It's not easy to understand, I'll try. Then the next part of the question was, how comfortable am I with achieving a 15% growth over what we'll report in 2015? I'll work backwards. I feel based on everything that I've known, that you never say anything's a layup. This is not a layup. I think that we'll hit the 15%. I think talking to utility partners, they're going through the planning process now. As soon as I'm done with this, I go back to Chicago, we have three days of planning, then next week, I do the three days during that time, I have a series of media on clean energy. I feel good that we're still comfortable with our outlook on that we can bump it up by 15% next year.
What was the first part of the question? Sorry.
15% is because you anticipate to install more units or because of just the production?
I think it's more units will be installed, and it's also the ones that we've been working on during 2015 will come online in 2016. We already have some of them that we're only half on for this year.
Okay.
I feel like we've got designated spots. We've got production plants. We've ordered chemicals. I feel pretty confident in that predictability.
Okay.
Now, if a plant goes down because of one reason or another, they could have a reason they just stop producing, then that would put some variability. Please look at the risk factors. There are other reasons why a plant could stop producing besides natural gas. They just decide that fuel's too expensive or fuel's not cheap enough, or they don't need it, or they've got another solution, or they have a maintenance issue. They had an outage in another part of the boiler that makes them shut down for two or three months, or they don't buy a compatible coal. I feel like the step up of 15% is pretty good.
Okay. The first part is really related to the seasonality of the tax credit.
Oh, yeah. The accounting. Yeah, the fun part. Here's the thing, is tax credits, you don't recognize them when generated. You recognize them in proportion to your pre-tax earnings. Gallagher is a seasonal company where we report substantially less pre-tax earnings in the first quarter than we do in the second, third, and fourth quarters. As a result of that, you'll see we add disclosures. We might generate $40 million worth of tax credits in the first quarter. That's based on what the plants are generating. We might only be able to recognize in our financial statements $18 million. There's $22 million that then gets spread out over the next three quarters. I kind of like that in our case because here's the problem.
If I thought in the first quarter if I was going to only produce in December, I would be required to recognize tax credits that I hadn't ever generated before. Almost thank goodness Gallagher is a seasonal company where we overproduce in the first quarter and under-recognize. That helps me with some of the predictability in the next three quarters on it. If you just think about it, we kind of recognize them in proportional to the pre-tax earnings, and that includes special charges or special gains. In the third quarter, we took a gain when we settled the litigation in the U.K. against our former executives there. We created a big gain. That actually pulled credits out of the fourth quarter and caused them to be recognized in the third quarter. We try to do that. We give you guidance by quarter.
We try to levelize that for you don't have to think about it too much. There's three or four other things when we get to my next part of the presentation. I just don't think that's good accounting, to be honest, that is the accounting. That is GAAP. If you just think proportional to pre-tax earnings, kind of, that's what you'll get. The good old days of just being able to book to an effective tax rate kind of apply in this. I'm looking at Bob on that one. No emphasis on the old there, Bob. Just the good old days. Other questions. One back here?
I had two questions. Do these coal plants generate positive free cash flow or earnings on their own outside of the tax credits that they generate?
No, these clean energy machines, we would have to renegotiate with the utility to pay us for. The profit pool is $6.50. Anytime you get into a situation where you have early on subsidization theory would say that you split that subsidy with all parties that contribute to the success of obtaining the subsidy. That's just pure 101 subsidy theory, right? After the subsidy period, the utilities are going to have to decide, do you want to pay the $2 a ton to get mercury control or not? Well, they may be forced to do that. What margin are we entitled to produce that clean energy for them? They may decide to buy the plant and do it themselves. Therefore, we'll take a royalty off the ChemMod recipe card.
They may say, "No, continue to operate it for us, and we'll pay you a margin." I don't believe that the margin would be as high as what we have now. I don't believe that we would make $4 a ton profit after there's no subsidy. That's going to narrow it's going to commoditize that value a little bit. We'll see, because these things run till 2021. We'll see how. They have to be able to pass these costs along to the rate base. If they increase the cost of producing coal, they may want to do it because they get to pass it on to the rate base, to the payers, and then they get to mark it up. They may have an economic incentive to keep doing this, not only a legislative requirement to do it. You had two questions.
Yes. The second one was, is there any guidance that you would give on how to value these coal plants outside of once the tax credits expire?
I think the actual steel, the actual plant itself, it's probably going to be a banged-up mixer that might need to be replaced for $1 million. I think the brakes and the conveyor belt still add value. Our total cost per plant is about $6 million, $7 million. Maybe it's worth half that at the time, but it's worth zero if they don't want to continue to use the solution. There are other solutions they could use. They could go to activated carbon. They could put a wet scrubber in to do these things. There are other things that they could use instead of our recipe card in order to get environmental control. Truthfully, what we do is we have to book along the way, assume that we're going to have a dilapidations charge.
I put up about half a million dollars over 10 years, $50,000 a year to tear it out and scrap the metal. Could be an asset there at some point. Other questions on clean energy? Come to a broker's meeting, you spend a lot of time talking about coal, huh. We think it's a viable way to reduce our tax strategy. It used to be kind of almost naughty talk to talk about wanting to control your tax rate, but we think it's a meaningful differentiator, and other companies are doing the same thing to try to manage their tax rate. As industrialized countries have a big difference in their tax rates, you're going to look to have to come up with creative ways to reduce your taxes paid in order to remain competitive.
There's a large merger that I think was entirely fostered based on saving taxes, right? All right. Enough on this. Should we get a little lunch and then come back, and I'll go through the CFO comments?
I have one.
All right.
Hello, can you hear me? Is that one live?
All right, go ahead and get up. We're going to take 10 minutes, about five to 10 minutes, as soon as you get back, I'll start again. For those that are online, we can start as early as five minutes from now.
Okay. We'll start at 12:05.
What time is it now?
Five to.
Five to. Okay.
Justin. Justin.
People are doing the same thing, right? Not a thing. Right. Working on sort of like a lot easier to create. Yeah. The time is here. Okay. I'll give it to you. Yeah.
Okay, can I have your attention please? We're going to start here in a second or two for those people on the webcast as well. Just again, level set on the agenda, Doug Howell will have some commentary. It could go 40-45 minutes or so, depending on your questions. Then both he and I will be available for general questions afterwards if you have them. Having said that, I'll turn the meeting back over to Doug.
All right. Thanks, everybody. Thanks for taking a little bit of a break, grabbing something to eat. I've got about three or four minutes of commentary that I want to go through. Just I want to walk around the world a little bit from the CFO's perspective. Pat did that also, but I want to provide some clarity because I've had some hallway conversations on it. We'll start in the U.S., where you've heard from Dave McGurn, Jim Gault, and Jim Durkin and Rick Strader, really from on the benefit side. Again, like Pat said, if you add up those businesses, those domestic retail businesses are somewhere around two billion of revenues. All of them are running margins nicely in the upper 20s.
Really well-stabilized, well-developed businesses that I don't see a lot of room for margin expansion in those businesses, it'll be much more about investing for organic growth, et cetera. I think that's a healthy margin for a brokerage that's operating in the spaces that they're at. That included Bermuda. I'll throw Bermuda in there. Canada, Pat talked about, that's about $150 million business. Margins nicely in the mid to upper 20s. Their task at hand is to consolidate the rest of these six little systems into the same system we're using in the U.S. I don't see tons of margin expansion out of that, they're a heck of an organic grower. They're in the mid to single digits, I would think that will go on.
We don't have that big of an energy concentration in Canada, but we do have the ancillary businesses that feed off of the energy sector. I still feel comfortable in the mid-single digits there for that. The U.S., you heard Pat say primarily in the 1.5%-2% core organic growth. You heard Jim Gault talk a little bit more about there are opportunities on the supplementals and contingents. Carriers are moving between those two a little bit, so I could have in one year, I could get both a supplemental and a contingent, or in another year I could get zero because they didn't pay a supplemental and the contingent comes the following year. I'll try to be as clear about that in the earnings release, when you see shifting.
I sense that there's lots of opportunity for us to continue to demonstrate our value to the carriers and clients to get more supplementals and contingents for that. By the way, I'm going into budget and planning meetings, budget meetings the next three days as soon as I'm done with this, I'll have a better idea. I feel like that 1.5%-2% core organic, primarily U.S., in the way I interpreted Pat's comments, I think that we have an opportunity to maybe better that with the supplementals and contingents a little bit. Leaving Canada, moving to New Zealand, terrific upper 30% margins, $150 million business. Good growth opportunity, good market share. No integration risk on that business at all. It's a stable business. It's been running terrific down there for a long time. Moving to Australia, it's a $175 million business.
It's running in the upper teens. I think there's probably a couple points of margin expansion on that business over the next three years. A couple points each year, maybe over the next three years. I see that ultimately running around 25%. Sydney's kind of expensive. Some of the areas are there. We have to do a better job of reinvigorating the sales culture. We knew this going in. There's no surprise on this. They were owned by an industrial conglomerate that really wasn't focused on insurance. I think that we can reinvigorate the sales culture there. Then I think we can also bring some of our extra commission expertise through supplementals and contingents into that market space.
Remember, they had a sister insurance company, I think that caused. They had to trade with their sister insurance company, or if they went to trade with independent insurance company, there was always some reluctance there to view it as the same type of partnership. There was a conflict there maybe by some insurance carriers that I hope that we can expand. That's a $175 million business. Maybe if we got them where we need to go, we'd pick up six more points. It'd be $12 million more. After tax, might be worth a nickel to us, something like that by the time you add it all up. Moving to the U.K. Specialty business, as you said, was hitting on all cylinders. That's a really great business, nicely in the mid to upper 20s. Good organic growth coming out of that. It's a $250 million-$300 million business.
You've got basically no systems integration. With that business, we've kind of built one brick at a time over the years. We've picked up some of that specialty business through the Heath Lambert, Oval, Giles acquisitions, too. Pushing together a $400 million retailer from four different pods of business. Old Gallagher, Heath Lambert, Oval, Giles. Each of them $100 million plus or minus. I think that's going well. That retail business is all in the same instance of the software package now. That's where we're going to spend most of our integration money next year, is finalizing that push on putting those retailers together. That margin is in the upper teens at this point, and I see that maybe being a 23 or 24 point business ultimately.
Maybe there's four or five points on $400 million there, as I think out long term as the CFO, where's their opportunity for growth. You get to the overseas units. What we call the overseas, and these are emerging markets. I get a lot of questions about it. We have $35 million of revenue from that and $5 million worth of EBITAC. Our business that we have in Mexico, Peru, Colombia, even mainland Europe, we have a little operation in Oslo. These are all specialty type brokers that have a unique product that either trades into the U.S. or trades into London. If you look at Oslo, the reason why we have a position in Oslo is because they're big energy and marine business that trades with our London marketplace.
Lets us come in and learn about the markets, like Pat said, I get questions like, "Are you going to do a big deal down in South America?" There isn't a big deal down in South America to be had. I'm not so excited about the currency there. I'm not so excited about the economy there. I think we get a lot of play on this or a lot of questions, but it's a $35 million business and $5 million or $7 million worth of EBITAC. These are opportunities to harness flow that goes back into London because of the trade value. What did I leave out? I got overseas. I've got New Zealand, Australia. I hit on Canada, U.S. domestic. I think there was a question about margin expansion that Jim Gault was talking about. His business, they've done a terrific job of expanding margins.
I think Jim may have said 9%, something like that. I think when I got there, that business was running 18 or 19 points, and it's in the upper 20s now. They did through a combination of a lot of different things, put the right people in the right jobs, get them focused on sales. That's always helpful. We've consolidated some leadership ranks there. We've put in a common system, and we've capitalized on our offshore centers of excellence, and we've reduced down our defects and improved our quality. Those four things that we've done really are what has caused Jim Gault's business, domestic retail, to have the margin expansion.
We think that the U.K., Canada to a certain extent, Australia, New Zealand, or excuse me, Australia, not so much New Zealand, have equal opportunities for taking what we've done already in the U.S. space and taking it to those countries. For those of you that have been around the story a long time with me, I spent from 2005 to 2010, a ton of time in India, getting that operation off the ground. We have four operating locations there, 2,500 employees globally now, and we really do a terrific job there. Our quality is number 1. You saw the J.D. Power ranking on that. The defects that we have are next to none. We've reduced our E&O. It really is a terrific, well-run operation. Don't do very much voice there. It's almost all middle office and back office processing.
We think that we can bring those capabilities easily to the U.K. and Canada, Australia, and to a certain extent, New Zealand. New Zealand's already in the upper 30s of margin. They got good growth, so I think leave that one alone for a while. Those are the things that we're. Let's see, where's Chris? He asked the question in the hallway that he wanted me to ask just about what the. That's what we're doing. You talk about the sales, the cross-selling playbook, the white space playbook, the things that we do very well as a broker that sells insurance, we're bringing that to the U.K.
I was just there before Thanksgiving, had an opportunity to spend time with the 50 or 60 branch managers and their number 2s in command, and the cadence and the conversation is sounding a lot like what you see in Jim Durkin's business, Dave McGurn's business, and Jim Gault's business. The same, what are we looking at? Actually, a cute story is when I went to Australia, the first thing they did is they wanted to come in and talk about the return on assets for the brokerage business there, and I said, "What assets?" They said, "Well, we really don't have any assets, so the industrial conglomerate made us have a proxy for assets." They created an asset that didn't exist and then said, "Now compute a return on it." I said, "Well, that's easy." You create $1, infinite return. Create $100 million of asset, zero return. Just getting them to talk like that, and this is the second budget season with them. It's really a lot of fun. They actually are getting out, they're talking in Gallagher ways, they're using the tools and the planning mechanisms and the systems. It's happening. It's taking a little longer than expected in the U.K. just because four organizations coming on.
Create $100 million of asset, zero return. Just getting them to talk like that, and this is the second budget season with them. It's really a lot of fun. They actually are getting out, they're talking in Gallagher ways, they're using the tools and the planning mechanisms and the systems. It's happening. It's taking a little longer than expected in the U.K. just because four organizations coming on. I got to give the teams, King Keenan, Steve Lockwood, Andrew Godden, Mike Henthorn, the folks that have been working on Australia, Canada, and New Zealand have really done a terrific job of Gallagherizing the sales culture down there. That's kind of my walk around the world. Do you want me to stop there for a second, take some questions?
I want to make sure I get to this large print document I put on the website, give you some flavor from that, point you into some whys on a couple of things, then as part of my CFO commentary on it. Question back there?
James Nittoli with Citi.
Sorry, I can't hear. I don't think the speaker's on. Sorry.
James Nittoli with Citi. Just one more question on the core growth in the U.S., the 1.5%-2%. It's a step down from 2015. How much of that is driven by U.S. commercial pricing? How much of that step down is driven by losing more accounts or not selling as many new accounts?
Yeah, it's rate driven. Most of that delta is rate driven. Remember, when rates were moving up 5%-10%, we said that about a point of our growth or a little less than a point came from rate and exposure. It's kind of hard for us to separate some of that in our systems. Now we're saying that instead of maybe a point tailwind, maybe we've got a point, a point and a quarter headwind that we're working into because of rates and exposure. Also, the real question is, in an ideal world, the exposures would be going up faster than rates are coming down because then we'll sell more. You'll sell more insurance.
You can't have a customer opt out of insuring an extra truck, but they could raise their deductibles, or they could do something different if they are insuring the like number of trucks. I think that the U.S. economy, even though everybody worries about energy, I just see more activity happening. Any place I go, in the cities that I go to, there's more cars on the road, there's more cranes in the air, there's more fences around neighborhoods. That means that activity is happening. I think, James, to your question, what I'm hopeful is maybe we'll have a little shot in the arm from the economic lift that might moderate that a little bit. That may not come until 2017. I also don't see a real reason for carriers to continue to cut pricing.
Yes, they're profitable, come on, when they're talking about achieving returns in the high single digits, it's like, why are you cutting price? You're not going to make it up for in volume. When frequency reverts to kind of more norms, then I think that you could have some underpricing. I'm not saying that historically it's underpriced, but you could have current pricing, really. Hopefully we're not in these large soft market, hard market swings, and we're more in moderating and firming markets. That's what's causing the 2% core difference versus 3.5% or 4%.
Got you.
I say for the fourth quarter in this sheet, I think that we're looking at 2%-3% organic based on my best shot. I'm telling you it's on the sheet here. I think that last year, our margins in the fourth quarter were 24.4% or 24.5%, and I think that we should be able to bring it in somewhere between 24.5% and 25% of margin. I'm not seeing the 2% at this point. We're a big December broker, though. We have a lot of business that comes in in the last two weeks of the year. Right now, I think it's looking pretty good for us to be in that 2%-3%. Maybe that'll hold next year. I don't know.
Just one other topic, the share count. You've got.
Yep
178 at the end of the fourth quarter in there. Should we assume it flat or up for 2016 from that number?
Great question. Let's talk about that for a second. If you can indulge me, I'll lead into it. Share count growth is a outcome of acquisition activity. Our share count grows only really because of acquisitions. Yes, we have a little teeny creep because of options and incentive awards that go out in stock, but not a big number. Maybe one million shares a year or something to creep, and I'm not discounting the one million on that. Most of the time, it's because our acquisition opportunities outstrip our available cash and debt. How do I see 2016? Let's go to that because I hit on one point. We want to pay 10% of our EBITDA in tax. That's our goal, we've done pretty well on that. Next year, I'm going to use the number that, let's say we did $1 billion of EBITDA. All right?
I'm not saying we're going to do that. What I know in all the pieces is that 50% of that will be reinvestable into. Maybe 45% of it will be reinvestable into acquisitions. Right? Just assume we've got $500 million next year that we can spend on acquisitions. Where'd the other $600 million go between EBITDA and what we have to spend? Shareholders get $275 million through a dividend. Right? Now I'm trying to explain where $325 million of other cash went. I told you that 10% goes to taxes. So $1.1 billion comes down to about $1 billion. Pay the dividend out of $275, it goes into your pockets. Right? Now we're down to. Let's see. We're at $1 billion, so we're at $725. Right?
There's $225 million that goes out, costs us some money to create those tax credits, and we've got CapEx, and we've got interest net of tax in there, too. Those different pieces. Just take my word for it, that of the $1 billion, 45% of one of our EBITDA ends up reinvestable in buying franchises. The other thing, too, is we've said that we kind of like a debt-to-EBITDA ratio somewhere around 2.5 times. If I buy $100 million worth of EBITDA, I can borrow $250 million to do it. Right? Because I can borrow it two and a half times of that. Plus $500 million of free cash flow means that I can spend about $750 million on acquisitions next year without using any shares. The pipeline looks like that's achievable right now.
I think that we have a lot of small deals, and coincidentally, that's at about seven and a half times. Historically, we're forecasting we're going to do. This is where I might have to pull the glasses out a little bit. On this sheet, you'll see on the right side. I should go back and orient you. We think that we're going to end up somewhere between. Where are we here? Sorry, guys, I'm just catching up. In the brokerage segment at the bottom, we think that we're going to do around 40 acquisitions this year, and we think that our all-in multiple is going to be about seven and a half times. That includes the William Gallagher, that we are closer to 9-plus on William Gallagher, which was a little bit larger one. Overall, we're still buying at seven and a half times.
If I got $750 million to spend next year on deals at seven and a half x, I can buy $100 million of EBITDA, which means I can borrow $250, and our free cash flow of $500 will pay for the rest of it. To the extent that we do more than $750 million worth of deals next year, we'll have to use shares for us to do that. Right? To answer your question, yeah, I think that we have the ability to have a nice acquisition year. Buy $100 million worth of EBITDA on a recurring basis and not have to issue any shares. That is our objective, and we were doing that for years before we went on the large international acquisitions. We're pretty successful in doing that.
There are times we have to use shares because it's a tax-free exchange, the seller demands our shares as a part of the deal terms, we'll give them the shares. We don't have that many transactions like that in the course of a year. By and large, flat shares for next year is certainly what I'm planning for. Does that answer your question, Richard?
Okay.
Do I have to say it another time for everyone to understand? I don't see big share creep next year unless we have an acquisition appetite more than $750 million worth of purchase price.
Can you talk about the sensitivity that your share count creep with the acquisitions you're doing
Maybe you got a mic right here. Sorry about that.
It's all right.
You know what, we got two great guys here, guys are notable guys in the business sitting there passing mics between each other.
You're too kind and wrong. Could you talk about the sensitivity of that share count creep with respective of whether or not the acquisitions become more expensive than the seven and a half time? What is the sensitivity around If we end up with say, the deal's costing, an easier number like eight and a half instead of seven and a half, how much of a big deal is that?
Well, listen, let's say we went to eight and a half. Let's say we went to eight. We had to do a half a turn more in pricing. It means that we're going to have to spend, $50 million more to do the same amount of deals and at a $40 or $50 stock price, it means we'll have to use a million shares, something like that. That's the sensitivity to it.
Pat talked about it, at least the very high end, 13-14, you're walking away. Where are you walking away today and how do you think about-
Yeah. Listen, we are hell-bent to not dilute. We're trading. I'd like to trade a little higher today. It's not happening, but I think that if when you get above nine, it's pretty tough to do it. One thing I will say is our nine multiple is not the same as somebody else's nine multiple because any of the earnings that come off of that, I'm not paying any tax on. Anybody that's paying a nine that doesn't have a low tax rate is taking less to their shareholders because they're paying more tax. You don't want to, but that makes a point and a half turn. None of our brokers are out there doing deals because remember, these field originate. We're paying what the market requires.
None of our brokers are going out there and saying, "Hey, I can pay you more for your franchise because we don't pay as much tax." That's just not how it works. That's something that unless they're listening to this call now, and some of them will, that's not how we do it. Each deal has to stand on its own. We have to look at it. What we pay, if they're a one-trick pony, we don't pay as much. Remember, we buy people that know how to make money, know how to sell insurance. We don't buy retirements by and large. If somebody doesn't want to be in the business for 5-7 years, at least with us, we don't have much interest.
The criteria, if the only profit comes from supplementals or contingents, it's a little bit of a red flag for us. There's lots of other things. That criteria drives what we pay, not the taxes or the multiple that others are paying. We have been disciplined. I'm telling you, it's been pretty easy in my chair for the last year. I just haven't had any big deals where you heard Dave McGurn say that we're not working on a big wholesaler right now just because it'll trade maybe to a PE firm that can pay a lot more for it. That's all right. We'll wait. We'll be back. We have a question over here.
Can you talk a little bit about the EBITDA of those acquisitions? Obviously, a lot of the companies you're buying are private companies that don't like to pay tax. I suspect the EBITDA is not a true EBITDA. It's depressed as much as they can. Can you maybe talk about that? Then when you say 7.5, is that on an EBITDA calculated by you and then incorporating the synergies that you can bring, or was that pre all the synergies you expect?
We're paying 7.5 times based on their historical pro forma, right? Pro forma is the art of the game here. Somebody else's pro forma might be all tricked up. Others might not. Most of these small little franchises, and I don't mean small in terms of their perspective, but certainly they don't have a The only thing they have in there is excess owners comp, is that they have paid themselves a dividend only. That means we got to add comp back.
If they've paid themselves a ton of comp, we bring their comp back to what they would make for a branch of that size, and we pay them a fair wage just like And we have so many of them that if it's a $3 million branch in Des Moines, he's probably going to make the same amount of money as a branch manager, assuming they're well-performing as the guy in Omaha or in Fort Collins, Colorado or something like that. By and large pay them a fair wage based on the size of their branch. That's the only thing that we get. The larger deals that you see that have complex structures, there's a lot more pro forma in it, but not the deals we're doing. You just don't have that.
Mike?
Just was running through just some of the things you were saying about your ability to make acquisitions without issuing shares at $100 million of EBITDA plus or minus.
Right
rough numbers. On a billion-dollar base, that's 10% EBITDA growth. Two questions. One, the path to continue this type of acquisition strategy, the opportunity to do this over the next several years on a repeatable basis, question one. Question two, has your hurdle changed? The strategy of issuing a lot of shares, you've done a great job operationally, but it hasn't driven shareholder value from a stock price perspective yet.
Has your hurdle changed in terms of what you're willing to pay on these larger or more trophy transactions, given that your valuation has now moved down towards the lower end of your historical range?
Yeah. A good question, Mike. How do we view it? First of all, we're not pricing any big deals right now, so our mindset on big deals is not there. We just don't have one right now. I don't think that we feel a big need. I don't feel any place in the U.S. or any place in the world where I don't think that we have enough scale to be successful. We had no scale in Canada. We had really no retail scale in the U.K. We had no presence in Australia or New Zealand at all. To pass on those deals means that we would have probably never been in the market there, which is fine. We don't have to be in every country in the world, and we don't intend to be.
However, we saw dynamics in those areas where it's still a very fragmented market. Other than New Zealand, there's two of us that own 50% of the market. In Australia, Canada, and the U.K., still thousands and thousands of family-owned brokers that are available for sale coming out over the next 10 years. 15 years. In answer to your question, in the U.S., by some count, there's 15,000 to 20,000 brokerage agencies that are there that will have to go through some type of event over the next 10 years in the U.S. Canada, Australia, and the U.K. probably in total have maybe 8,000 between those countries. That's 7,000 to 8,000 of family-owned agencies that will be coming. We saw the opportunity to do a platform deal in those countries. Let's say we paid nine times for it, or 10 times, right?
Let's say we just paid on par with what we were trading at. The ability to bolt on deals now in the six to seven times range is real, and we're doing that. There's a nice deal that Marsha was working on her computer down in Australia. If we get it across the line, it's a nice deal that we're paying sub eight on. I don't know exactly where it is on it. That will bring down the effective cost of those other deals. I feel comfortable there's an immense market. Gallagher is a terrific story. There's a lot of families that want to be associated with the Gallagher family name and the culture that's there. I think that we've got unlimited opportunities to do smaller bolt-on deals. When I'm 85, maybe not.
I don't know how this consolidation of this industry will go, but right now we're happy where we are. Again, if you see an announcement that we're in a small country someplace else, it's because they're trading with our London office primarily. That's where there's that reverse flow that comes into the insurance marketplace. It's not because we're putting a toe in to make a big move quickly into another country. Dan?
Doug, you gave us kind of a little bit of a review, again, with the organic from a geographic perspective. Can we just touch again from a product segment perspective? It seemed from presentations, maybe retail a little weaker versus employee benefits, and wholesale seemed a little more positive. Maybe any color around the line of business would be great.
Yeah, I think you've got it right. I think that just retail P&C that's commission-based might be a little bit more under pressure than an employee benefit that is primarily fee-based. Most of Jim Durkin's business in the U.S., it's fee. It's kind of based on the number of lives that they're working on more than it is on the actual premium volume. I wish it was based on premium volume, but those are such big numbers as the carrier and the client are exchanging. They're doing it on a per head basis. As headcount grows, that's helpful for them because it allows them to grow their fees. With all the new healthcare law changes, just the complexity of it is no longer a small broker business.
An employee benefit person can't interpret 26,000 pages of reg, can't interpret 50 different agencies that have been created, all these different words like exchanges. The consulting fees that come off of that, the employee benefits business is a good business, I see it outperforming U.S. P&C retail maybe a couple of points illustratively. Australia and New Zealand, it's soft down there, I don't understand how it could get any softer. I don't see it. Their budgets, they'll come in. If those two areas next week when we're done with budgets show one or 2%, I'll be pretty happy with that on that. Canada, mid-single digits. The economic conditions in Canada haven't been fully baked in yet, again, it's a $150 million business for us, so they'll do well based on their expertise up there.
We're strong in housing up there, a multi-tenant or multi-family housing. That's something that is really kind of on fire in the big cities in Canada.
If I could just sneak one more in.
Sure.
Your comments on cash flow versus what you might actually think, I would agree that there's sort of limitations there with some of the working capital and the fiduciary assets. I guess my question would be, normally you see the working capital reverse, and it's been a headwind now for multiple years. Do you see things that are now changing in the working capital that will be helping cash flow as well?
I think you really see it. Really what's happening in working capital, there's two things. First, when I got to Gallagher 12 years ago, just in the U.S., we had 150 legal entities and maybe 800 or 900 bank accounts. We're down to like six legal entities in the brokerage business and 20 bank accounts. In the U.K., we've got 400 bank accounts. We've got 200 legal entities. All this integration we're working is trying to get these consolidated down. We're good at this. It just takes time to do it. The problem is I've got 400 different bank accounts, and if each one of them, it doesn't, but each one of them had a half a million dollars in it. That's $200 million of free cash that's stuck all over all these different bank accounts.
Until I can consolidate systems and legal entities, I can't squish those bank accounts and release that. That is causing a little bit of a drag on working capital. Our line costs us 1.3% or 1.6%, something like that. If you think about the trade-off, it's not really hurting earnings that much, but it certainly is not reinvestable cash that we can use to buy brokers. We're working hard on that, and that will help with cash flow on working capital. The other thing is integration. It's pushing these things together. I'm really happy when you read this, early turn-ins of the budget show that we'll be spending half as much on integration next year as we spent last year. That's coming down, and I would expect to have very little integration cost in 2017.
It's important for everybody to note, we don't have integration costs that we break out separately for our small, little tuck-in deals. We have the capability of just rolling them onto our system. They bolt on. The only thing that's really running through there is the large international deals that we are pulling out of their old parent's environment or pushing onto our systems or consolidating their systems. That's all that's there. Oval, Giles, Heath Lambert, the old Gallagher is what the final push in 2016. We may have a real estate move at the end of that process, but that's not the type of integration that I'm worried about. Brian? I think all things like that help our working capital, and we're working on it, and there's teams that are dedicated to it that are working on it day in and day out.
In just about under 90 minutes, we're going to probably get our first Fed rate increase in 10 years. Your fiduciary funds that you hold, what % are in the U.S., and what kind of lift can we start thinking about as interest rates come up higher? Is it going to match? 25, is it going to be an equal match, or is there going to be some sort of a lag on that?
Here's the thing. I wish I knew. I've asked the question. Here's how I'll speculate. I don't know for sure. I don't think the 25 basis points is going to give us much lift, even though we might have $2 billion laying around on it. A little help. The reason why is that a lot of that money is in accounts that we don't get interest rate on anyway because we've been receiving expense credits against that reduce our transaction costs and our banking costs. I think maybe we'll get a little bit in the U.S., 25 basis points, a few million dollars maybe. I don't see it as being a big, huge lift by the time the offset of the expense credit's on it.
You could see interest expense coming up and operating expense coming up by a similar amount just because you get the credit through the operating expense line versus the interest expense. The bigger issue is, okay, when's the next one? Is this a series of hikes every quarter? I'm telling you, I don't think the U.S. economy can handle 4 quarters in a row of 25 basis points hike. I think it'll kill what's left of the housing market. There's no inventory on it now. Maybe they can do it there. I just don't see us being in a step-up every quarter environment right now. Look at what it did to New Zealand by tightening too fast. Brian? I like this, the mic runners. One in the front, one in the back. One in the front, one in the back.
Just back on the organic growth, I just wanted to make sure I understood this correctly. You interpreted Pat's comment on 1.5%-2% to just mean U.S.-based organic, right?
No, I think that he's seeing core commissions and fees maybe blended in all over the world being in that 2% range with maybe a little pressure in the U.S. on it because of the rates that are coming off a little bit more now. It could be mutual that, okay, the other areas around the world, I'd probably see if you add it all up, maybe two points is probably about right.
He was thinking about the better growth in Canada, the better growth in employee benefits, and the higher stuff in benefits.
I don't think so in his one and a half to two comment.
Okay.
I don't believe that those things were factored into that math.
Understood. Then just on the buyback, I was hoping maybe you could just And this was probably a better question for Pat, but if you could just update us on the board's current thinking around the buyback philosophy, and I guess the follow-up to Mike's question, whether or not that's evolved recently given the fact the stock's now trading at the lower end of its historical range, or if there's ever a place that the board would consider doing a share reverse.
Yeah. Question was, what's our philosophy on buyback? I think there is a price that we would say, "Gee, this is a terrific opportunity for us." Right now, the trade-off is that we have an immense amount of great acquisitions. Is it better to buy our stock back at nine and change or go out and buy acquisitions at seven and change? I think it's still better for shareholders for us to buy small tuck-in acquisitions that continue to build up the franchise because there's still an arbitrage there.
This was definitely a delta for Pat on his economic commentary from, "Things are fine, the economy's doing well," to, "It's starting to roll over a little bit now." I didn't know whether that was something you're seeing in the fourth quarter where the economic impact, or this was him playing an economist looking out to 2016, just reading the tea leaves of what's going on with energy.
I think his comments are pretty informed based on the branches that he goes to. I think he's got a real feel. That is the advantage, that Pat is in our branch network talking to the producers that are out there on a frequent basis. He spent an hour with us here today, and he's going to spend seven hours in our New York office with the producers. I think his comments are pretty informed, and I do believe that there is a sentiment change from even what we were seeing in September. I'm not as bearish on the actual economic conditions in the U.S. necessarily underlying. I think that rates continue to. We're starting to get a feel that the carriers are being a little bit more aggressive. There is a sentiment change there on it.
Definitely the carrier competition seemed like it was more heated than these. He's been saying rational.
Yeah. Here's the thing, is they may not be irrational in what they're doing. I just don't think that they've had the frequency or severity revert to what maybe you were seeing in 2006 and 2007. I'm not saying their pricing's inadequate. I'm just saying that they're smart by line now, and if there's a nice account that's got good risk profile and stuff, they'll be aggressive on that for new business. There's a difference. The larger carriers are holding the line a little bit more on rates, and some of the smaller carriers are being a little bit more aggressive to try to pick up market share. We'll see where that. Do larger carriers follow that down, or do they hold the line on it?
Was Zurich a big market? Is their announcement at all important to you guys?
Zurich is a good market for us. I don't. Which announcement? Just so I have.
Rethinking U.S.
Yeah. Listen, I'll be honest. I was in Pat's office the day that Kemper got downgraded. It's one phone call. All right, guys, you've got somebody downgraded. They're out of the business. The business will move. We'll stick in there. When AIG went through troubles, we stuck right in there with them. If you get downgraded, that's a problem. We just are not going to sell a sub-rated carrier's product. They have to have financial viability ratings that the experts. We don't do that. If they get downgraded, we have to move that business. If they decide to exit, if it's sold to somebody else, we stick with those carriers. Those underwriters are a personal basis that our folks get stuff done with. If they exit the U.S., that means the business is going to go someplace, right?
Thank you.
Maybe while you're collecting some thoughts, can I talk about this sheet just for a second? I want to make sure that you anchor into it. This is what we posted on our website this morning. It's a lot of small numbers. What I did is on the left side of the sheet, to the left of the black line in the middle, is I really kind of captured what I talk about in the earnings conference calls, not only in my prepared remarks, but also in question and answer that follows afterwards. I encapsulated that kind of in sound bites on here. This is a document that I suggest you use by listening to me in tandem. There's a lot of forward-looking comments on it, and of course, the legal folks got one page and I got one page, I guess, is how it works.
The right side is where I feel now. What am I seeing now? There's some subtle items on there that we've moved a little bit. Again, we have a big last two weeks of December. Not saying it's going to come true, but this is my best guess. Most of these things on here are just to help you when you're building your models. If it's yellow on there, generally we report those items as an adjustment because they're not comparable between periods necessarily, or they've been broken out on a press release. If they're not color-coded, it has an influence on EPS, but not necessarily EBIT, but it's in the adjusted number. I want to point out a couple of things to get my lobby on this. I still feel pretty good about where we are on integration for the third quarter.
Might be running just a little bit faster. The U.K.'s moving faster than I thought, that might produce an extra $0.01 or so there. I'm in the fourth quarter 2015 column, immediately to the right of the black line for anybody that's following along. We've got a balance sheet item. This is one of the things that I don't particularly care about. We have a balance sheet cleanup item that we have to adjust that goes through earnings. We're going to take a charge for that because that acquisition is more than a year old. I also have a slightly larger balance sheet adjustment that's a good guy, but it's within the year period, so that goes directly to the balance sheet. Unfortunately, the good guy goes directly to the balance sheet. The cleanup of something that's older than a year goes through the P&L.
Not a big fan of that accounting, I think that it's immaterial regardless. FASB's working on that to give us some relief on that, what I consider to be nonsymmetrical accounting. Not the first one on this page. You heard the organic growth. Before I answer the question on a hypothetical, it's hard to grow margins unless you have organic greater than 3%. I think that we'll come in someplace between 2%-3% organic growth all in everything for the brokerage segment, supplements, contingents, core, everything will be in that range. I think that we can hold margin equal to last year, which was about 24.4%, 24.5%, or maybe even have a smidge of margin expansion in that range. We'll just have to see where we come in. That's why I said 24%-25%. No change in the non-cash items.
Now here's the other accounting item that we all love, adjustment charge due to net better performing mergers. Remember, if we put up an estimate, we have about a range in earn-outs between $0 and $700 million of potential earn-out payments. Our best estimate is about $250 million of that, within that range. That $250 million has moved up to about $260 million in our estimated payments. 23 deals look like they're going to perform better. About 17 deals look like they're going to perform slightly worse. They're all a couple million dollars one way or another, we got a charge that goes through the P&L. You're all used to seeing that, Cory Walker from Brown was also very unconstructive on this accounting. I think this should go through other comprehensive income, but that's all right. It's a non-cash adjustment. The other thing. Oh, here's another one.
Other non-cash charge, we're going to take a $7 million-$9 million write-off intangibles related to our wholesale business down in Australia. We bought this in 2012. We did a lot of business with Marsh, Aon, and Willis and JLT when we bought the OAMPS business in Australia. Now that we're a big retailer, they don't want to trade with a wholesaler that is owned by a retailer. You know that Dave McGurn's business, there's hardly any Aon, Marsh, or Willis business in that wholesaler. But we're keeping all the smaller account guys, but it's a non-cash write-off of the amortization. We're writing off a little software down in Scott Hudson's business as they put in a new system. We have some obsolete software there. I think those are kind of the big soundbites that are a little different than what was in my October conference call.
Any questions on this? Go ahead.
Is this going to be on the logo on it?
Well, what's going to be an adjustment? I mean, it's your models on the sell- side. I don't think it'll impact your model because we'll break this out as an adjusted item, you report adjusted the first call, I think.
I'm sorry. When we think about our 2016 models, there's no kind of one-off business in terms of organic growth that we should think about excluding that's going to impact next year's numbers?
Oh, good question. Let's talk about 2016 a little bit. Here we are in December, again, I'll have a lot of more transparency on next year. Here are some things that are facing us that I think that in 2016, that it'll be interesting to see how we do it. There's a couple of law changes in the U.K. regarding commissions that can be paid on pension business that come through the benefit space. That might hurt us a couple million dollars because we just can't take a commission on placing that business, so it's not a big number. There could be some really small pods of business that we decide.
When you do $1 billion worth of revenue, basically, in acquisitions in 2014 and between the couple of years, there's two or three little businesses that might add up to $25 million of revenue that have no EBITDA on it, or we don't think there's good growth prospects on it. We may cull those out and some, but we would show that as an adjustment. I don't think it'll affect your numbers that much at all. We've got the integration in the U.K. Those are the things that on the core business brokerage and risk management business, I just don't see a lot of noise next year in the numbers that would be coming through. We're not doing any big deals. Integration is kind of on track and known. Those are just executing a plan.
As I think out loud here, I don't see anything big. If we did, I'd telegraph it. In January, I'll have a better idea. We'll have been through the budget process, I will have definitive plans from the folks. If there's anything, I'll tell you in January, you can update your models then. Might be February 1st. I forget when we're doing the earnings release this quarter. January 30th or February 1st or 2nd, something like that. Health of the business. I'm really excited about our business around the world. I'm going to be in Australia here in a couple of months' time for a big piece of time there, but I've spent a lot of time with the Australian leaders. They've been over not only to the U.S. but to London to see what we're doing there.
I'm really excited about these businesses around the world. These are manageable opportunities for us to get better. I do believe that we have people that know how to do this. They have the energy to do it. They're bought in. Big thing at Gallagher owners are culture, is it may take an extra three or four months to get buy-in on an objective, but once you get buy-in, people are good about it. They execute, they deliver, they make it happen. We didn't talk about Scott Hudson's, the Gallagher Bassett business very much from my standpoint, but that team is really hitting on all cylinders right now. You're seeing organic growth almost to double digits on that. They've got great reputation, good leadership. They're refining the business model. Even Scott said, I didn't have to tell him to put his margins up another half a turn for next year.
He's doing it on his own. I feel really good about that business. The real question, somebody asked, "Why Gallagher Bassett inside of Gallagher?" You got to understand the genesis of Gallagher, is that we started off by being self-insurance experts. When you sell self-insurance, you got to have a claim provider in order to provide that business. That is really Gallagher's success throughout the '60s and '70s into the '80s was the alternative market. Right now, we think at Gallagher that we do things, certain things better than the carriers do themselves. Right? We think we sell insurance better. For some of them, we might underwrite better because on our MGA, MGUs. We're not good at making investments. We're not good about underwriting risk necessarily. We're not good at necessarily capital deployment in order to insure that risk.
We let the carrier do that. I think 50% of our volume might be coming from the alternative market right now between captives, reciprocals, pools. Just certain items inside. Gallagher Bassett pays almost $10 billion of claims in a really small vertical, workers' comp, which means a worker gets hurt on the worksite, or general liability, which means a customer gets hurt in that location, right? That's $9 billion worth of claim payments that we do. I think we'd be the fourth largest or fifth largest claims payer in the U.S. just based on claims that we pay. Why do we do it? We think that we do it better than many carriers that don't have large work comp business. We think we do it better than them.
Anything that a carrier doesn't do as well as maybe we will, we think that provides good shareholder value in terms of, we're in with the carriers. We also have all these customers that want to go into the alternative market, not only that we're selling, but other brokers are selling, that will need claim service. It fits inside of us as we do things better in certain areas than what maybe the carriers do. That's why we're in that business. Brian?
I know the question was asked before about buybacks. How's the company thinking about its dividend policy? You've been raising it $0.01 a quarter for the last couple of years. Prior to the recession, you were growing more in line with earnings growth. Just like to get a sense of how you guys are thinking about the dividend.
To me, it's just all cash flow. You tell me, would you like a constantly increasing dividend and no stock buybacks? There's alternatives that you could dramatically reduce the dividend and do a buyback every year instead. We believe that having a steady dividend, we wake up every day thinking about what do we need to do to create more cash flows in order to increase that dividend. I think there's a healthy partnership there of constantly returning cash. If I can get out of the business of using stock in deals, it's a nice cash flow for shareholders. I'm sure the board will look at it carefully in January and make a decision on whether to increase it or keep it flat or decrease it. Those are the only three alternatives, right?
I'm not saying one way or another, we've never decreased the dividend in 30 years. We've held through the recession, through some other tough times, losing content. We chose to make the dividend not your problem, but our problem. I think you'll see us being very similar in the future. We're not using a lot of shares in deals. We don't put out that many shares for compensation. The burn rate, we don't have that big of a ladle out every year in compensation. I think dividend's a wise capital management for us to do for shareholders. I think a lot of you want the dividend, I think that's important for us, too. Kai?
If we put all the parameters together today, like organic growth, like 2%, Margin probably will be stable given the organic growth. Your share count, average share count, will still probably trade a little bit higher year-over-year in 2016, probably a couple points dilution. If you put together the earning growth will be mostly driven by what the deal you have done this year and potentially done next year. Is that a fair way to think about it?
Yeah. I think that we'll still have the impact of the difference between outstanding and fully diluted shares just because we issued shares mid-year, so you'll get a little drag on that. The organic margins on that, you end up taking maybe 60% of a brokerage extra organic dollar to the bottom line. On the Gallagher Bassett side, you get about 30 points of every incremental dollar, again, over a certain threshold. Somebody asked Scott, where do you see the opportunity to expand? If Gallagher Bassett is consistently running greater than 5% or 6% organic, they can show margin expansion. We've just been having them reinvest for some of the deferred maintenance that happened there. They've become more competitive by doing that. Yeah, your math isn't wrong on that would be the type of growth.
You get the organic growth. Then you get the M&A arbitrage on it. That would be the other piece you'd want to put in there. I also caution a little bit about EPS because of the amortization history. That does influence. I think there's a better way to measure it than EPS in an acquisitive company, which would be some type of adjusted EBITDAC, less interest or whatever. I think you got to factor in the taxes too.
Anybody else?
Well, it's great.
Okay.
Thanks for joining us here in December. We've got a big couple weeks for us coming through. Hopefully that we'll finish strong and be well-positioned. If you've got any questions, you know how to get in touch with me or Marsha. We do go quiet tomorrow, I think. It's our last day for questions for the quarter, think fast.
Thank you so much everybody.
Thanks, everyone.
Thanks for participating.
Thanks, everybody on the call, too.
Those people on the website, if you have any follow-ups, please feel free to give me a call at 630-285-3501, or you can reach out to me at marsha_akin@ajg.com. Thank you very much again for coming. Have a great holiday season. We're out.