Session. As always, I am always excited to have Arthur Gallagher up here. I don't think you've missed one. I think we've been doing this an awfully long time now, right?
What number is this?
We've been doing this since 1997, Jay and I, and I don't think you've missed one.
Nope.
We have the CEO of Arthur J. Gallagher, Pat Gallagher, and the CFO, Doug Howell. We're going to do the question and answer format, but I thought it might be a good way to start, maybe if you guys would like to reflect a little bit on 2014, and then maybe with a focus on the brokerage segment, talk about just a bigger picture strategy and outlook for 2015. I figure that'll get you started.
Well, that always does. She knows how to feed me.
Yeah, now I'm done.
2014 was a seminal year for Gallagher. I say to my own people that really, if you look at that year, I think it will go down in our history as every bit as important as 1984 when we came public. Came public in 1984, we were a $60 million business. We finished that year, we raised $11 million in our public offer, and finished that year with about a $79 million market cap, but we had a currency. That currency is what we used to do pooling of interest acquisitions to build our company with partners. That was a very, very important year for us. In 2014, our global aspirations were really incredibly improved with the acquisitions that we did in Australia, New Zealand, Canada, and the U.K.
What that's done for us is that in each of those locations, those geographies, we were players there, but we were smaller players. We didn't have the credibility to do the kind of bolt-on acquisitions that have helped us grow in the U.S. We had done an acquisition in Perth. We had a small acquisition in Sydney. We had about $30 million or so of revenue in Australia. When we'd go to compete for that smaller bolt-on acquisition, we would lose out most of the time because we just weren't necessarily seen as a credible player in that market. Today, our pipeline for bolt-on acquisitions in Australia is really, really becoming robust. Same is true in Canada and the U.K.
Today, when you look at Gallagher, you look back to 2014, and you say you really improved the global franchise to a level now where you can take the very same strategy that has built Gallagher in the U.S. and employ that on a global perspective in those other locations, which broadens our reach and allows us to be credible acquirers. At the same time, this is not just a roll-up strategy. It's exactly what we did in the U.S. We're going to take these opportunities to bring people in that are good resources. When we do an acquisition, we always say, yes, we're looking for a revenue stream, continuing revenue stream, and a continuing earnings stream. What we're also getting is incredible talent and capabilities and brains, and that's what we're going to do now on an even more global basis going forward.
2014 was just an outstanding year. I couldn't be prouder of our team. Margin expansion in both our operating businesses, contributions from every place across the globe in every business that we're in, and very bullish on our opportunities to continue to improve our franchise, continue to expand margin, and to grow the business in 2015.
Maybe if we drill down a little bit, again, leaning towards the brokerage segment, and talk some about, and Doug, maybe this is more in your area, I don't know. Talk more about perhaps organic growth. You've been running in that 4-ish% range, and it's been volatile, seasonality and things like that play into it. Perhaps your strategies for how you're looking at organic growth for 2015, and of course, there's an implication that you're taking shares. Maybe where you think that's coming from or how you're doing it, and just flesh that out.
Let me hit the numbers first. I think you're right. We typically sell less in the first quarter than we do in the second, third, and fourth quarter. Gallagher is a seasonal company, and our organic growth has historically in the first quarter been less. There's two reasons for that, is that we're a pay-for-performance calendar year basis company, and so a lot of our producers work very hard through December 31st, and usually the first quarter is when they take their vacations. That's when our sales awards meeting happens. Typically, we produce a little less new business in the first quarter. Organic growth is slightly less than that. Second of all, the niches that we play in that we're particularly strong in, when you look at the higher ed, not-for-profit, municipality business, et cetera, those tend to have second and third quarter renewals.
As we're farming new business out there or ginning up new business, those would naturally come on during the second and third quarters. We tend to skew heavier production in the second and third quarter on our retail business. Benefits business is naturally a year-end, especially in the U.S. Most of them are calendar year companies. They put their benefit plans together in the fall. They offer it to their employees in November and December, like most of us enroll. You get lift in the third quarter from our benefits business. Organic in the 3%-5% range. Typically, we sell 10%-12% new business. If you take a book from last year, the producer will sell 10%-12% new. They tend to lose 4%-5%. You get kind of a glide ratio of 4% or 5% going forward.
Rates and economy right now, I'll let Pat talk about the rate environment, but really, rate and economy hasn't contributed much more or less than a point to our organic growth. Just when you look at rates, they're largely stable, up 4%, down 2%, flat. That's a stable environment, and it's been that way for four years. Exposure growth is an opportunity. As you see the recovery in the U.S. economy in particular, if a person has 10 trucks and they put on two new ones, they've got to buy 20% more insurance. You can see that quick math. They may get a 2% discount on the 10 trucks, but they've got to buy 20% more. We're probably geared a little bit more towards exposure growth than we are rate in a flat environment right now. How do we look forward to 2015?
We see it much like 2014, frankly. We see it as a really good, healthy environment for the brokers right now.
You talked about share, Alison, in terms of where we're taking share from. We know this because we now have the capability of measuring really everything. We know that about 90%-92% of the time when we go into competition, we're competing with somebody that's smaller than we are. When you take the size and the fragmentation of our industry, it's really quite remarkable. If you took Marsh, Aon, Willis and Gallagher and Brown together and add us all together, on a global basis, we have no market share.
Where we're taking share is where we have an opportunity to show a client that we have capabilities that are superior to the local broker, and that we can do a better job of both helping them grow their business, as well as taking care of their risk management needs, and we are taking share from the smaller players.
If we could go further in the brokerage segment and talk about how this all plays out for the margin. Maybe actually before you talk about the margin, just one little thing popped in my head on retention of business. If you could talk about what you're doing there, then maybe we can go out to the margin and how your organic growth, you've talked about what levels you can expand the margin at, et cetera, how you're looking at the brokerage margin for 2015.
I'll take the retention aspect, and Doug can take the numbers. We get up every single morning, and if any of you have followed the Gallagher story, you've heard me say this 150 times, you're probably sick of it, but we try to do four things. The first thing we get up every morning and do is not lose an account. We don't want to lose business. Second thing we do is we're aggressive salespeople. Our culture, everyone knows that from the CEO down, we're peddlers, and we're proud of that, and nothing happens till you ring the cash register. All hands on deck for a new opportunity or for an opportunity to serve and save a client. Second thing we're trying to do is get the best people in the business to sell their business to us.
They got to be making money because if they can't make money for their family, they won't make money for us. They got to be able to grow, and we've got to look at them and say, "We can double together faster than separate." Our organic growth is key, mergers and acquisitions are key, and then to Doug's next answer, productivity is key. We want to continue to expand margins to be a higher level of quality, and we've done that over the last five to 10 years by instituting a tremendous service center in India that has helped our quality and helped our expenses. The fourth thing we concentrate on every single day is maintaining a culture that's unique, where we work as a team.
People across geographies, people across divisions work to help the clients, work to help us get new business, work to grow the enterprise. If we continue to stay focused on those four things and execute on those every day, the growth will take care of itself. You do the margin numbers.
Yeah, on the quality side of it and the retention aspect, we actually have some great learnings inside of Gallagher by itself. Gallagher Bassett, our claims paying unit, has a tremendous focus on quality and has for 30 years. We've got the highest quality in the claim paying business, customer retention is well into the mid-90s for that business. We have learnings there, we borrowed from that when we came over to the brokerage side. The brokerage side was largely done, if you go back 10 years ago, on a decentralized basis.
We've spent a lot of time maintaining the local front office feel of the broker being in that community, but much of the work in the middle office, that's the service layer, if you want to add a car, get a certificate of insurance, auto ID cards, we put that into a Center of Excellence that has a substantial amount of work done offshore with our own employees over there. Then we also have consolidated most of the back office when it comes to accounting. What's happened is we've improved our service quality on that, so we just don't make mistakes, and we measure it every day.
We know exactly how many certificates are issued, how many have to be done with rework, how many bills have we sent out versus how many collections we've made, all of these metrics of service that if you put in your own life, you bought the policy from Gallagher because of our market capabilities. You stay with Gallagher because we just don't make mistakes, and the person that's servicing you on the phone in the U.S. is supported with a high level of technical and professional capabilities that are spread around the globe. We get some cost containment on that, but really our quality has gone up. We know this because we measure. We did 57 deals last year of the small guys.
We go in and measure their quality when we get them, then we measure their quality 2 years later after they've been put into our service program, and we know the quality is higher by a large degree. As a result of that should drive and has driven down lost business. You don't want to lose a client because you issue a bad bill, or you don't get the certificate right, or the auto ID card show up 2 weeks later, or the policy shows up 90 days later after they've had a loss. Those are the things that we're working on day in and day out, and our quality is remarkably higher, and our operating expenses are lower, too.
That puts the operating expenses down, allows us to expand margin a bit. I think the other things that we have that are going for us when it relates to margin is that the economy is improving. Doug's point, if I have 10 trucks and I add two more, there is compensation and other related operating expense that goes with putting those two trucks on. It is by and large, very accretive.
Don't let me monopolize. If anybody has a question, please feel free to raise your hand at any time. No? All right. In the brokerage segment, you've put parameters around your organic growth. I think you've said that around the 3% and upward for organic growth, you can get some expansion in margin there. Has that changed at all? Are you looking at it the same way for 2015?
Well, I think that there's margin expansion, and I think you have to look at the pockets of where it is. There are pockets within our business that last year we posted well over about 25.2% of the brokerage segment adjusted margin. That's a good margin across any of the platforms in which we compete in our jurisdiction. There are opportunities for improvement, and typically that improvement comes from operations that haven't been in the Gallagher fold for a long period of time, or we reach a stairstep in terms of a system enhancement or a systems consolidation. We do have pockets within Gallagher where we like the margin just where it is, but we see organic growth opportunities in those. We do have some pockets where we'd like to have the margin up two or three points in those pockets, and we're working on that.
2015, do I see a big step-up in margin? I don't see that unless it's over 3%. There is margin expansion as you bring some of these other pockets up to the level that we expect. 2016, I would see some more capabilities coming online, that's a year away from now, too.
Perhaps that's a good transition to the acquisition. You made a number of deals over the past, whatever, several years, year plus. You've added to the revenue base. They're sizable by historic nature. Can you talk some about how that's going, how the integration process is going? Then, of course, the next question obviously is, how are you thinking about acquisitions going forward? How's the pipeline? How's the pricing on the deals? Where are you looking to add?
Well, let me take the integration piece from just an operating perspective. The 57 deals that we did that were not the platform deals in the international arena, those things integrate in 90 days. We can buy a small shop and roll it into a branch that's already there or open a new geography and by and large, get those people on Oracle. Over the first six months, get them up on Epic. They start using our document management stuff, they're already integrating into using India within the first year easily, right? We've done that only about 500 times in the last 25 years. We really know what we're doing there, and 57 of them are essentially, when I look out, and I'm really proud of this. We'll do 57 acquisitions in 2014.
You know, I didn't receive one phone call, not one phone call, nor have I in five years, from a seller saying, "The money didn't show up. The closing didn't go well. Your HR people don't know what they're talking about. My people didn't get paid this month." Hasn't happened. It's incredible. It's incredible. The backroom people that we've got that bring these folks aboard is unbelievable. Then what we do in terms of bringing them capabilities, it's virtually overwhelming. They almost have to say, "Wait, I just can't." It's a lot of data overload. There's so many capabilities, what we do is help them funnel their opportunities to meet where our capabilities are. When you get a couple of new sales in an acquisition, it takes off from there.
Our larger acquisitions, like Bollinger in New Jersey, like Wesfarmers, et cetera, that's going to take 18 to 24 months. That doesn't go the same as the $3 million shop that rolls into our Chicago office. These are people that have been owned by private equity. They've heard it all before. They're skeptical. That show me, show me, show me is what they want to know. Is it really going to be better here? Well, I'll be darned. You understand what I do. I'll be darned. Someone I called for help actually helps. At about 18 to 24 months, they are Gallagher. The larger ones take a little bit more. The pipeline itself has never been stronger. The pipeline is not full of $100 million deals.
Remember, if you look at Business Insurance's July issue, where they rate the largest brokers in the U.S. and globally, to be number 100 in the U.S. last year, you did $24 million in revenue. We think there's 30,000 of them in the U.S. You think about the fragmentation of this industry. It's unbelievable. Our pipeline gets stronger and stronger, and our best salespeople for the acquisition effort happen to be acquired parties that are happy being part of Gallagher. Couple that with the fact that demographically, most of these acquisition targets are run by baby boomers. I hate to say this at 63 years old, they're kind of running out of runway, right? They got to do something.
When you finally make that leap in your mind that I've got to do something, then you start thinking about where do I want to finish my career and where do I want our people to be? All of us that are in the acquiring mode have different personalities. If you don't want to be with Gallagher, you got other choices. That's why those of you that listen to our quarterly conference call will always hear me say to our merger partners that I appreciate the fact that they chose to be with Gallagher, because there's huge choices in the marketplace. The people that are telling them that that's the right choice happen to be people that sold to us in the first place. It's really a benevolent circle. It's kind of a cycle.
We've got people out there talking about why joining Gallagher is a good idea. Those that join come aboard, they see their career path and their people happy. They become a vocal part of that circle saying, "You really ought to consider this. It's a great alternative for you and your family to capitalize your life's work. More importantly, if you love insurance broking and you love to sell insurance, this is a platform you can double your book of business on quicker." By the way, when they do that, we pay them. The entrepreneur that joins us, that's paying he or herself or himself $500,000, sells his business, capitalizes his or her life's work, and two or three years later, could be easily making $1 million. That's magical.
I think that on the financial side of it, if we did 57 deals on what I consider our tuck-in merger partners, average was about 5.9x EBITDA. Weighted average is about 6.7x EBITDA. The businesses that we buy are of nice upper 20s margins. These are not turnaround stories. These are not retirement stories. These are people, like Pat said, that want to come in and believe that putting our companies together will be a win-win for us both. The pipeline is very long. We review it every month. Each division goes over it every week. There are people that we've known for three or four years that maybe weren't ready to sell three or four years ago. They're ready to that point, so we'll date them as long as they would like, and then we'll get married when the time is right for them.
We don't want to force them into it. Just the demographics of 17,000 folks in the U.S., or agencies in the U.S. that are below $20 million in revenues, there are opportunities for those folks everywhere. We're seeing that in Canada, Australia, New Zealand, the U.K. As we open up those geographies, those opportunities are there too. Our acquisition pipeline's full. The multiple on it, believe it or not, has been kind of in that six range for the last 10 years, since I've been here. It was a little lower during the recession. Maybe it's come back to kind of where it was pre-recession levels. Owners know that it's a terrific opportunity for them to monetize and stay on and have a career, and so I think they see that as a terrific multiple that they can get for their franchise.
What about your ability to fund deals in 2015, the stock versus cash trade-off? What kind of ammunition do you have?
Yeah, I think that if you go back and listen to our comments in the conference call, we think we've got about $400 million worth of free cash flow that will be thrown off by the business this year. We have about $200 million in the balance sheet. We will probably use two or three million, four million shares during the year because there are tax-structured transactions where the seller will say, "I want to trade your stock for my stock because I want to defer the capital gain treatment." That's called the tax-free reorganization. We will issue stock. Then for any partner that would like our stock, we would be more than happy to give that to them in lieu of cash because we like partners in the tent. A lot of our merger partners have come on. They've held most all of their stock.
They've done very well on it. It creates a culture of partnership, togetherness, one stock, one company. We'll do that. If you look at it, $700 million-$800 million worth of acquisitions is probably our capability this year. The pipeline is big enough to support that at this point, I don't see us using a ton of stock at all, just the de minimis amount, in my opinion, probably less than 3% outstanding in order to fund deals this next year.
There's questions out here. Jay, do you want to ask a question?
Sticking on the M&A topic, who are you competing against for deals these days? Has that universe changed?
The competition for deals is very real, it's very robust, you're competing on a number of different playing fields. Number one, there is some combining going on of local agencies that are private. You've got people that are private that know a competitor locally, they'll talk them into joining together, maybe joining into a bundle, over time, maybe selling that bundle. Secondly, you have private equity in our business, very substantial private equity plays in our business. You have Hub International, very successful firm, was public, went private, has remained private with private equity funding. AssuredPartners, you get to USI, who's a private company as well.
There's a lot of private equity money chasing deals in our business, and they have a whole different story to sell than we do, which is why when I talk about the competition, it's rampant. You have the publicly traded brokers. Marsh was not very active in the acquisition activity in the HC business just five years ago. They've become very active. They've done very well. They're a strong competitor. When you take a look, every single one of us as an organization has a different personality. Quite honestly, if you're someone that would really rather not do the types of things that I'm saying you have to do, which is come on our agency system, use our India service center, have our professional standards, et cetera. You're not likely to want to join Gallagher if what you'd really rather do is be left alone.
That's what most of the private equity firms will do. They'll say, "Look, we're buying your business because you're a good operator. Keep sending us the money. We'll build this thing up, and then we'll eventually trade it out, and you'll make more money." Right? The competition is very deep, and what we're selling from our perspective is, let us help you double your business. Why would we leave you alone? Why wouldn't you want to participate with a larger team of people? Every sale that we make today, as opposed to when I came into the business 40 years ago, is essentially when you get over $20,000 in revenue, a team sale.
The one-off producer who goes and knocks on doors and talks about, "I'm Pat Gallagher, here's my card, and you and I are going to do business together for the next 20 years," that's a non-sale anymore. What you want to know as a buyer is that I'm bringing resources to you that are going to not only help you with your insurance or risk management needs, but are going to likely help you with your business because we have a deep understanding of your business by virtue of the niches that we've put together over the last 20 years. That's how we compete.
I think the pricing actually, though, when you look at it, there's a level of business brokers out there that are selling the small to midsize shop. The price isn't all that different between us, so really the owners that are selling, they really want to decide who it is that they want to marry into and be a part of that. The competition. There's so many of them around the world that we can do 50, Hub can do 50, Brown can do 50, Marsh can do 50. There's that many of them that show themselves, because that's right, do that math with you right there. If there were 17,000 at the end of the year, okay, we're now down to 16,500 at the end of this year.
I think if you look at some of the tracking, there might have been a total of 175 deals done last year, something like that when you look at, it just depends on how you track it. There's plenty of opportunity. Like Pat said, most of them are owned by baby boomers at this point. You've got this compression that will go on over a 10-year period where people decide where it's best to move their franchise into. There's some people internally that will buy it from the owner. Those are prospects for us five years from now. They'll buy it from the owner, they'll reshape the agency into their form. Agency perpetuation is very hard in this business.
There's just not enough owner-operators that have hired talent that will take over their agency from them on an ownership basis. That level of person is a little less risk willing, so they're not willing to go out and borrow everything they have or mortgage everything they have to buy the agency. They eventually see, why would I want to compete when I can join?
Question? Oh, go ahead.
Talk a little bit about the nature of the business from the perspective of those assuming the insurance risk. As I understand your business, after you help place it as an intermediary, I'd be interested in any thoughts on what you're seeing develop there, competitive advantages your company brings to that side of the equation. Thank you.
The question was, what do we see in terms of the, I'm going to try to rephrase this so I make sure I get it right. As an intermediary, what are we seeing on the risk-taking side? First and foremost, understand we are dead committed to never being a risk-taker. Right? If you look at our mission statement, we clearly put our stakeholders, number 1 is our client, number 2 is our people, number 3 are the insurance company partners that take the risk, because we aren't going to do that. Then if we get those right, the shareholder wins, right? On the risk-taking side, it's a very dynamic, and it's a very sophisticated market. There's plenty of opportunity to place risk. It's not what I would call a classic soft market, so it's not necessarily a buyer's market, but it's a disciplined market.
This is a change. I appreciate your question because if you look at us historically, if you graph out what's happened with rates and the insurance, especially property casualty, global insurance pricing, you typically have a period of time which we refer to as a hard market, that's when pricing spikes. That's when balance sheets have to recover. When that pricing spikes, which it did in 1974, it did in 1984, it did in 2001, you have a complete disruption of the buyer community. You're running your trucking business, you're doing just great, I come in one day, I say, "Tom, I'm sorry, but prices last year were $100, this year they're $250. By the way, your deductible's going from $25 to $100." That doesn't make you very happy. Right? That's not a happy client.
Right after those balance sheets replenish, we go into what's called a soft market. A soft market is where we're selling, the prices are coming down, they get to a point oftentimes where the prices have come down so far, they don't make any sense. All through the 1990s, I kept saying, "One insurance company's going to go broke, surely the rest will get the message." That didn't happen. We had literally numbers and numbers of companies that wrote themselves into trouble and went broke. Kemper Insurance, Reliance, et cetera. There's been a change over the last four years. The analogy I use is that the benefits business used to be cyclical as well. The cycle went out of benefits in the early 1980s.
Any of us that are running businesses know that you never sit and say, "How much cheaper is my benefits insurance going to be this year?" It's how am I going to mitigate these costs going up? What happened? A, there was transparency, B, loss costs were escalating to place that if you cut rates, you got killed. Look at the PC market today. There's no yield. If you play the cash flow game, you're not going to get a big yield on that cash flow that's going to cover bad underwriting, right? Secondly, you have much better information. Significant underwriting companies like Travelers, Zurich, et cetera, CNA, those CEOs know where they're making money and where they're not making money literally every day across every type of risk, right?
You now have Sarbanes-Oxley, because in the old days, if you posted a 90% combined loss ratio, you'd basically tell the world that you did 96%, and you'd put six points away for a rainy day. You can't do that anymore. What's happened is in the PC world, in particular, where we're placing risk for our clients, the rates have, for the last four years, essentially been flat. They've gone up three, they've been down two, they're down two, up one. That is a very, very different environment. Frankly, some of the investment communities has a hard time getting their head around that. I don't blame them because the muscle memory is hard, soft.