Arthur J. Gallagher & Co. (AJG) J. Patrick Gallagher, Jr. on Q4 2015 Results - Earnings Call Transcript

| About: Arthur J.Gallagher (AJG)

Arthur J. Gallagher & Co. (NYSE:AJG)

Q4 2015 Earnings Call

February 03, 2016 9:00 am ET

Executives

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Analysts

Ryan J. Tunis - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Elyse B. Greenspan - Wells Fargo Securities LLC

Michael Nannizzi - Goldman Sachs & Co.

Charles Joseph Sebaski - BMO Capital Markets (United States)

Adam Klauber - William Blair & Co. LLC

Josh D. Shanker - Deutsche Bank Securities, Inc.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Sarah E. DeWitt - JPMorgan Securities LLC

Kai Pan - Morgan Stanley & Co. LLC

Daniel D. Farrell - Piper Jaffray & Co (Broker)

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Sean Dargan - Macquarie Capital (USA), Inc.

Operator

Good morning and welcome to Arthur J. Gallagher & Company's Fourth Quarter 2015 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be opened for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at this time.

Some of the comments made during this conference call, include answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject to certain risks and uncertainties that will be discussed on this call, and which are also described in the company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed today.

It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thank you, Brenda. Good morning, everyone, and thank you for joining us on our fourth quarter and year-end conference call. We appreciate you being with us this morning. This morning, I am joined by Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

Today, I am going to comment on total company financial results, make some comments on our merger and acquisition program, and then I'll move into each segments' results and provide a bit of a wrap-up after Doug's comments, and about really an awesome recognition we received by JD Power & Associates, and then we'll get to your questions.

We had a great quarter, capping a great year. Total company, strong finish to an excellent 2015. Our combined brokerage and risk management core operations in the fourth quarter posted 4.2% total organic growth, 10% total adjusted revenue growth, adjusted EBITDAC was up 12%, and we expanded our adjusted margins by 46 basis points.

For the year, on a combined basis, we posted 5.1% total organic growth, that's 5.1%, 17% growth in total adjusted revenues, surpassing $4 billion in revenues; 22% growth in adjusted EBITDAC, and we expanded our adjusted margins by over 90 basis points. And to top it all off, we topped the $100 million of net earnings mark from our clean energy investments, that's up from less than $4 million in net earnings in 2011. What an amazing run and we've got more of that to come in clean energy.

Let we move to some comments on our merger and acquisition program. We completed 15 mergers, totaling $46 million of new annualized revenue in the fourth quarter. For the year, we did 44 mergers, two of which were in the risk management segment, totaling about $230 million of new revenues. Let me break that down a bit, a $195 million of that was in the United States, split half property/casualty and half employee benefits. $15 million was in Australia and New Zealand, $15 million in the U.K., and about $5 million in Canada. That averages out to about $5 million in revenue per merger. We paid a weighted average price to EBITDAC of 7.6 times. As I do every quarter, I'd like to thank all of our new partners for joining us and extend a very warm welcome to our growing family.

Two further comments on mergers and acquisitions. First, since July 2014, when we did our last big deal, Noraxis in Canada, we returned to our program of doing smaller tuck-in mergers as we forecasted in every conference call and investor meeting since then. Further, for these mergers, we're still paying fair prices and only slightly more than what we were paying for smaller tuck-in deals prior to 2014, consistently in the 6.5 range to 7.5 range. So when I look forward, I see a merger and acquisition program in 2016 as being very similar to the last 18 months. Our merger pipeline remains very strong, particularly in the United States, and we are also seeing good opportunities in Canada, New Zealand and Australia.

With having platforms in those locations now and most of our integration efforts behind us, merger prospects now see Gallagher as a partner with vast capabilities and they want to join us. Further, we do not have any large deals on our plate right now, neither domestic nor international, and based on our current pipeline, we do not see the need to use stock to fund mergers in 2016.

And second, final comment on mergers, one of the first things we do when we complete a merger is to quickly collect and analyze their client and carrier data. Today, we have nearly all of our data from every client and carrier globally in one spot. We use this data to help our carrier partners develop better programs for our clients and we use this data to help our clients match up with the right carrier based on their needs. This value-add, to both our carriers and to our clients, gives us the opportunity to enhance our compensation. We see tremendous opportunities for that in 2016 and beyond.

Let me move now to the Brokerage segment. Brokerage fourth quarter results were very strong, adjusted revenues up 11%, 2.8% in total organic growth. Adjusted EBITDAC is up 12% and our adjusted margins expanded by 30 basis points.

Brokerage results for the year were terrific. For the full year, adjusted revenues were up 19%, 3.6% total organic. Adjusted EBITDAC, up 22% and adjusted margins expanded 70 basis points. And in 2015, we posted adjusted EBITDAC margins of 26.1%, that's up over 400 basis points since the full year 2011. Four full points of margin expansion. What a fantastic accomplishment and it shows our Brokerage business is really, really healthy and vibrant.

So, let me drill down a bit into each of our Brokerage operations around the world. First, domestically in the United States, that's our retail property/casualty, our retail employee benefits consulting and our wholesale operations, which for the year, combined for about $2.1 billion of our $3.3 billion of Brokerage segment revenues. In the fourth quarter, these units combined to post 3.5% organic and expanded their margins by about 80 basis points.

For the year, they posted 3% organic growth and expanded margins by 120 basis points. These units all have annual adjusted margins in the very high 20%s, about 28% and each unit is nearing the upper-end of our margin expectations. To put this into perspective, over a four-year period, as I said just a moment ago, margins in these units are up over 400 basis points, which is really a nice work.

Looking towards 2016, we're seeing domestic retail and wholesale PC units having a slight rate headwind, on average down about 5%. Property off more like 10%, with casualty a little less than flat, but we are seeing increases in exposure units offsetting that a little bit, and we also continue to have nice new business growth and our retentions are holding. So, we see 2016 a lot like 2015 in our domestic retail wholesale PC units.

As for our retail employee benefits business, we're seeing more activity in 2016. Our clients and prospects are now having to deal with the complexities of the ACA, much of that happens in the second half of the year, but we still see organic better in 2016 than in 2015 in our benefits units.

Next, our international operations, that's our PC brokerage operations in Australia, Canada, New Zealand and the U.K., which for the year they combined for a little over $1.2 billion of our $3.3 billion Brokerage segment revenues. Combined, they posted 4% organic growth for the full year and expanded margins by 50 basis points. In aggregate, they are posting mid-20%s annual adjusted margins.

And I think it's worthwhile for me to touch on each country for just a moment. So, I'll start with Canada. About $125 million of annualized revenues, fourth quarter organic was in the mid-2% range. Margins are similar to our U.S. operations, in the very high 20%s. So, also near the top of our margin expectations.

When I look at our January 1 renewals, rates are fairly stable to even slightly a bit positive. As for exposures, while we are not really significantly exposed to energy risks, the broader Canadian economy is suffering because of the knock-on effect of those businesses reliant on the energy sector. But despite all this, the team is in the final push of integration efforts to convert to our systems and they haven't missed a step. So, I see a similar 2016.

Next, moving to Australia and New Zealand, about $265 million of annualized revenue. Fourth quarter organic was near 2%. Of the two units, New Zealand performs better in terms of organic end margins, which is in line with what we saw when we did the acquisition in 2014. Both countries have been faced for several years with soft renewal rates, especially in property and their economies are weak, but starting to show a bit of recovery with their weaker currencies.

In addition, our January 1 renewals are starting to show a bottoming of the cycle. Both New Zealand and Australia are effectively finished with their integration efforts. It's important to note, in aggregate, margins are nicely in the very high-20%s, which is a touch better than what we expected when we purchased them in mid-2014.

So, while we do have some modest opportunity for margin efficiencies on Australia, in 2016 our real focus is to energize the sales culture in Australia. I was there in the fall and I can tell you the Australian team is working with their counterparts in the U.S. and New Zealand to build a similar sales and service culture.

Finally, let me move to the U.K. About $775 million of annualized revenues, $360 million of that is retail property/casualty, that's our branch network, $325 million is London and Bermuda specialty, and about $90 million is underwriting and programs. All together, about 1% organic growth in the fourth quarter and a little over 3% for the full year.

Aggregate margins are a little bit over 20%, and so let me make a couple of comments on the three units. U.K. retail, we posted flat organic in the quarter and full-year 2015, and margins are in the very high teens. We're seeing rates flat to slightly down, and we're not seeing much growth in exposures due to the stable economic conditions in the U.K.

But posting flat organic is actually quite an accomplishment given it is this unit that's going through most of the integration work that's remaining from our larger deals. Remember, we are pushing four different retail organizations together and we've become a top-five retailer in the U.K. in just two years time. These retail branches are going through the similar processes that we did in the U.S. over the last five years. Those are standardization, simplification, using common technologies, migrating work to our offshore centers of excellence, using our niches and adapting the Gallagher's sales culture and learning our retail playbook.

2016 will be the year where we evolve from a unit going through integration to a unit focused on harvesting synergies, and executing on our sales and service plans. Accordingly, we should see a little margin improvement in 2016, and then hopefully much more in 2017.

U.K. underwriting, underwriting program is about $90 million in revenues, about 10% margins, which is similar to prior years. Organic growth was flat for the year, but our efforts to improve this business showed promise in the fourth quarter and we posted over 5% organic growth. This is a collection of underwriting businesses, many of which came with the retail acquisitions of Heath, Giles and Oval. We have reconstituted management and these businesses have a line of sight towards improvement in 2016 and 2017.

, about $325 million in revenue. For the year, these units posted over 5% organic growth, but it was closer to 1% in the fourth quarter. We're seeing some pressure on rates in most lines and in particular, in the energy and marine lines written by our London specialty units. Margins are in the lower mid-20%s, which is really respectable given the nature and complexity of this business.

This is the unit that also has about $30 million in revenues from smaller and emerging markets, that breaks down to about one-third in the Caribbean, one-third in Norway and one-third in South America, which posts similar margins. Clearly, none of these smaller units is financially significant, but we did these mergers because they have specialties that align well and trade with our U.K. and Bermuda specialty businesses.

So, to recap our Brokerage segment. In 2016, while we see retail PC rates as a headwind, we do see PC exposure growth offsetting this partially. We also see employment growth and complexity surrounding the Affordable Care Act, as tailwinds for our employee benefits units. In addition, our history of strong new business generation, solid retention and enhanced value-added services for our carrier partners should all result in further organic growth opportunities around the world.

Integration efforts related to our larger mergers we did in the U.S., Australia, New Zealand and Canada are effectively done and we expect our integrations efforts in the U.K. to be nearly done by the end of 2016. Integration costs in 2016 should be less than half of our 2015 amounts. Margins are excellent in most of our units around the world, with some further opportunities for efficiencies in Australia and our U.K. retail and underwriting businesses.

So, let me move to our Risk Management segment, essentially Gallagher Bassett Services. Risk Management finished the year with an outstanding fourth quarter. Adjusted organic growth of 10.5%, adjusted EBITDAC grew 17% and margins improved 140 basis points. For the full year, we posted over 11% organic growth, 18% growth in EBITDAC, surpassed 17% of adjusted margins and we expanded margins by 120 basis points.

Gallagher Bassett is now over $700 million of annual revenue. And since we embarked on our retooling efforts five years ago, it has shown consistent, excellent, top and bottom-line results, and we see it continuing to gain momentum. In fact, 2015 was the third year in a row where we posted around 10% organic growth and also hit or exceeded our annual margin targets, up nearly two full margin points since 2011. 17% EBITDAC margin is our 2016 margin target and near the top of our expectations.

Our U.S. claims management business is about $575 million in annualized revenues, and posted especially strong double-digit organic growth for the quarter, and full-year margins, as I said earlier, of around 17%. We've been successful in developing new and improved services for our clients. Following last quarter's introduction of Luminos, which is Gallagher Bassett's acclaimed risk management information system for clients, we rolled out GBGO, the first of a suite of mobile technology products designed specifically for use on smartphones and tablet devices.

In addition, new medical management products and approaches together with broader adoption of GB products by clients has led to improved claim outcomes as well as increased revenue for Gallagher Bassett.

Strong performance in state administered workers' compensation schemes in Australia pushed Gallagher Bassett's operations to well over $130 million in revenue in 2015, or roughly 20% of the segment's revenue, also posting organic growth of about 10%. GB's international operations are expected to make a strong contribution again in 2016, with investments in our self-insured and carrier segments scheduled to come online later this year.

So, really, truly a remarkable year on all measures, which is a testament to an incredibly strong sales and service culture. These results don't just happen, our team gets up every day and works relentlessly to service our clients and to aggressively demonstrate our capabilities to new prospects. A great quarter, a great year, I couldn't be prouder of our colleagues' efforts and what we've accomplished. Over to you Doug.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks, Pat, and good morning, everyone. Before I start, some housekeeping. Starting with this quarter, you'll see on our investor website two documents, plus our earnings release. One is the supplemental quarterly data document. That's the one that we've been providing for over a decade, but you'll now see that it contains only historical reported and adjusted information.

The other is a new document, it's called CFO Commentary, it is this document that contains our forward-looking items. In other words, it summarizes both the commentary I typically provide in these calls, plus it has the corporate segment earnings forecast that were previously at the back of the supplement. We hope this CFO Commentary document makes it more investor friendly and easier to use, rather than to having to dig out my comments from the conference call transcripts and back pages of the supplement.

Okay. On to my comments, and like Pat said, an excellent quarter to end a terrific year. Yes, the fourth quarter is a little noisy on the face, but all items are right in line with the forecast we gave you in our October earnings call and then again at our December Investor Meeting. Two additional items we didn't forecast back then.

In the Brokerage segment, you'll see a $0.02 one-time tax item gain. That benefit results from the newly enacted lower statutory rates in the U.K., related to our net deferred tax obligations on our balance sheet related to our U.K. operations.

The other item is in the corporate line of the Corporate segment in the tax column. We had a favorable tax item of about $4 million in the fourth quarter. We were a little conserved in our estimates in the first three quarters of 2015 when we estimated certain permanent items, so when we trued up those estimates in the fourth quarter, it added a couple of pennies of gain in the fourth quarter, but it has no impact on full year.

As for adjustments in 2016, when you digest the information in the new CFO Commentary document, two items will stand out. First, you'll see FX in 2016 being half the headwind that we saw in 2015, and second you'll see that we are forecasting integration costs in 2016 to be less than half of the 2015 levels. I'm really pleased that we are effectively done integrating the larger mergers like Bollinger, OAMPS, Crombie Lockwood and Noraxis, and by year-end 2016, we should be nearly done with Oval and Giles in the U.K.

Now, let's turn to page three of the earnings release to the Brokerage segment organic table. You'll see supplementals way up and contingents way down in the quarter. Ignore the geography, as we simply had a couple of contracts that had some slight language modification that is causing the flip between lines. Rather, I suggest that you look at supplementals and contingents in total and you'll see we're up organically 10% in the quarter and up 8% organically for the full year.

Based on current conditions we expect in 2016, that these lines will organically grow better than the core commissions and fee line. At the bottom of that same page three, you'll also see that we used next to no stock this quarter to fund M&A and you'll see at the bottom of the CFO Commentary, first page, we don't anticipate using stock to fund M&A in 2016 either.

I'll hit some cash flow comments more in a minute.

On pages five and six of the earnings release, you'll see that we had nice margin expansion in the Brokerage and Risk Management segment. In the CFO Commentary, you'll see that we still believe margin expansion for the Brokerage segment is difficult if we don't have 3% organic growth, and you'll also see that we're moving up our Risk Management target in 2016 to 17% from our target of 16.5% in 2015.

Let's move to page seven to the clean energy line on that page. I'm really pleased that we crossed the $100 million of net earnings mark this year which came in right at the mid-point of what we forecasted a year ago. That's really, really great work by the team.

I also want to point out, we've added some more convenient disclosure. On page 12 of our earnings release, on the deferred tax asset line in our balance sheet, we've had a parenthetical disclosure showing that $342 million of our deferred tax asset relates to credits that we've generated, but not yet deducted from our tax returns. Think about it this way, it's effectively a cash receivable from the government as it will reduce our cash taxes paid in the future. I've said before, our goal is to pay about 10% of our global EBITDAC in taxes and these credits are a big part of that strategy.

Looking forward to 2016, you'll see on the second page of the CFO Commentary document that we're forecasting about a 15% step up in earnings in 2016 for clean energy investments, that's if we hit the mid-point of the range, about $116 million of net after-tax earnings.

When we were preparing our 2016 estimates for clean energy, we worked closely with our host utility partners and we assessed the ever-present risk surrounding these investments, things like fuel source substitution, are they going to burn coal or natural gas. We looked at governmental, regulatory, and IRS laws and policy changes. We looked at plant shutdowns during the year, both temporary and permanent. We looked at the location of the plants and the power grid utilization curve. We looked at our supply-chain distribution, so on and so forth.

In the end, as we sit today, we've digested these risks and we feel comfortable with our 2016 estimates. In addition, our 2016 estimate makes a provision for continued warm winter and then reverts to more of a normal spring, summer and fall.

Finally, let me move to GAAP and free cash. First free cash, we have about $275 million of free cash in the balance sheet. As I said last quarter, all of that is technically free cash of that $275 million, but until we complete our integration efforts to consolidate legal entities in the U.K., about $100 million of that cash is hard to access, because it is in hundreds of smaller bank accounts that need minimum balances. We have plans to free up most of those balances over the course of 2016.

Second, you'll see in the CFO Commentary that we're at about 2.5 times debt to EBITDAC ratio. That was down substantially from around 2.9 times to 3 times at the end of 2014. We believe 2.5 times is about the right level going forward.

Third, you'll also see in the CFO Commentary that we might go into the debt markets and raise another $200 million to $300 million. We might do that for several reasons. We can pay off the line, which is currently about $200 million, we can use it for M&A, we have a strong pipeline or we can use it to have cash-on-hand to repay the $300 million tranche, which carries a 6.44% interest rate and comes due next year or we can do a combination of all three.

So finally let me put all together. If you assume 2 point times debt, if you assume that we use no stock used in acquisitions earnout, if you assume that we continue to do mergers at that 7.5 weighted average multiple just like we did in 2015, we will have ample cash to fund our M&A program in 2016, similar to level that we did in 2015.

Okay. Those were my comments. Back to you, Pat.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thank you, Doug. Before we go to questions and answers, I just want to make a quick comment about the Gallagher culture. It's as strong as it's ever been, we see it in our successful integration efforts, we see it in our branding efforts around the world and we see it in our service to our clients.

In December J.D. Power announced that Arthur J. Gallagher & Company ranks as the highest in customer satisfaction among brokers for large commercial insurance. This is on top of the fact that earlier in the year, we were recognized as one of the World's Most Ethical Companies by the Ethisphere Institute for the fourth straight year. The Gallagher culture is alive and well and developing and growing year-in and year-out. With that, Brenda, we'll go to questions and answers.

Question-and-Answer Session

Operator

Certainly. The call is now open for questions. Our first question comes from the line of Ryan Tunis with Credit Suisse. Please go ahead with your questions.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Hey, thanks. Good morning.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Good morning, Ryan.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

I think, my first question is probably for Doug. In his CFO deck, I think, he said it would be difficult to expand margins if organic is below 3%. I'm just kind of curious under what conditions do you think you could keep margins at least stable and not necessarily expansion, but flat margins, is it 2%, is it 2.5%, is there a wriggle room on the expense side, just curious on that?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Listen, good question. We're always looking for opportunities to get better. I mean, our service quality is pretty darn high if you look at what J.D. Power says, but we have opportunities to continue to improve that. When you are in the 2% to 3% range, I think, that we can hold margins pretty well where they are, below that might get a little tough.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Okay. Understood. And I guess my follow-up is probably for Pat, just thinking back to his comments in December, the 1.5% to 2% organic growth, just some clarity on what that entailed? I know Doug mentioned that supplementals are supposed to probably run north of that level or is that just U.S. P&C, is that all in true organic growth, is that just base commissions and fees, what exactly again were you referencing there Pat? Thanks.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Well, Ryan, to be perfectly blunt, I was coming off of a more pessimistic view given the October/November results, and I was really pleased with what we did in December and finishing up the quarter. My comments were mostly around U.S. domestic PC as well as Australia and New Zealand PC. But I think, given December and the end of the quarter, I'm a little bit more optimistic. Remember, organic growth is comprised of, you mentioned the supplementals, but it's also retention, new business, so there is a lot of components that go into that and we just really had a strong quarter.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thanks.

Operator

Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your questions.

Elyse B. Greenspan - Wells Fargo Securities LLC

Hi. Good morning. So, just following up a little bit on the last question in terms of the organic growth outlook for this year. Since you said you are little bit more optimistic, I mean, how do you see the Brokerage organic growth shaking out in 2016, kind of maybe a ballpark number? And then, digging down into that a little bit, do you see some seasonality by quarter in terms of starting off stronger and then getting weaker towards the end of the year, anything that might impact the numbers as we go through 2016?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Well, I'll let Doug speak about the seasonality, then I'll come back to my view on organic.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Now, actually good reminder, yes. For those of you that have been on this call for years, we are a highly seasonal company. Our first quarter is by far our smallest quarter. Our second quarter and third quarter are about the same and then December comes in just a step below that. So, we are a seasonal company, so, that's why if you look at our margins, we have 26.1% margins for the entire year. And I think if you go back to the first quarter, in the Brokerage segment, they were in the high teens, low-20%s, I don't know if I can pull that out. So, we are a highly seasonal company.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

So, let me address your issues around – or your question rather, which is a good question around organic. Again, what comprises organic? We go out every single day, we try to get new business. We're fighting every single week to keep the business we've got, and that's an ongoing battle. But frankly, we know that 90% plus of the time when we go out to compete, we're competing with someone who is smaller than we are and doesn't have our resources. I think the ACA is beginning to show an opportunity to have expanded organic growth in our benefits units.

Our wholesale units have been very, very strong in terms of organic growth. So I'm a little bit more bullish than I was in December. As I said, I was coming off a weaker October/November than I liked. I was very, very pleased with what we did in December, and if we can carry on with that kind of level of new business growth and hold on to our clients, we should do a little better. I would put that in above 2.5% to 3%, 3.5%.

Elyse B. Greenspan - Wells Fargo Securities LLC

Great. Thank you. And then in terms of your wholesale business, I know that's been a pretty strong driver of growth. We did see a change in management announced earlier this week. If you can just kind of comment about that, was there any kind of timing associated with that announcement or anything you might want to add there?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Yeah. This is, I think, just a great example of where the company is. Over time, you'll see us transition in a number of responsibilities and we've got a great succession planning process. We've got an incredibly strong team. Joel Cavaness, who takes over the unit now in terms of being the CEO, is someone who's been with us 30 plus years, started his career in our St. Louis office, was one of the founders of Risk Placement Services in United States. And it's just the same hand on the tiller, I really like that.

Elyse B. Greenspan - Wells Fargo Securities LLC

Okay. And then last question for Doug, great commentary in terms of the M&A pipeline, and you know the cash and debt to finance potential deals. Just assuming your plans at this time don't assume any kind of share repurchase activity in 2016?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Listen, if we have excess cash, which I don't think we will necessarily, because we have a terrific M&A pipeline, we would buy shares back. We feel comfortable with our debt level, the way it is right now. I don't feel the need to bring that any lower. We have lots of good opportunities out there, and if there – if our cash is – if we have excess cash, we'd of course buy our shares back.

Elyse B. Greenspan - Wells Fargo Securities LLC

Okay. Thanks so much and congrats on a great quarter.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks, Elyse.

Operator

Our next question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your questions.

Michael Nannizzi - Goldman Sachs & Co.

Thanks. Just one question on the acquisition environment. Have you seen any change in the appetite from private equity, just given higher spreads on lower rated debt? Are you seeing any benefit just from your ability to pick up targets? Thanks.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

We haven't seen that come into marketplace yet. It's a little early yet to see that, but we are seeing that private equity folks are out there. Truthfully we don't run into them a lot in our nice smaller tuck-in acquisitions, they're more out there trolling for the large platform acquisitions. But, for us we like picking the smaller partners that we can bring in, but I haven't seen anything on the higher spreads right now impacting multiples paid. It should happen, but we'll see.

Michael Nannizzi - Goldman Sachs & Co.

Got it. And then, Doug, is there any risk if – so if natural gas prices, and I'm guessing that's a more relevant benchmark for the clean energy credits. So, if natural gas prices remain at these levels, is there any risk or how should we think about the risk that plants could come offline. Is that something that – I mean, you kind of alluded to that in your comments, but maybe if you could just give us some thoughts on that? And also just maybe a reminder of what the geographic breakdown of the coal plants where the devices installed are?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah. Okay. Good question. Yeah. We've – and I want to make sure that I'm clear on this, because I've answered it quite a few times, but I appreciate the question is that. We sat down with our host utility partners, and we asked them a simple question: are you going to convert this plant to natural gas in the foreseeable future? And for the ones that we're running, the answer has been no, we don't have the plans to convert to natural gas. Remember, if they do, we can move the plant to another location also. So, it doesn't necessarily mean that that plant all of a sudden ceases to become a revenue generating plant. But right now, based on what we've seen, there was a substantial amount of displacement that happened to natural gas in the early 2000s, around – and into the like 2007, 2010, when natural gas prices fell through the floor. We're not seeing that level of displacement now for a lot of different reasons. So, I don't see that as a rift that's facing us right now, when it comes to fuel price and differentials there.

And the second piece of your question was what?

Michael Nannizzi - Goldman Sachs & Co.

Just the geographic breakdown of the coal plants?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Oh, yeah. Right. So, we have good concentrations of coal plants in areas like Maryland and West Virginia, South Carolina. We see – and we have plants that are in the Midwest, Iowa, Illinois; we have plants that are in the west in areas like Arizona. So, those are kind of the locations that we are.

Michael Nannizzi - Goldman Sachs & Co.

Great. Thank you.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Charles Sebaski with BMO. Please proceed with your questions.

Charles Joseph Sebaski - BMO Capital Markets (United States)

Good morning.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Good morning, Charles.

Charles Joseph Sebaski - BMO Capital Markets (United States)

This first question I guess will follow-up on wholesale. What was the factor on organic growth from wholesale versus maybe an ex-wholesale brokerage operation?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

You're looking for the organic growth in the wholesale...

Charles Joseph Sebaski - BMO Capital Markets (United States)

Yeah. Yeah. I'm trying to understand how much of a factor the Risk Placement wholesale is in the 2% organic operation?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

2%, well, first and foremost let's go through our domestic wholesale operation, is that what you're asking about, Charles?

Charles Joseph Sebaski - BMO Capital Markets (United States)

Yeah.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah. All right. That business is about a $250 million business. It posted about 5% organic for the year. We saw about the same in the quarter. So – and so the blend of that across our $2 billion of domestic would be about 10% impact on the organic number.

Charles Joseph Sebaski - BMO Capital Markets (United States)

Okay.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Okay.

Charles Joseph Sebaski - BMO Capital Markets (United States)

That's maybe all I was looking for, I guess. And then additionally on the Risk Management business, do you see that there's any effect on the push out on the Cadillac Tax to a 2020. Do you expect that to have any negative headwind on the growth there?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

I think, you meant the – what's the impact on our Gallagher Benefits service.

Charles Joseph Sebaski - BMO Capital Markets (United States)

On the benefits – excuse me. Excuse me, sorry.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah. All right.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Listen, anything that the government can do, which they constantly do to make this more difficult, is great for us.

Charles Joseph Sebaski - BMO Capital Markets (United States)

Okay. Thank you very much.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks, Charles.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks.

Operator

Our next question comes from the line of Adam Klauber with William Blair. Please proceed with your questions.

Adam Klauber - William Blair & Co. LLC

Thanks. Good morning, everyone.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Good morning, Adam.

Adam Klauber - William Blair & Co. LLC

Just a couple of different questions. So, was Australia – was that positive or negative growth for the quarter?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Positive. In fact, our New Zealand operation had a terrific quarter.

Adam Klauber - William Blair & Co. LLC

Okay, okay. And sorry not to beat wholesale to death, but I'd heard the market was doing okay, but then actually took a stair step down in November and December renewals. Did you see that also?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Listen, first of all, when you look at our wholesale operation, there's two different operations, we've got our open brokerage business and then basically we've got our program business in that. When you look at our open wholesale business, we had a really nice, nice quarter and our – some of our program business we are seeing some of that move into the standard lines to a certain extent, new business start-ups weren't quite as robust, still they posted a decent quarter.

And (38:05), remember as a retailer if it moves from the wholesale business into the retail space, we stand to pick that up over on our retail side.

Adam Klauber - William Blair & Co. LLC

Okay. Thanks. And then as far as a number of the charges, for the year it looks like between acquisition and integration some of the other adjustments, it was almost negative, it was almost negative $0.70. That seems – if we're seeing it last year more than you had thought. What was, I guess – what costs more compared to what you thought originally last year?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah. I think, our costs, overall when I step back and look at it. Our integration in areas like the U.S. with Bollinger or when you look at Canada, when you look at New Zealand and Australia, all of them came right in with where we expected the integration efforts in cost come up.

Over the last couple years, we've probably spent an extra $50 million in the UK to put together the four different retailers that we basically have bought to become the top-five broker there. So that's the – probably, if you look back over the last couple of years, that's the difference in the spend there.

Other adjustments we had – all of them are right in line with what we telegraphed in December that we had a non-cash write-off related to a wholesaler down in Australia, that the channel conflicts that developed as a result of that when we bought Wesfarmers we had owned the wholesaler before that, when you buy a big retailer, it does cause some channel conflict there, so we had a non-cash write-off there that cost us about $0.09, something like that. Other than that, most of them are coming in right where we expect them to come in.

Adam Klauber - William Blair & Co. LLC

Okay and as far as the UK retail integration, do you think that's mainly done or is that kind of – is there some extra charges next year for this year, for that offset?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah, we say that, our integration costs will be less than half of what they were, and most of that relates to the UK integration in 2015. So when you – if you look at the CFO Commentary, we talk about the – we expect that it cost us $0.17 to $0.19 next year in integration costs and this year the number was more like $0.40.

Adam Klauber - William Blair & Co. LLC

Okay. Thanks.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

And then we sat and then – I think, Pat said and I said about that we expect that to be substantially done by the end of 2016.

Adam Klauber - William Blair & Co. LLC

Okay. And then as far as working capital in 2016 do you think that will expand or decline?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Well, listen I think the amount of money that we can shake out of our working capital balances will be substantially higher. I made a comment in the early part of my script that when we get done with lot of these legal entity consolidations that frees up a substantial amount of working capital for us. So even though it's in our cash balances right now, it actually creates bottom extra $100 million of available cash for us.

Adam Klauber - William Blair & Co. LLC

And do you think that will come out in 2016?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah, by the end of 2016, we're pretty well done with most of the integration, so that would be the spot we'd be able to see it available to use for acquisitions, et cetera.

Adam Klauber - William Blair & Co. LLC

Okay. Okay. So that – but to be techno, should that be throughout the year or more should we see that in the back half?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

I don't have the – I don't – I just got an email yesterday we consolidated 15 legal entities over there. They struck them off as of January 26. I have to go back to see how much was in that 26 legal entities that we struck off in the UK, just see how much cash. I don't have that exactly for you, but...

Adam Klauber - William Blair & Co. LLC

Okay.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Certainly, by the end of the year.

Adam Klauber - William Blair & Co. LLC

Okay. Thanks. And then one other, could you remind me, there is an exclusion for client runoff of $17.5 million, what is that again?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Remember we had the program in Australia. This is in the Risk Management segment of that. That basically is running off of a portfolio of claims that we're running off there. So, we won't see revenues from that again.

Adam Klauber - William Blair & Co. LLC

Okay. Okay. Thanks a lot.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks, Adam.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks, Adam.

Operator

Our next question comes from the line of Josh Shanker with Deutsche Bank. Please proceed with your questions.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Hey, good morning, everyone.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Good morning, Josh.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Good morning. So, Doug and I have had a friendly argument over the last year, then – and often times, Doug's response was, look if somebody who wants to sell to our business, they want stock, we're going to give them stock. And now, you're saying that that's probably the doors closed for that in 2016. Can we talk about the change of heart a little bit?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Well, let me clarify that is that if we have somebody that really wants our stock, if they need it in a tax-free reorg, we might give it to them, and then we'll just buy shares back in the market to keep the share count at level.

Josh D. Shanker - Deutsche Bank Securities, Inc.

So, you're still open-minded to it, but you're going to dilute shareholders in any stock transaction?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Well, first of all, none of these are dilutive. We're buying at 7 times – 7.5 times. We don't see that as dilutive, but it is something that we do not see ourselves waiting in just stock. If somebody have to have it for a certain structure, then we'll have what – we have ways in order to minimize the impact on shares outstanding, but I wouldn't consider it to be dilutive.

Josh D. Shanker - Deutsche Bank Securities, Inc.

All right. And so, my other question, (43:15) what would have to happen for you to think your stock is more attractive than doing acquisitions?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Well, I think you got to look at it over the long term. I think that in this case, we really are having success with our smaller acquisition growing. As a matter of fact, we had one deal that – one merger that was $50 million in revenue, if you take that one out our weighted average multiple is somewhere around 7 times, 7.2 times. We see a pipeline right now that is robust. We like our ideas of growing the franchise. When you buy a share of stock back, you don't get trade into London, you don't get using our niches, you don't get organic growth ultimately out of a share stock repurchase, but you still have a lot of opportunities to grow out our franchise, especially here in the U.S. There are cities we just don't have presence in right now.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Well, besides, Josh, so let me make a comment. This is Pat. When we do an acquisition, we want a continuing revenue stream and we want an earnings stream, that's a given. But we're putting great resources, terrific people into the company and that's very hard to put a price on. I mean, our pricing folks do a good job of holding the line, as Doug said earlier, we don't dilute our shareholders, but on top of it these are new producers, these are new teams. You don't do that acquisition and someone else does, it's gone forever. So I've answered this question over 30 years the same way. When we've got a great acquisition partner that we want to put on, I'll buy that all day over buying a share.

Josh D. Shanker - Deutsche Bank Securities, Inc.

I understand. And then just in the improved margin outlook for the risk management business. Do you feel there is a ceiling to just how good the margins get on this business or can you always find ways to improve it and even though 2017 has a very excellent margin, do you think there is an opportunity ever to make that better?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Listen, I think that the great strides have been made over the last five years. We've just done a tremendous job of retooling that business. The management team down there is and the fact that we're growing organically in the 10% range really shows that we have an offering that we consistently demonstrate better claim outcomes than what their other choices are out there in the marketplace. Where do I see margins ultimately on that business? Not nearly as geared business as the Brokerage segment is. When you pick up a new client, you have to put adjusters behind the desk and you've got to be ready to handle claims. So we feel comfortable with 17 points of margin right now, we'll take a look at it at the end of this year, see how we do and we'll either adjust next year or we'll leave it 17 points for another year. But that business it's a scale business, there's great opportunities for it. It's a value-added business, so it's not a commodity. So over time, we'll see where margins ultimately get.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Okay. Well, congratulations to both David and Joel on the transition all set RPS.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

That's a nice comment.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Take care. Thanks guys.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

We're going to miss Dave around here so...

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks, Josh.

Operator

Thank you. And our next question comes from the line of Quentin McMillan with KBW. Please proceed with your questions.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Hi, guys. Thanks very much. And Doug thanks very much for the comments around share repo. I just had a – not share repo, share – just maintaining flat shares. Just had a quick question in terms of the stock comp and what you'd be using for a number this year for stock based compensation growth in the shares? I think you had said at the Investor Day maybe around $1 million, is that a decent estimate for the year?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah, if you look at the back of our investor supplement, we actually have a schedule in there that shows the change in shares outstanding up on page 16 of that supplement and if you look at the impact that's related to stock based compensation for employees, it ends up adding about $1 million or $1.2 million a year in our shares. Now, we also have some that lapses off, but by and large if you assume a $1 million a year, that's about right.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

So, that's a pretty decent estimate, if we're not going to use anything for M&A, of what the share growth should be this year, assuming no repurchase?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

That's right.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Okay. Thanks so much. Secondly just in terms of what your debt addition is going to be and holding that leverage ratio constant, if we look at the midpoint of that $200 million to $300 million, so $250 million at a 2.5 times leverage ratio, that implies sort of a $100 million of EBITDAC growth, is that a fair thought of what you guys are looking for without being too specific?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah. That's right.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Okay.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Might be a little – maybe that's about right.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Okay. And then last, if I could just touch on Gallagher Bassett and follow-up on what Josh started asking there. You are – you've mentioned that you are investing specifically in Gallagher Bassett and you mentioned Luminos and other initiatives that you have going on, but you also just said the 10% organic growth range. First, do you still think that that business in 2016 and maybe the foreseeable future is going to grow kind of in that close to double digits range? And secondly, at that kind of very impressive organic growth, is there still operating leverage in that business, and if not, kind of why won't there be some operating leverage coming through?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Well, on the organic or one thing about it, when you get into our international operations, there is kind of some stair step growth, that happens with that business. Much of our business in Australia can be in large programs and so you can see kind of flat growth for a year or so, and then all of a sudden we pick up a nice big client, and it happens. So, you get a pop-up in organic. Domestically, I think that we're competing out there at a terrific range. We think the margins of 17% still allow them to continue to build out their product offering and the leverage on it is just the fact that this is a – this is still highly intensive people business and when you get claims, you got to put adjusters on behind the desk in order to pay those claims. So we're comfortable with 17% growth, high single digit type growth, 17% margin, high single digit organic growth that's kind of where we feel the business is right now.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

And by the way, I'd comment, I believe that 17% is significantly best in-class.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Okay. Great. And just so if I could sneak one more in on there. Just in terms of the way that we think about the business, is the softer rate environment actually a benefit to Gallagher Bassett in some capacity because some of your smaller clients might be looking to strip out costs and looking for ways to not have to have those claims adjusters on their own payroll or does it net out with something or maybe that's not quite the right way to think about it?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

No, that's not the right way to think about it. What we – a hard market is a great growth market for Gallagher Bassett because it pushes more clients into the alternative market. They will self insure. When markets soften, clients will purchase insurance at lower levels of retentions and sometimes that's not – that's a headwind for GB.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

But by and large the reason why a client would use Gallagher Bassett is because the claim outcomes on their loss experience are better. That's the – so anything you think about it, what's the behavior of our client or a carrier to outsource a certain vertical of claim management with – we do work for carriers too, is that when they see the claim outcomes that Gallagher Bassett demonstrate, we're paying almost $10 billion of claims through Gallagher Bassett. We have tremendous expertise and we can demonstrate our claim outcomes are better.

Quentin McMillan - Keefe, Bruyette & Woods, Inc.

Great. Thanks so much for the answers guys and congrats on the quarter.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thank you.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks.

Operator

Thank you. And our next question comes from the line of Sarah DeWitt with JPMorgan. Please proceed with your questions.

Sarah E. DeWitt - JPMorgan Securities LLC

Hi, good morning. On the brokerage organic growth guidance of 2.5% to 3.5% next year. If we look out a bit longer-term over the next couple of years, is that a reasonable range to anticipate or do you think it could get better or do you think it could get worse?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Sarah, I have no clue. If the market goes in the tank, I've been through four cycles. If the market goes in the tank, like it did in 2005, 2006, our organic is going to suffer. If the market tightens and let's face it, there is some controversy out there right now, you've got little bit of firming going on in places like Australia, New Zealand, got a little bit of controversy with some of our larger trading partners that are having some management issues, and there's some renewed discipline around that. If you get a harder market 2001, 2002, significant double-digit organic. So, the market makes a huge difference, how we do a new business makes a huge difference. If we keep our retentions that's a huge – that makes a huge – that plays a huge role. I have no idea.

Sarah E. DeWitt - JPMorgan Securities LLC

Okay. And then, I'd also just be curious on your view on the P&C market. How do you think that plays out over the next couple of years, does it get more competitive or we can start to see some tightening with the some dislocation at large players and M&A?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Well, I'd tell you – I've said this many times. I've been very – I've been pleased and interested to find that over the last five years, I would say the PC market globally, and also very much in United States has really by and large been flat. I mean, if you go back and look at the charts starting in about 1970, this market was violently cyclical, you'd have times when rates were going up 30% and 40% and times when rates were falling 15% to 25% through the 1990s, it seemed never ending. Companies kept going broke, and prices kept getting cut. You get through 2001, you have a violent hard market that softened substantially in 2005, 2006, but literally, since about 2007, maybe 2008 this marketplace has been pretty flat. And I would consider the present environment which is about 4% off on general business to 10% off on large property schedules, essentially with the exception of that property, 4% off is pretty close to flat when you're used to what I've seen cyclically. So I do predict that management of these carriers today has – have better information, they absolutely understand loss cost inflation and they're going to fight hard not to have a deterioration in their returns. So my view is that I think they'll find a way to get that back closer to flat because they need to make money in underwriting to have any kind of return.

Sarah E. DeWitt - JPMorgan Securities LLC

Great. Thanks for the answers.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

You're welcome.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks, Sarah.

Operator

Our next question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your questions.

Kai Pan - Morgan Stanley & Co. LLC

Thank you, and good morning.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Good morning, Kai.

Kai Pan - Morgan Stanley & Co. LLC

So first question probably for Pat. In the past you commented on – in the stable pricing environment actually ideal for your producers to gain new business while the retention rate have been stable. But now and the pricing coming down to mid-single digit level, do you think the buyers buying behavior, shopping behavior changed that make it – would impact your producers, like either on the retention side or gaining new business?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

No, I think that it probably helps us with new business. We got a little bit more of a story to talk about. But again I would comment that anywhere around 4% to 5% off is a pretty stable market. If I'm doing a good job for a client and I'm sitting down talking to two of them about their renewal, and I say, look I think that this carrier has been a good partner for a long time, they've paid their claims, et cetera. And they're willing to come in at two points off, my suggestion as an advisor is to renew it. You'll renew 90% plus of those accounts. So, competition is fierce all the time in the business, but if – in a market like this I think our story is all about capabilities and about service. It really is about doing a great job on service, doing a great job for the client on the transaction and being a trusted advisor.

Kai Pan - Morgan Stanley & Co. LLC

It's great. Then finally a larger picture question is really looking at – on the personal side, basically you see the direct distribution actually taking share in the marketplace. I just wondered what's your view on the direct distribution commercial line especially in the small and middle-market commercial distribution, because you heard Berkshire Hathaway started sort of online distribution on the commercial lines. I just wonder, what do you think the – both on the challenges side as well as opportunities side for you guys?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

I think there's tremendous opportunities and there's some challenges on the small business side.I think a lot of that will be traded electronically. Once you get up to having some real assets, you want a trusted advisor that sits in front of you, that's not changing.

Kai Pan - Morgan Stanley & Co. LLC

Okay. Great. Well, thank you so much.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks, Kai.

Operator

Our next question comes from the line of Dan Farrell with Piper Jaffray. Please proceed with your question.

Daniel D. Farrell - Piper Jaffray & Co (Broker)

Doug, just a quick numbers question. Do you – and I apologize if I missed this in your comments, do you happen to have the operating cash flow number for fourth quarter? It would seem that cash ended relatively high, so I'm assuming it was up?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

I don't have it here in front of me, but we did show good strong cash flows in the fourth quarter. If you look at this year, I think since September 30, I think, we're up $120 million in cash, compared to where we were at September 30, and then maybe $180 million more than what we had at the end of 2014. I said that – in our balance sheet, right now, there is about $275 million of truly free cash in it. So, yeah, there was strong operating cash flow in the fourth quarter.

Daniel D. Farrell - Piper Jaffray & Co (Broker)

So, then if I look at your balance sheet cash, your conservative assumption of what you'll generate in free cash flow and then your debt raise that you're looking to potentially do, it would seem that you could not only do the amount of acquisitions that you did last year, but probably exceed that if you saw the opportunities. Is that a fair statement or is there anything else that I'm missing there?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yes, we could exceed the amounts that we had – that we did this last year. If we could use all the free cash in our balance sheet and if we can borrow at 2.5 times, the new EBITDAC that we get and our new cash flow we could do more than what we did last year.

Daniel D. Farrell - Piper Jaffray & Co (Broker)

Okay. And then one other thing, is there anything with regard to this debt raise that you're thinking about a little longer term that positions you for some of the upcoming debt maturities? I know you have one coming up in 2017. Could that – is in the back of your mind, is that part of providing some flexibility, potentially around that?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Yeah, I said that in my comments early that there – we have that $300 million tranche that comes due in 2017. We'll look at this, we'll look at how things look here in the second quarter and it might make sense that we pull -pull some down. It really makes no sense to prepay that, just because of the defeasance cost on that. But it could be one of those things where we pull a little bit down, we may use our line next year to refinance some of that too at lower interest rates, but it is all the things that we're taking a look at right now.

Daniel D. Farrell - Piper Jaffray & Co (Broker)

Okay. Great. Thank you very much.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thanks, Dan.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks, Dan.

Operator

Thank you. Our next question comes from the line of Mark Hughes with SunTrust. Please proceed with your questions.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Thank you. Good morning.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Good morning, Mark.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Sorry, if you got into a little bit more detail on this previously, but I think you had said your benefits business you look for more organic in 2016, and I think you had cited the increasing complexity from ACA. What's more complex this year than last year, and how much more growth do you think you'll get in 2016?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

So, I think, what's more complex is that the rules just keeping being changed and rewritten. You've seen just an example, someone brought up the Cadillac Tax that everybody was expecting to get started in 2016 has been pushed back a couple years. That – those things just make up for a whole another round of discussions with your clients. You're preparing them, you don't know the answer if the self-funded part of the individual's cost is calculated into the calculation for Cadillac Tax or isn't, that makes a huge difference on what our clients will or won't fund, or they're going to put their employees, and all of a sudden that changes. So there is – there's stuff that goes on like that literally ever week. We've got 23 people, 24 people in our compliance department, and the head of that writes an email to all of us about once every week to two weeks, and it's four pages long of new updates on what the rules are. So, it's – those complexities just drive a lot more activity for us and we hope to bill it.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Does that mean there's more meaningful changes among your clients, they're doing more wholesale, redesigns to benefits plans; is that the way we should read it?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Yeah.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Okay, and more so this year than last year. And then – I'm sorry – the magnitude of that difference?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

I don't know, Mark. I don't know if can position that for you. It's more – it's just more activity. I can't really give you a number around it.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Okay. And then on the wage front, something that might have come up in the earlier meeting, maybe one of the Analyst Days. Anything in terms of competitive pressure for brokers, anything on the retention front or wage front that's worth noting?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Well, I mean, it's a war for talent every single day, that's why culture is so important. And yes, we're doing everything we can to make sure we have the best place in this industry to work and give the best resources to those people that work here and pay them really well.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Got you. And then I'll assume from your more enthusiasm, a great enthusiasm about the organic outlook that January was a pretty good month for you, is that fair?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

No comment.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Okay. And from me, I wish Dave McGurn well also.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thank you, that's nice of you, Mark. He's doing great.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

He's in Florida already.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Good for him.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Yeah, no, we're going to keep Dave involved, that's one of the things that I'm really excited about. These are guys that are – at a point in time, where they want to do have less responsibility, but don't want to disassociate, and that's wonderful. Brenda, any more questions?

Operator

Our next – yes, our last question comes from the line of Sean Dargan with Macquarie. Please proceed with your questions.

Sean Dargan - Macquarie Capital (USA), Inc.

Yeah. Thanks. Pat when you were discussing the outlook for brokerage organic growth. I think, you discussed that line, your thoughts on the P&C market with Sarah, but you sound pretty upbeat on economic exposure. If you look at the equity markets at least, it's- depressing and some probability of a global recession. I'm just wondering if the U.S. went into a mild recession, which is not our best case, what does that do to organic growth.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

It hurts it.

Sean Dargan - Macquarie Capital (USA), Inc.

Is there anything in particular that makes you feel more upbeat than some others about economic exposure at least where you play?

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Yeah. First of all, our largest location still remains the United States and my view on the economy in United States is – and I'm no economist, but when I talk to our midmarket retail PC and benefit employers, I would not say they're elated, but they are hiring. The foot isn't off the break, but they are hiring. Payrolls are up, unemployment is down, strengthening dollar certainly doesn't help exports, but it certainly does signify that we've got a pretty darn strong economy in the United States. When I look at Canada, anything that's exposed to energy or natural resources is down, but beyond that, then beyond the knock on affect, Canada seems to be pretty, okay. New Zealand is strong, Australia is a bit week, again based on the economic impact of energy and natural resources, but not drastically. So – and again, we're not that exposed to those industries. So, I kind of look around and go, where we're playing, we tend to be in a pretty good spot and the United States seems like it's okay.

Sean Dargan - Macquarie Capital (USA), Inc.

All right. That's great. And just one quick one for Doug, regarding the change in FX guidance. Were there any large drivers behind that?

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Well, I just think if you take a look at in December 16, when were last all together together, the £ was somewhere around $1.50 and it's somewhere around $1.42 now. And if you look at the Canadian dollar and Australia dollar, it's recovered a lot – a little bit in the last week and a half, but it was 70% and it's down to 73%, it's down 70%. So you see that in just a – in a month, we've had a substantial strengthening in the U.S. dollar, that's the only difference that we're seeing there.

Sean Dargan - Macquarie Capital (USA), Inc.

Okay. Got it. Thanks.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Thank you, Sean.

Douglas K. Howell - Corporate Vice President, Chief Financial Officer

Thanks, Sean.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Brenda, any other questions.

Operator

We have no further questions at this time. I'd like to turn it back over to you for closing remarks.

J. Patrick Gallagher, Jr. - Chairman, President & Chief Executive Officer

Sure. Thanks everyone for joining us. We're really excited about what we accomplished in 2015 and we're optimistic for 2016. Have a great day.

Operator

This does conclude today's conference call. You may disconnect your lines at this time.

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