Arthur J.Gallagher & Co (AJG) Q4 2020 Earnings Call Transcript

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Arthur J.Gallagher & Co (AJG 0.11%)
Q4 2020 Earnings Call
Jan 28, 2021, 5:15 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to Arthur J Gallagher & Co.'s Fourth Quarter 2020 Earnings Conference Call. Participants have been placed on a listen-only mode. Your lines will be open for questions following the presentation. Today's call is being recorded, if you have any objection, you may disconnect at this time.

Some of the comments made during this conference call, including answers given in your response to questions may constitute forward-looking statements within the meaning of the security laws. These forward-looking statements are subject to risks and uncertainties, that could cause actual results to differ materially. Please refer to the cautionary statements and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on its forward-looking statements. In addition, for reconciliations of the non-GAAP measures discussed on this call, as well as other information regarding these measures, please refer to the earnings release and other materials and the Investor Relations section of the company's website.

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

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thank you. Good afternoon everyone and thank you for joining us for our fourth quarter 2020 earnings call. On the call with me today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions.

Before we get started, I'd like to make a few comments regarding the tumultuous year that was 2020. It was year the tested everything from our physical health to our mental state of mind, to how we see one another. This impacted our colleagues, our families our communities around the world. It brought personal hardship and loss, stresses and challenges that none of us would have predicted a year ago. I believe we've learned a lot about ourselves in our society over the past year, and while 2020 is behind us, many issues and difficulties remain. But let's not forget 2020 also showed us that the world can work together toward a common goal, to develop vaccines, in order to solve a global problem. And for that on both thankful and I remain optimistic about our future.

Now onto the discussion of the quarter and year. We delivered an excellent fourth quarter in the midst of the pandemic. We grew organically, we picked up momentum and grew through acquisitions, we improved our productivity and raised our quality, we continue to invest in our bedrock culture. I'm extremely proud of how the team performed during the quarter and the full year.

In our Brokerage segment fourth quarter, reported revenue growth was a positive 3.6%. Most of that or 3.1% was organic revenue growth. We executed on our cost containment playbook, and further utilized our centers of excellence, saving about $60 million in the quarter, helping drive our net earnings margin higher by 281 basis points, and expanding our adjusted EBITDAC margin by 579 basis points. The net earnings were up 33% and adjusted EBITDAC was up 30%, another fantastic quarter for the Brokerage team.

Let me walk you around the world and give you some sound bites about each of our Brokerage units, starting with our PC operations. In U.S. retail, organic growth was strong at about 4.5%. New business and client retention was similar to last year's fourth quarter, and mid-term policy modifications, including full policy cancellations, were slightly better than prior year levels.

In our U.S. wholesale operations, Risk Placement Services, organic was about 5%, open brokerage organic was more than 20%, due to strong renewals, fueled by double-digit rate increases. Our MGA programs binding businesses were up about 2%. Retention was better sequentially, but as expected, new business wins are still lagging, given the economy.

Moving to the U.K.; around 4.5% organic for the quarter, in both our retail and specialty operations, new and lost business was consistent with prior year, and special mention to our aviation team, they performed well in their largest quarter of the year, helping clients navigate exposures that were down significantly, call it 30% to 40%, and rate increases that pushed premiums close to pre-COVID levels. Australia-New Zealand combined posted organic of about 1%, the spread between new and lost business was similar to last year, but we are not getting as much lift from rate and exposure, as we had in previous years. And finally, our Canadian retail operations posted organic of 13%, another terrific new business quarter, combined with a nice tick up in client retention and strong rate environment. So overall, our global PC operations posted 4.5% organic, which is a bit better than the 4% we discussed at our December Investor Day.

Moving to our Employee Benefit Brokerage and Consulting business. Fourth quarter organic was around minus 2%, which is at the favorable end of what we thought. During our December IR Day. Similar to the previous couple of quarters, fees from consulting arrangements and special project work were down. However, revenue from our traditional health and welfare business continues to hold up, with slightly positive fourth quarter organic, which is an encouraging sign. So when I bring PC and benefits together, total Brokerage segment organic of 3.1%, a really strong quarter in this environment, and even better, when you consider the tough compare against the fourth quarter 2019 of over 6%.

Next I'd like to make a few comments on the PC market, starting with the rate environment. Global PC rates continue to march higher during the fourth quarter and overall. Rate was up around 8% across our footprint. Rates in Canada led the way up, more than 12%. The U.S. was up more than 8%, with wholesale stronger than retail, including rate increases of 15% within our wholesale open Brokerage operations. Followed by the U.K., including London specialty at about 5% and Australia-and New Zealand combined in the low single digits.

By line of business, Property and Professional Liability, are up 12%; other casualty lines are up mid to high-single digits, and workers' comp was flat to modestly positive. Not only are PC rates continuing to rise, terms and conditions are tightening and capacity is becoming increasingly constrained for some coverages. Nearly every area and line of business is firm or firming, and there are even a few lines that are very hard, like Umbrella, Cyber and Public Company D&O.

So needless to say, it is a difficult PC environment. This is where our teams excel, helping businesses, many of which are still struggling, navigate the market through creative program design, shopping coverages and altering programs with increasing deductibles or reduce limits to help their risk management programs fit their budgets.

Looking forward, I see similar PC market conditions continuing in 2021. And while economic growth is coming, the pace of the recovery remains uncertain. So we remain laser focused on what we can control, delivering the very best insurance and risk management advice. Now successfully doing this virtually more than ever before, constantly improving our high quality customer service, engaging with new prospects and growing our new business pipeline.

Thus far in January, full policy cancellations and other mid-term policy adjustments are trending similar to January 2020. While still early, we are seeing year-over-year renewal premium increases at levels comparable to fourth quarter 2020. On the benefit side, the annual enrollment season is behind us and for many of our clients, we saw covered lives stabilize from last year's declines. While retention in new business were similar to pre-COVID levels. In addition, a few of our benefits, consulting practices are seeing increased activity and engagements, early on in the year. So while there's a lot of year left, these early January indications give me further conviction, that full year 2021 Brokerage segment organic will be even better than 3.2% we delivered in 2020.

Moving on to mergers and acquisitions; following an active December, we finished the fourth quarter with 10 completed brokerage mergers, representing about $100 million of estimated annualized revenues. And we've announced a handful more so far in January, representing an additional $85 million of estimated annualized revenues. This includes The Bollington merger in the U.K., which we think will close in early February, after receiving regulatory approval this week. I'd like to thank all of our new partners for joining us, and I extend a very warm welcome to our growing Gallagher family of professionals.

As I look at our M&A pipeline, we have 30 term sheets signed or being prepared, representing around $300 million of annualized revenues. We believe we are the platform of choice for successful entrepreneurs, looking to take their business to the next level, by leveraging our niche expertise, our tools and data. In addition to being a great place for their employees to advance their careers. We expect to have a very active 2021, particularly in the U.S., due to concerns related to possible tax changes.

So to wrap up the Brokerage segment. For the full year, we delivered 5.4% growth in revenue, 3.2% all in organic growth. Adjusted EBITDAC margin expansion of 418 basis points, fueled by cost savings of about $180 million and we completed 27 mergers, representing about $250 million of estimated annualized revenue. A fantastic year for the Brokerage team.

Next I would like to move to our Risk Management segment, Gallagher Bassett. Fourth quarter organic edged back into positive territory, nicely surpassing our December expectations of being down, as much as 2%. We had some positive lift due to increasing COVID related workers' compensation claims, and saw strong retention and new business. So we ended 2020 with full year organic of minus 2.7%. In this environment, to close a year in which core claim counts were down double-digits for more than 10 months of the year, and after posting a 10% organic decline in the second quarter alone, is a just terrific recovery story.

Going back to April and the beginning of the pandemic, we set our sights on delivering full year 2020 adjusted EBITDAC similar to 2019. Even with full year revenues forecasted to be down $38 million or more, and boy, did the team deliver. The team proactively managed its workforce, carefully rebalanced claim loads across adjusters and implemented expense controls, ultimately driving 2020 adjusted EBITDAC of nearly $150 million, $4 million better than 2019. Being able to grow full year EBITDAC, despite organic revenues that were backwards, it's just fantastic work by the Risk Management Team.

As we look forward, January claim counts are trending very similar to the fourth quarter, with many clients operating still at partial capacity. With new business sold in 2020, incepting over the next few quarters and still room for substantial job recovery, we believe, full year 2021 organic will be closer to pre-COVID levels in the mid-single digit range.

Let me wrap up with some comments regarding our unique and resilient Gallagher culture. Culture guides our organization, our people in both good times and even more so, in demanding times, and I believe culture is the source of our perseverance, our determination, and our constant push for excellence. I'm extremely proud of our collective successes during 2020. But more importantly, how we came together, to work as a team, even while physically apart. Our culture has never been better, and I believe we are adding 2021 even stronger.

Okay, I'll stop now and turn it over to Doug, Doug?

Douglas K. Howell -- Chief Financial Officer

Thanks Pat and good afternoon everyone. I'll echo Pat's comments, a great quarter and an excellent year. I too would like to extend my appreciation to the team. Today, I'll begin with some comments on our cost savings, provide a few observations from our CFO commentary document that we posted on our website. Then I'll do a vignette on our clean energy investments, and finish with some thoughts on M&A cash and liquidity.

All right. Let's turn to the earnings release, page 6, to the Brokerage EBITDAC table. You'll see that we grew adjusted EBITDAC by about $85 million over last year's fourth quarter resulting in about 580 basis points of adjusted margin expansion. Within that we realized about $60 million of cost savings relative to fourth quarter '19 adjusted for merger. So underlying margin expansion was about 115 basis points, on 3.1% all in organic, which on its own is impressive.

When you move to page 8, the Risk Management segment, we grew EBITDAC a bit more than $4 million on slightly positive organic, resulting in about 190 basis points of adjusted margin expansion. Within that we realized about $5 million of cost savings relative to Q4 '19, which was moderated just a little by new client ramp-up costs. So underlying margins were up just a bit, that too is actually giving the flattish organic this quarter.

Categories of fourth quarter savings for the combined Brokerage and Risk Management segment were consistent with second and third quarter. Reduced travel, entertainment and advertising, about $25 million. Reduced consulting, and professional fees, $14 million. Reduced outside labor and other workforce savings, $16 million. Office supplies, consumables and occupancy costs, about $10 million. So that totals around $65 million, which is consistent with what we said at our December IR Day.

Now looking forward, the pace of recovery is unclear. We came into the year with another virus surge, now maybe some positive cases coming down. Some areas are imposing more lockdowns, yet others are loosening up. While there has been some successes, but mostly delays in a vaccine rollout, and now it's looking like more and more a stimulus might be caught in gridlock here in the U.S. Regardless of whether you're looking at it as half full or half empty glass, very few outlooks are expecting the business environment to be much different by the end of the first quarter. So for us, when it comes to first quarter '21, we are seeing organic in the 3% to 4% range, and we're seeing expense savings similar to fourth quarter '20, call it another -- excuse me $60 million. If that happens, then we could again show margin expansion over about 500 basis points.

Then looking toward, second, third and fourth quarter of '21, it gets a little more tricky when you do your models, because the slope of the recovery is still uncertain, and we're getting -- we're already realizing substantial COVID induced expense savings beginning early in April of '20. But as the recovery steps up in those quarters, and we get back to organic of say high 4% or 5%, it does give us a path toward holding full year margins, especially if travel and entertainment remains limited. Now all of this needs to be taken into context. In 2017, 2018 and 2019, we were expanding margins 50 to 75 basis points a year on organic in that 4% to 5% range. Then the COVD hits, we execute on our cost containment playbook, and still managed to grow organic 3%. That pops margins over 400 basis points in the face of this global pandemic.

So now what I'm saying, is that we have a fighting chance to hold or even improve full year margins here in '21, on the prospect of getting closer to pre-pandemic organic growth later in the year. To me that's still about a bullish story as you can write.

Now if we move to the CFO commentary document that we post on our website. On page 2, the blue fourth quarter column, you'll see most of the items are consistent with what we provided during our December IR Day, and that's in the grey column. FX came in a penny better, and severance and integration costs also a penny better, when you compare that to the prior quarters.

Also on page 2 in the reddish column, we are now providing our quarterly look at 2021, a few comments. First foreign exchange; with the U.S. dollar weakening, and if it stays that way throughout the year, 2021 revenue could see a $100 million tailwind in brokerage and $14 million in risk management. Wouldn't be much EPS impact within risk management, but could translate late into a nickel or so for our brokerage segment. And that would even be better on reported EBITDAC.

Second, amortization expense. We're currently forecasting a little over $100 million a quarter in brokerage, which includes all announced mergers to date. You can see the role in revenues associated with all announced mergers to date on page 5. And then also, don't forget to adjust your amortization expense in the second and later quarters to reflect any future M&A, you might be including in your model.

Third, when you look at M&A multiples shown on page 2 on the last line of the table. Like Pat said, we had an active December, closing 10. Three of which were on the larger end of our typical tuck-in size. That pushed the multiple up a turn or so this year, but it's still creating a nice arbitrage to our trading multiple. More importantly, it brings some really terrific merger partners to the team, letting us grow better together over the long haul.

When you move to page 3 of the CFO commentary in the corporate table. When you compare our December IR Day estimates in the gray column with our fourth quarter results in the blue column, we posted favorable interest expense due to strong cash flows. We had better clean energy earnings, in line M&A expense, and a slightly more favorable corporate line. Also on page 3, we are now providing a first look at '21 ranges for the corporate segment, and that's in the reddish column. Nothing surprising and there is no change on our outlook for clean energy, still in that $60 million to $75 million of annual after-tax earnings we provided during our IR Day.

So, this brings me to my vignette on clean energy. You will read on page 4, note 5 of the CFO commentary document, that these investments are winding down at the end of '21, and lesser, as an extension. That means in 2022, we will have zero GAAP earnings. But remember that will be more than replaced with substantial cash flow benefits. In other words, '21 and prior years were the credit generation years, when we report the GAAP benefit of our P&L, but '22 starts the cash harvest years, where we will get considerably larger cash benefits in our operating cash flows.

Here is the shortcut way to think about how to compete those cash benefits. First, if you go to page 14 of the earnings release about the seventh line down in our balance sheet, you will read that we have a deferred tax asset of over $1 billion, mostly consisting of clean energy credit carryforwards. With one more year of credit generation, that asset should grow by another $100 million. So call it $1.1 billion of credit carryovers by the end of '21. Then assuming in '22, we will begin using more credits than we've been using thus far.

Third, then how fast we will be using those credits, will depend on how fast we grow our U.S. taxable income. But for this illustration and if you assume a seven year period, it might mean we would be harvesting about $125 million to $150 million in '22, with that ramping up to say about $175 million to $200 million in 2028. It's a little odd that GAAP earnings go to zero and then the cash benefits become dramatically better, but that's just how it works. This is and has been a really important part of our story over the last decade, so I think it was worth some extra time today.

All right, let me go into some comments on cash and M&A. At December 31st, available cash on hand was nearly $700 million. We have a significant untapped capacity on our revolving credit facility, and we have another year ahead of us of really strong cash flows. That might mean, that we would have perhaps up to $2.5 billion of M&A capacity here in '21. That's a terrific position, as we come into our year that we see as perhaps the most active year ever in the Brokerage M&A space.

Okay. That wraps up '20, and we're positioned really well for '21. Organic looks better. Bolt-on M&A looks better. We have a decent chance of keeping a large chunk of our cost savings assuming -- of harvesting cash flows from our Clean Energy initiatives, and most important, I can feel our team's excitement about coming out of the pandemic stronger than ever before. My thanks to them for another fantastic year,

Back to you, Pat.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks Doug. Operator, let's go to questions-and-answers if we can?

Questions and Answers:

Operator

[Operator Instructions.] Our first question comes from the line of Elyse Greenspan with Wells Fargo. You may proceed with your question.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks. Good evening. My first question, Doug, so I appreciate the color, that you provided on the expense savings. So as we continue to think about, I guess coming out of COVID, I know last quarter, I believe you guys had said, right, kind of when things settled, that half of the phase[Phonetic] could persist and maybe think about some level between half and the $60 million, I guess I'm just talking about Brokerage in kind of the middle two quarters of 2021? Do those figures -- I would assume that they still seem about right given where we sit today?

Douglas K. Howell -- Chief Financial Officer

Yeah, I think your recollection is right. I did say is -- it's that -- there was a silver lining coming out of something so terrible, and we've learned a lot about ourselves. I think that ultimately, we think there's $125 million to $150 million of annual cost savings that we might -- that we're pulling forward earlier into our continued march on margin improvement. As it emerges for the quarters this year, it really is kind of a sensitive interplay between organic and then just really what happens with the economy. We'll follow our customer's expectations. We are learning that they are much more receptive now to virtual interactions, allows to get our niche expertise at the point of sale, easier than jumping on an airplane or spending days traveling. So we are learning a lot, but we will follow our customers' expectations.

How that exactly plays out in the second and third and fourth quarters, really depends on how fast organic moves from that 3% to 4% range, up into maybe the 5% or 6% range.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. That's helpful. And then on the M&A environment, so you guys mentioned, right, you posed a couple of larger deals to end December, right, the [Indecipherable] multiples. On the $300 million of revenue within those 30 term sheets that you guys mentioned. Can you just give us a sense like kind of the skew? Are there any larger ones in there, or is it more just kind of the typical smaller bolt-on deals that you guys focused on of late as well?

Douglas K. Howell -- Chief Financial Officer

Yes, I would say that, just clarifying that we had some larger tuck-in ones at the end of the December, call it revenues that $20 million, $25 million range. The deal sheets that we're looking at right now, $300 million of revenue, spread across 30, 35 term sheets. They're in a smaller range, nice local family owned entrepreneurial businesses, and the range is lower than where we are right now for the year. So I would see us back, kind of more where we were in the second, third -- first, second and third quarters.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then can you give us an update on Capsicum, your reinsurance business? I guess, where that sits at the end of the year? How that has been trending from both a growth and margin perspective?

Douglas K. Howell -- Chief Financial Officer

Yeah, it's doing really well. We couldn't be more pleased with the team. Pat can talk about some of the cultural excitement that we have on that. But financially, they're growing in double digits still. Their margins are north of 30%. We see terrific opportunities for that business.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

As you know, Elyse, this is my second go around. This one is a lot better.

Elyse Greenspan -- Wells Fargo -- Analyst

And then one last question, Doug. Is there a chance that there is any kind of extender bill that would extend your ability? I know you gave us a lot of helpful color, assuming that you can't generate any credits beyond the end of this year. Is there a chance that there could be any extender bill or I guess, most likely not at this point?

Douglas K. Howell -- Chief Financial Officer

Well sure. I always think there's a chance and I think that when Congress said about this, about helping us, us getting better and burning some fossil fuel, they wanted help in making it better. So as long as we're going to be using it, let's make it better. So I think they see that, and I think they see the opportunity for this to continue to help innovate. So we hope that there's some -- there are some proposed legislative changes that possibly could make the extension happen. So we're hopeful for that and we certainly are trying to get that message on everybody's desk that we can.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thanks Doug and Pat for the color.

Analyst

Thanks Elyse.

Douglas K. Howell -- Chief Financial Officer

Thanks Elyse.

Operator

Our next question comes from the line of Phil Stefano with Deutsche Bank. You may proceed with your question.

Philip Stefano -- Deutsche Bank -- Analyst

Yeah thanks and good afternoon. In thinking about the sales pipeline, I've been trying to contemplate -- I guess, in my mind, clients would have hunkered down early on in COVID and been less likely to change brokers, or to really contemplate a move like that. Does it feel like people are just getting more comfortable with the world we live in today, and that's opening up? Or when we think about the path from 3% to 4% organic growth to 5% to 6% organic growth, are we just waiting for the economy to improve and the shops to get in the arms, so everyone can get back out there and live it?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Well Phil, this is Pat. There's a lot of answers to your question. So let me back up a little bit. First of all, did the clients hunker down? You start with March of last year and the answer to that is yes. Having said that, they have a lot of needs and a lot of requests. So we were running webinars around COVID return to work, all kinds of different SI or what have you -- blew my mind, thousands of people signed up. And it was not unusual for us to run a webinar with 5,000 attendees. I mean, I never heard of such a thing. So there's a huge thirst for information, which helped our people, of course, know exactly some of the hot buttons that they should be talking to, the potential clients, and to get out -- and I was amazed. I really would have told you, that I thought maybe new business would have hunkered down. I didn't think our lost business would increase because of that. In fact, it's amazing to me, the kind of new business that we did generate. So I think that -- it gives us a lot of confidence to sell the kind of business we sold last year and you'd get some fall over from '19 into the first quarter, maybe a little in the second quarter. But everything from May on, was really generated after the first of the year. So really an incredible new business year.

Secondly, are we seeing the advent potentially of people beginning to come back into the businesses? I think, yes. I think we're seeing that there is going to -- and whether stimulus happens or not. I think businesses have learned how to do this tick, just to look at your local restaurants. And about a better a year ago --or March, they might -- they're not going to survive. Take out is not making them robust, but they're surviving. And they're ready. I mean, in the Chicagoland area now, we can go to restaurants again, they have very limited occupancy. But they are ready. They're welcoming. They want people back, and people are excited about it. So I think the pent up demand for people to be able to go do things, is also going to be helpful.

Then lastly, let's not forget something and I've told you guys this a thousand times, I don't like hard markets and -- I get it, they all look good on paper what have you. But they tick every customer off and they're suffering through this right now, because they don't really have a choice. But they are going to shop and we are there for them to understand, that both our data capabilities, as well as our professional niche capabilities, and our ability to work them through the process of taking more risks, becoming more self-insured, that's our bread and butter. We're better at that than anybody. So I think that, that is -- it's all of those combined that leads me to believe, that we see a very robust new business year ahead in '21 and '22.

Philip Stefano -- Deutsche Bank -- Analyst

Okay. Thanks. And switching gears a bit, I feel like the dividend is something that we don't really talk about. But I was a bit surprised by the extent of the raise in the past week or so. Is there a long-term growth rate that you target, a payout ratio? Maybe you could just refresh our understanding on how you think about the dividend?

Douglas K. Howell -- Chief Financial Officer

Yeah, I mean, we did pop it up a little bit more yesterday. We did raise. I think it's an indication that our cash flows are very strong. We typically raise it a few cents, and then maybe a little bit more and sit there for a year or so. But I think there was a vote of confidence by the board, that said that, let's take that dividend up just a little bit more this week. So we did that and so, we'll look at that every year. But we agreed with the observations that cash is strong, so let's increase the dividend.

Philip Stefano -- Deutsche Bank -- Analyst

Okay. Thanks.

Douglas K. Howell -- Chief Financial Officer

Thanks Phil.

Operator

Our next question comes from the line of Mike Zaremski with Credit Suisse. You may proceed with your question.

Michael Zaremski -- Credit Suisse -- Analyst

Hey good -- early evening. I guess first question on expenses, I know we've talked about this a lot but it's just -- it has been phenomenal and so, I am trying to understand, do you feel that a lot of these expenses that will persist are kind of more Gallagher specific, and it'll give you a leg up on your competitors? Or like do you feel like a lot of these things are things that just -- your competitors are going to catch up to you eventually, you're just a -- kind of first mover? I know that's maybe a complicated question, but just trying to get a sense of whether this kind of gives you advantage that'll persist, versus peers or others just are going to kind of follow you guys, but just will take them time?

Douglas K. Howell -- Chief Financial Officer

All right. So let's break this into a couple of things. Let me talk about who our competitor is. 90% of the time we're competing with somebody that's smaller than us, right? So when you look at the -- where are we really getting leverage? I think that we're getting leverage because of our scale, especially relative to that that level of competitor. The smaller ones that we compete with day in and day out. I think we have opportunities to continue to use our lower cost labor locations in our centers of excellence. I think our ability, in order to rationalize our real estate footprint, I think that we can buy goods and services cheaper. I think our ability to automate many of the interactions with the clients and with our own employees, all of those things, I would say that Gallagher is positioned, we have a common agency management system in most of our countries, in most of our businesses. Those are things that we believe that we will continue to bring scale advantages versus our smaller competitors.

How do I feel about it comparing to, let's say, the other top 10 brokers? First of all, you got to pick the ones that have the culture that want to work together and make it happen. And then you've got to pick the ones that haven't already gone down this journey, to see whether or not they are there yet or not. But we think that we're in really terrific place to continue to leverage our technologies and our scale, compared to most of our competition. So I don't know if they're catching up or if they're already there or they just don't have the culture to pull it off.

Michael Zaremski -- Credit Suisse -- Analyst

Okay. That is helpful, Doug. Did you -- more straightforward question, free cash flow for 2021, did you cite kind of an estimate for what we should expect?

Douglas K. Howell -- Chief Financial Officer

I didn't, but I said that we probably could do about -- up to $2.5 billion in M&A for this year. So if you break that apart, we got $700 million on hand and if you look at our operating cash flows being somewhere in the $1.3 billion to $1.5 billion range something like that, I think, and then you borrow a little bit more. So that's how you get to the $2.5 billion.

Michael Zaremski -- Credit Suisse -- Analyst

Okay. And just lastly curious, a broker that reported earnings earlier today, kind of actually talked about stepping on the gas on hiring and taking advantage of some of the M&A that's just taking place in the industry. Just curious, are you seeing any increased opportunities on the hiring side?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Definitely seeing opportunities from two areas. Doug mentioned that 90% of the time we compete, we compete with smaller brokers. And the smaller brokers have the problem of just simply not having the capabilities that clients are starting to ask for. And these could be simple questions, like, how do I know? How do I know you just gave me the best deal? When I was out selling 30 years ago on a daily basis, that would be answered by saying, I went to three carriers, this is the best price. That does not float today. They want to know what you're doing with clients, what carriers are doing at, where the ranges are, what their loss ratio looks like compared to others. They want detail. They want data. Smaller people can't do that.

So what you've got is, folks that are losing accounts to the likes of ourselves, and we're out telling them, why wouldn't you come to a place that's happy to pay you, for what you hunt and kill, and at the same time, you have all the support and the capabilities in the world. We can write any account of any size, no matter where it's located in the world, and that's very attractive. And then of course, there's always opportunities for larger competitors. We clearly believe we offer a cultural difference.

Michael Zaremski -- Credit Suisse -- Analyst

Thank you.

Operator

Our next question comes from the line of Greg Peters with Raymond James. You may proceed with your question.

C. Gregory Peters -- Raymond James -- Analyst

Good afternoon. Just a follow-up on Mike's question, I don't know, if I missed it in the prepared remarks. The free cash flow for 2020 was what?

Douglas K. Howell -- Chief Financial Officer

For 2020, our free cash flow and our operating -- our free operating cash flow will be about $1.4 billion this year, in the cash flow statement. When we file our 10-K in a week, you'll see it's around $1.4 billion.

C. Gregory Peters -- Raymond James -- Analyst

And so you said the guidance for '21 is $1.3 billion to $1.5 billion, was there some one-time benefits that floats through in 2020 that you're not going to realize in '21, otherwise I would normally expect the free cash flow to grow, after growing your top line and bottom line, I expect free cash flow to grow? What am I missing?

Douglas K. Howell -- Chief Financial Officer

I don't think it will appreciably change significantly in '20 versus '21. We will grow at -- if we hold margins in there, we're going to grow, based on not including acquisitions in that number. So if the cash flow is off the acquisitions, we will also fix that too.

C. Gregory Peters -- Raymond James -- Analyst

So then just to close the loop on your previous comments, when you said in '22, that you'll drive -- was it $125 million cash benefit from the pull down of the tax credit?

Douglas K. Howell -- Chief Financial Officer

In '22, yes.

C. Gregory Peters -- Raymond James -- Analyst

I can assume whatever free cash flow growth I have off of '21 on an operating basis, and then just add on an additional $125 million, is that a fair way to think about it?

Douglas K. Howell -- Chief Financial Officer

Yeah, if you are factoring mergers out, that's a fair way.

C. Gregory Peters -- Raymond James -- Analyst

Okay. The second question I had. Listen, I know you've commented on this before, and you were sort of dancing around it in the prepared remarks in the Q&A. But you just talked about an 8% rate increase across your entire footprint and you talked about, terms and conditions being changed -- changing. I'm just curious about your customers, and how they're dialing up retentions, reducing limits to offset the price. And I guess what I'm really trying to gauge is, how does it look here at year end '20 versus how it was looking at year end '19?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Well, I think it's continuing to get stronger, Greg. This is Pat. I think that, look, if we're telling you that, basically we're seeing rate increases of around 8% and organic is about 3.5%, you see a 5% difference, where did it go? Well it went to modification of what the purchase -- what the purchasers are buying. And that's our job. I mean we sit down with these guys and say, men and women, and say, look here are your options, you had $250 million of limits last year. We could show you the stats, that would be a very unusual claim to break the $150 million barrier. Do you need that extra $100 million? And we help them work through that. Retentions are a very big part of it and a big part of it is, and this is where our history comes from, clients that enter self-insurance for the first time. I don't understand this, what's the deal? Well, why don't you take a $150,000 retention, and you'll basically save X on the transaction, but you'll only have to pay, if you do have the claims. Now, let's really focus on loss control. So I don't need to get too detailed with you, but that's really -- that's what we do for a living.

C. Gregory Peters -- Raymond James -- Analyst

Right. Well, I guess, what I was -- I had assumed that the difference between the eight and the three was a combination of retentions, reduced limits and reduced economic activity. But maybe, I was overthinking there.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

That's fair. That's fair. Yeah, I'd look out the economic activity. That's fair.

C. Gregory Peters -- Raymond James -- Analyst

Okay. The final -- I guess the final thing, and I know you've been talking about M&A, but listen, the dirty little -- not so big of a secret is the two -- number two and number three are out there in the merger events. And it feels like that is an opportunity for dislocation for customers being unhappy for you to bring new hires, etc. And so I guess from the time that they announced this thing back in March of last year to now, have you seen anything in the marketplace that's disruptive, that you see as an opportunity? Or is the disruption, if there is any, going come later in this process?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

So Greg, let me, obviously, I'm not going to talk about our competitors and I -- but I've said to you many times, change is good for us. And when we move to further consolidation of three players at the top end of the spectrum and our name happens to be one of them, there's lots and lots, and lots of opportunities, along the lines of everything you're talking about. There's clients that have never really talked to Gallagher, that we're going to have a shot at. I mean, if you go back in time and I went to the RIMS Conference 100 years ago, nobody came by our booth. We've got 5,000 people that show up to our RIMS Conference virtually. I mean, there's interest. And so really, it's -- we're in a very, very good position.

C. Gregory Peters -- Raymond James -- Analyst

Got it. I probably got a little too acute on the question, sorry about that. But thanks for your answers.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Sure. Thanks Greg.

Operator

Our next question comes from the line of Yaron Kinar with Goldman Sachs. You may proceed with your question.

Yaron Kinar -- Goldman Sachs -- Analyst

Hi, good evening. I guess my first question, just trying to tie the organic growth to margins next year. So I would think there are different ways to get to 4% to 5% organic growth, and each of those potentially has a -- have very different impact on margins, namely, if you're getting more of that organic growth through rate versus exposure unit growth. So maybe, you can talk about that a little bit? And then on the flip side, I think in the past you used to talk about, of needing to get at least 3% organic, in order to keep margins stable. How should we think about, let's say a 3% organic growth for -- if you achieve that in '21, what does that mean for margins?

Douglas K. Howell -- Chief Financial Officer

The workload -- the difference in workload on a customer that is adding exposure units, i.e. adding vehicles or changing miles, isn't significant, whether they're adding a couple of failures. So the workload associated with a rate increase that comes from exposure units, not that much more. If it comes from additional rate, that means we want to go out and shop more, we'll take a little bit more effort, but because of our efficiencies, we can do that at pretty low cost months. So just the number of policies or the exposure units or a modest rate increase or decrease doesn't change our workload that much. So I wouldn't say that that would have a significant impact on margin, if you're kind of in that 2% to 4% range on rates and exposures.

When you're asking the next part of the question about when -- where do we see the kind of the old tried and true line? If you grow organically 3%, is there margin lift in it? Yes, I think there is. Is it -- in this year, in '21, since we were up 400 basis points in margin this year alone, I think that'd be pretty tough to get a 3%.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay. So, beyond '21 though, if you do achieve 3% organic growth, even though the bar is so much higher today, you can still achieve margin improvement even with that?

Douglas K. Howell -- Chief Financial Officer

Yes. we've moved that to 3% to 4% over the number of years. As our margins are getting over 30%, there's just not as much there to harvest, as our technologies get rolled out. As our scale grows, we'll be able to have margin improvement on those tuck-in acquisitions that can come onto our chassis, can use our technologies. It's really more about selling more than it is necessarily about making more margin. But there would be upward tick. Do I see that in -- at 3% organic growth in '22? I don't know if we'd have that much more margin expansion.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay.

Douglas K. Howell -- Chief Financial Officer

Do it for five years in a row? Sure, there could be some.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. And then with this step-up in Gallagher's margins, with a good portion of that being retained. How do you think about the -- about acquisitions and potential targets? I would think that the bar to clear there could be significantly higher, just -- that your margins are higher today.

Douglas K. Howell -- Chief Financial Officer

If they're running good margins for the business that they're in and they show a prospect for growth, we'll buy them regardless of whether it's dilutive to our margin if they come in. They are what they are and if we can improve their margins, terrific. If they're already at the upper end of the scale, then terrific. But they just happen to be in a space that requires a significant amount of service. That maybe, let's say that their margins are 22%, but they have a good growth. We'll still buy them and we'll let you know. We've done that in the past, where we've said, a rolling impact of acquisitions had X, Y, or Z impact on our margins.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. Thank you.

Douglas K. Howell -- Chief Financial Officer

Sure. Thanks Yaron.

Operator

Our next question comes from the line of David Motemaden with Evercore ISI. You may proceed with your question.

David Motemaden -- Evercore ISI -- Analyst

Thanks. Good evening. Just a question on P&C exposure units. In the press release, it sounded like, we're continuing to see an increase in exposure versus April and May 2020, which -- not a big surprise. But I guess I'm wondering, how exposure units were trending thus far this year, relative to 4Q? Obviously a tough comp year-over-year, but are we continuing to see an improvement in exposure units in 4Q or is it sort of flattened out thus far in January?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

They're flat in January.

Douglas K. Howell -- Chief Financial Officer

Yeah. I think that we've kind of bounced off the bottom. We're not seeing significant daily step-up. We are seeing -- we look at our global positive endorsements that go through on our policies every day. And we can see that that's still showing a nice upward trend similar to pre-pandemic. But you weren't seeing massive exposure unit growth a year ago in the -- fourth quarter '19, early into '20, you weren't seeing it there. But there is a steady increase. There has been a bounce off the bottom and we would expect throughout '21 and '22 as the economy recovers that those exposure units would go back up also. But not much difference today than let's say, in December.

David Motemaden -- Evercore ISI -- Analyst

Got it. Okay. That makes sense. And then on just -- I guess I'm wondering, after we've gotten through some of the renewals here in January. I guess, are you seeing any movement on the commission rates? And I guess just conversations around contingents and supplementals, maybe, an update on how those are looking?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Yeah I think that commission rates and the like are solid. We're not having pressure from our carrier partners to try to diminish their payment to their distributors. And as far as contingents and supplementals, we think we'll have a solid year, some growth this year.

David Motemaden -- Evercore ISI -- Analyst

Great, thank you.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks David.

Operator

Our next question comes from the line of Mark Hughes with Truist. You may proceed with your question.

Mark Hughes -- Truist -- Analyst

Thank you. Good afternoon.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Hey Mark.

Mark Hughes -- Truist -- Analyst

Why the rebound in risk management? I wonder if you could break that into pieces, more claims, more employees, new business. How does that shake out?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Well, I think Doug, if you want it granular to the percent, I can't do that. But it's -- you hit right on it, Mark. I mean, we got -- claims are recovering. We mentioned in our prepared remarks, that COVID claims in particular have helped out. The economic activity, people are adding more folks and those are the factors that produce claims. So as we get people driving, as we get people going back to work, they will come back to more normal levels and we don't hope to get more COVID claims, but they are filling a hole in the bucket right now.

Douglas K. Howell -- Chief Financial Officer

And they had a terrific new business here, too that's starting to incept. You saw that we had some -- it has been a couple of million or $1 million or so on some new client ramp up costs, as we transition to them. We've got a solid outlook for this year of being back in mid-single digits maybe, this year. So that team has done a terrific job of new business wins too. Didn't hit a ton this year, but it will next year.

Mark Hughes -- Truist -- Analyst

How are you thinking about the open-broker, it sounds like that it was particularly strong in the fourth quarter. Has that continued into Q1?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Yes, it has continued. It's very strong, Mark. I mean, you understand, wholesaling is a business that has an awful lot of market leverage up and down. So we were in a very firm property market, in particular and our team -- and this is -- what's exciting about this is, you know this, brokers do not want to go to wholesalers. It's not a friendly business in the sense that we're looking to give you a third of our commission. So they're providing an unbelievable service to the brokerage community, with whom we trade about 15,000 in the United States alone. And those people need help and we're giving them help and that's why along with rate. So we're getting it both in item count and rate, just by being ready to be very, very helpful.

Mark Hughes -- Truist -- Analyst

Thank you.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks Mark.

Operator

Our next question comes from the line of Paul Newsome, with Managing Director [Phonetic]. You may proceed with your question.

Paul Newsome -- Piper Sandler -- Analyst

Good afternoon.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Hi Paul.

Paul Newsome -- Piper Sandler -- Analyst

I wanted to ask, tell me a little bit more about your comment, about the lack of shopping by the customers? I mean, I think a hard market is one with increased shopping, but well, your comments seem to square with every company I cover, where the retention levels seem to be really unchanged through the last couple of years. Why do you think we haven't seen an increase in shopping? Why do you think the customers seem to be just kind of taking the rate and moving on?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Well Paul, again my comment was predicated on two things. To start with, in the pandemic, I didn't think customers would be having people knocking on their door as much as they do right now and as much as they did in 2019. And I think that as they started to ferret their way through, what's going to go on in this pandemic themselves, they were willing to very much hunker down and say, I've got a good insurance program, this is where it is. I don't have -- I've got to be considering my own survival tactics. And I surmise, there'd be less shopping of our existing business.

I was right a little bit. It certainly didn't stop shopping. It wasn't like everything came to a grounding halt. But if you're a good broker and we've got really good competition in this market. In a hard market, you early on explain to your client, that if you are unhappy with a hard market and you want to be really unhappier, shop the hell out of it, because you're going to get slaughtered. And in fact in a hard market, shopping does get decreased. Unfortunately, as things ease up a bit, people are unhappy, and it tends to increased shopping. So right now, we're in a very firm and firming market, and people understand that they need our expertise. And it also does scare some of those little competitors that we compete with 90% of the time out of being so bold as to say they can do better than we do. Pretty tough to prove it.

Douglas K. Howell -- Chief Financial Officer

Yes, I think there was a flight to quality. I think that when you sit down and look at what you get from Gallagher, you get more and how do you -- you get more from us. You get price, you get service, you get access, you get creativity, you get innovation. It's pretty hard to leave that, if you don't have competition knocking on the door that can offer that. So I think it's a different era from when you and I were cutting our teeth Paul, that basically a small -- small brokers competing with small brokers offering kind of the same thing. You get so much more from Gallagher today, than you ever got before.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

And another thing, piling in on that. Once you show someone how to get through these days and primarily by doing what we do so well, which is help people deal with assuming risk, bringing Gallagher Bassett in to help, pay the claims, mitigating those claims, and showing them that in the long term, they've really garnered a lot more control of their destiny. You never lose those clients. A client that moves from the traditional first dollar purchase, into any form of self-insurance, pooling with other public entities, moving into a group, captive, doing their own single parent captive, taking a large retention on their worker's comp in a very heavy employee state. Once you do that for them, it shifts the game completely.

Paul Newsome -- Piper Sandler -- Analyst

Makes sense. Switching to a different topic, obviously with the change in the quick tax rates potentially going away, we're probably looking at a change in how we value your company, plus on earnings, more of something else like free cash flow. I guess my question is, is free cash flow the right number, is operating cash flow the right number. Just curious, as I know that their customer usually get intertwined with yours in the measurements and what's your theory on how we should measure cash flow, if we have the proper way to do it?

Douglas K. Howell -- Chief Financial Officer

Yes. All right. Great. I think that's a terrific question. And all right, first, I still believe that EBITDAC gives a good proxy for how to value a broker. Then you just have to back off the cash taxes paid. And interest expense, of course, and the cash tax was paid, an interest shield on that. But if you basically start with EBITDAC, you're going to get pretty close to the way, and that's been a traditional way. So what does that mean for Gallagher, is that we've said this for years, we still pay taxes. People sometimes think that we're not paying our fair share. That's not the case at all. We still pay taxes. It runs about, I said this, if you go back to when tax change that we are -- we think that we're going to pay in that 5% to 6% to 7% of EBITDA range just as a proxy, we're probably at that same range, even if tax rates go up to 28% from 21%, it would be a book rate differential. It wouldn't really be a cash difference.

If the Biden tax measures were put in place, it might cost us $10 million a year in taxes more Paul. But it wouldn't be a huge number. The value of tax credits become more valuable if tax rates go up. So really for Gallagher, to take our EBITDA, back off our capex, back off our interest expense and put in 7% or 8% for cash taxes paid, and you get pretty close to the cash flow amount for Gallagher. I might've missed something in there, but I think I got most of the pieces in that. But I would start with EBITDA still.

Paul Newsome -- Piper Sandler -- Analyst

Fantastic. Thanks guys. Appreciate it.

Douglas K. Howell -- Chief Financial Officer

Thanks Paul.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks Paul.

Operator

Our next question comes from the line of Meyer Shields with KBW. You may proceed with your question.

Meyer Shields -- KBW -- Analyst

Great. Thanks. Good evening. One small question, one big one. Are the claims that you're seeing recover in -- sorry, Gallagher Bassett. Are any of those like just late reported claims that occurred earlier, or is it just now you're seeing more claims because of COVID or because of rising economic activity?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

More claims rising out of better economic activity, and the addition of COVID claims, which was a category that didn't exist a year ago.

Meyer Shields -- KBW -- Analyst

Okay, perfect. And then bigger picture, Pat, you talked about Gallagher's ability to write any clients to actually win those clients, do you need to a more extensive set of consulting services comparable to the brokers that are bigger than you?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Yes, we do.

Douglas K. Howell -- Chief Financial Officer

Yeah, when you remember our...

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Pardon me? Paul [Phonetic], I'm sorry, [Indecipherable].

Meyer Shields -- KBW -- Analyst

No. When you said we do, is that we -- that Gallagher has those services or needs them in the same proportion?

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

No. No. We do. We've got them. I mean, Doug was going to go down the line. If you take a look at our verticals, our niche capabilities, I mean, we don't stand second to anybody, and I can go through the list of those we provided to you, every time we get a chance. But, you take a public sector client anywhere in the world. You take a college or university. We had some great college and university wins in the last month. Names that if I threw them out, which I won't today, you'd go, wow, OK. And I'm talking on a global basis, where we are probably the largest provider of college and university risk management advice in Australia. So you're not going to be winning those types of accounts. We're very -- we've gotten much stronger in terms of our benefits capabilities. When you take a look at what we do on the consulting work for health and welfare alone, but also all the other human resource needs. I mean, we're clearly a top three consultant in that regard. So no, I mean, look, we know that over 90% of our business, Paul [Phonetic], has been clearly to find niches, which we have expertise that we think is frankly, better than our large competitors.

Meyer Shields -- KBW -- Analyst

Okay. Excellent. Thanks so much.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks Meyer.

Operator

Our final question comes from the line of Phil Stefano with Deutsche Bank. You may proceed with your question.

Philip Stefano -- Deutsche Bank -- Analyst

Yeah. Thanks for taking the follow-up. I was just hoping, is there any way you can help frame for us what the ceiling on the brokerage organic growth -- brokerage organic margin -- brokerage margin might be?

Douglas K. Howell -- Chief Financial Officer

Phil, that's a tough question. I'd rather not, but I think -- the answer is, it's just such an interplay between organic service expectation by our clients, and then in underlying inflation too that we face every day in certain of that. Right now, we're in a low wage inflation environment. We've kind of been in a low wage inflation environment since early 2007, 2008. We're getting more efficient with scale. Technology costs are coming down; on the other hand, there are costs that -- more specific technical expertise costs more. Just getting smarter people on your payroll that can handle some of the really, really technical aspects of what's going on, systems there's cost inflation and systems right now, so it's a tough, tough answer, but you're seeing the brokerage business somehow is running around 30 points plus or minus two points right now. That's the way it's running. You look across Austin and the other large Publix, and you look at the PE owned firms. There's a number around 30% plus or minus a couple of points there.

Philip Stefano -- Deutsche Bank -- Analyst

Yes. Fair enough. I figured I'd give it a try. Thank you.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks Phil.

Operator

Ladies and gentlemen, you have reached your...

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

I think that's all our questions, yes?

Operator

Yes. I would like to turn it back over to you, Mr. Gallagher for closing remarks.

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Thanks. And thank you again, everyone for joining us this afternoon. We mentioned this in our prepared remarks, but we delivered an excellent quarter and full year, and we all know how difficult the economic environment was. So I would like to thank all of our Gallagher professionals around the globe for being flexible, working hard and never losing focus on our job at hand. I'm competent that we can deliver another great year of financial performance in 2021, and truly believe that as an enterprise, we are just getting started.

So thanks for being with us folks. We appreciate it.

Operator

[Operator Closing Remarks].

Duration: 62 minutes

Call participants:

J. Patrick Gallagher -- Chairman, President and Chief Executive Officer

Douglas K. Howell -- Chief Financial Officer

Elyse Greenspan -- Wells Fargo -- Analyst

Analyst

Philip Stefano -- Deutsche Bank -- Analyst

Michael Zaremski -- Credit Suisse -- Analyst

C. Gregory Peters -- Raymond James -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

David Motemaden -- Evercore ISI -- Analyst

Mark Hughes -- Truist -- Analyst

Paul Newsome -- Piper Sandler -- Analyst

Meyer Shields -- KBW -- Analyst

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