Edited Transcript of AJG earnings conference call or presentation 30-Apr-20 9:15pm GMT

At home, they have the right tools and systems in order to deliver the highest quality service to our clients. And that includes more than 5,000 associates that are based in our service centers. And every day, we see countless examples of our employees unselfishly giving back from providing first responders with protective equipment, to sending meals to senior citizens, to distributing masks to the less fortunate. I’m proud but not surprised at the level of dedication, support and professionalism from all of our colleagues around the world. I thank every single one of you from the bottom of my heart.

Now moving to our first quarter financial performance for our combined Brokerage and Risk Management segments. Here are some highlights. We had a terrific revenue growth quarter. Total reported revenue growth of 4% and adjusted revenue growth of 9%, which includes 3% reduction due to COVID. Included in that is organic growth of 3.3%, but again, we had nearly 3% of an unfavorable impact due to COVID-19. This would have been another quarter like our fourth quarter last year. And even with around 2% adverse impact of COVID-19, we posted a net earnings margin of 20.1% and more impressive adjusted EBITDAC margin of 32.2%. And we completed 8 acquisitions this quarter with estimated annualized revenues of $124 million.

As you can probably tell from my tone, I am pleased with our quarter. But that is the past. While I wish we would have had some time to celebrate, we’re now full tilt on 3 objectives. First, we’re busting our humps for our clients, and we’re doing it in partnership with our underwriting markets. This virus crisis is hitting our clients at the exact same time underwriters, we’re already meeting rate for the risk that we’re taking. Rates were already going up mid-single to even double digits on nearly all lines, except workers’ compensation, and we see it becoming even more difficult. Now is the time our producers, combined with our capabilities can really shine. We have solutions, we have ideas, we have tools, and we have data that very few other brokers can bring to the customer. Our data would say that 90% of the time, we are competing with a smaller broker that does not have anywhere near our level of capabilities. I like our win chances even better in this environment.

Second, we have developed plans to ensure our employees can return to the workplace safely. We got them home safely. So now it is about a measured and conservative return to the workplace process. We have proven we can work remotely, so we won’t be hurrying large numbers of our folks back into our offices until we know it’s safe.

And third, while I am encouraged by the resiliency of our business thus far in April, we must balance that early information with the reality of deteriorating economic conditions. Accordingly, we’ve already developed and we are already implementing measures to adjust our expense base in a staged, contemplated manner. As we see economic deterioration develop, we can implement further adjustments to our cost structure. Doug will dive deeper into this, but looks like we can lower our expense base $50 million to $75 million per quarter, nearly immediately.

I do want to go back into some financial highlights by segment. First, to the Brokerage segment organic table on Page 4 of the earnings release. First quarter organic was 3.1% all-in, which includes 3.2% reduction due to the estimated impact of COVID-19. So you can see we had a terrific organic growth momentum month — or quarter through March. Our data capabilities allow us to monitor premium changes, client retention, new business production, renewal premium changes, audit premiums, endorsements and other rate and exposure metrics daily. During the first quarter, excluding COVID adjustments, we saw new business, lost business and changes in exposure units, similar to what we saw throughout 2019. As for pricing, when I roll it all together globally, the PC pricing environment was still up around 5% in casualty lines, up 10% in property lines and the loan exception of that is workers’ compensation here in the U.S., but even comps saw an inflection this quarter. We’ve been seeing rate decreases each quarter in 2018 and ’19, but first quarter of 2020 showed it as flat to a small increase.

So that is what we saw in the first quarter. Let me address what we are seeing thus far here in April.

First, we are not seeing a meaningful change in exposure ends. It’s early. It’s certainly early in this crisis, but we are just not seeing the impact yet. Also, retention is up a bit, and new business is still as strong as it was in the first quarter. Second, we’re not seeing a dramatic change in pricing from what we saw in the first quarter, perhaps up a little but not dramatically.

Now remember, all that is what we’re seeing through today. So what do we see going forward? Property and casualty exposure units will certainly decrease. How much and for how long is anyone’s guess. But what we do know is the concentration of our business by industry. Accordingly, we looked at our April renewals and stratified by industry in the higher, moderate and lower impact from COVID. Interestingly, it came out that 20% of our revenues are in higher impact industries, 20% in lower impact industries and 60% in moderate impact industries. Then we looked at rate increases versus exposure unit declines. For casualty lines, rate increases were about equal to declines in exposure units in the high-impact industries. And rate increases were actually more than declines in exposure units for both the moderate and lower impact industries. For property lines, regardless of high, moderate or low impact, rate increases offset exposure unit declines by 10%. And only in workers’ compensation, did we see a net decrease, down 6% in high impact, down 3% in moderate and actually up 4% in low-impact industries.

Finally, when we look at our employee benefits business, April information isn’t showing a big decrease in covered lives. But because a large portion of that health and welfare business has January effective dates, we must make an estimate as to how many covered lives will be under the employers’ plans throughout the rest of the year. Clearly, there will be decreases, but that could be mitigated, in part, by employers extending benefits through furloughs, periods under COBRA, et cetera. And we just don’t know yet how soon or when the unemployed employees will return to work.

All that said, I must caution again that this is very early. We are in uncharted territory. So these views are susceptible to significant and perhaps material changes going forward.

When I look forward longer term to the rate environment, we do see rates continuing to increase. I do not see this as an up 50% environment, like we saw in 2002 and 2003, post 9/11. The industry was coming off a 15-year soft market when that happened. We haven’t been in a soft market, rather, we’ve been in a stable rate environment for nearly a decade, up 2%, 3%, 4%, down 2%, 3%, 4%, and most recently, in a slightly more firm market as rates were up even a bit more. I also don’t see this like 2004 to 2011 when rates were soft. Even before COVID, losses were deteriorating and now this crisis could further — could cause further loss deterioration, causing the underwriters to need even more rate. I wouldn’t call it a hard market, but I would call it becoming a more difficult rate and conditions market. So for us, that means in the short term, a decrease in our organic growth due to declining exposure units, perhaps offset a bit by an increasing rate environment. It’s very hard to predict, but we are prepared for the possibility that organic may go flat or even a bit negative for a couple of quarters. But I see that reverting to organic growth levels like we saw in 2019 during 2021.

Next, let me talk about our revenue growth through mergers and acquisitions. We had a nice start to the year, completing 8 brokerage acquisitions during the quarter. Capsicum Re was the largest one in the group, and its revenues were previously consolidated in our financial results. For the other 7 acquisitions we completed in the quarter, we estimate they will add another $25 million to $30 million of annualized revenue. 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.

Looking forward, our internal merger and acquisition pipeline report shows around $200 million of revenue associated with over 30 term sheets either agreed upon or being prepared. A bit tough to get through due diligence in this environment, so I’d call it a bit of a lull. But don’t be confused. We are still having a lot of conversations with those that see how we can be better together. In fact, we’re even having some success co-brokering some accounts with those merger partners that were close to signing a deal with us. Some might call out a nice joint venture as a step to full ownership. We’ve also seen competition slow down a bit which might rationalize valuation multiples. Regardless, at a minimum, more consideration will need to be put on an earnout.

Bottom line, we are open for business and invite any broker anywhere around the globe to take a look at what Gallagher could offer as a merger partner. These are tough times, and we have a ton of resources to help smaller brokers continue to succeed.

Next, I’d like to move to our Risk Management segment. First quarter organic growth was a solid 4.1%, and results were even stronger for the first 2.5 months of the quarter. But since mid-March, we are seeing signs of dramatically higher unemployment and a reduction in our clients’ overall business activity. However, it’s important to break down this business as a bit differently than we do with our Brokerage segment. Our Risk Management business is sensitive, firstly, to the nature of the service we provide then, secondly, to the type of entity and then to the industry. So it isn’t simply about the headline number of closed businesses nor the employment levels.

Let me give you some more color. For highly specialized liability and consultative services, high-severity claims and captive risk-sharing and many governmental entities, we haven’t seen a big falloff in our claim volumes. Underlying that, some industries are up, some are down, but overall about flat. Looking forward, we would expect these types of claims to hold up well during a short-lived down economic environment. That’s about 70% of our revenues. Then cost-plus contracts, about 20% of our revenues, we are actually seeing 80% of those clients willing to pay for excess staffing as they are either seeing a V-shape recovery or have chosen to keep in place established and experienced teams that have the ability to consistently drive exceptional claim outcomes. Then there’s our high-frequency, low-severity claims, about 50% of our claims by count but only about 10% of our revenues and our lowest margin services. Those are being hit the hardest, off 50% or more. Fortunately, our Risk Management operation years ago shifted a large portion of our workforce to work from home, and often use temporary and contract labor to staff peak loads for much of the volume-sensitive and low-margin services. Accordingly, while revenues might decrease over the coming quarters, we believe we can adjust our expense base to absorb most of the lost revenues. Our playbook is even stronger today than what we used during the Financial Crisis, so we should be able to execute and still maintain our ability to deliver the very best claim outcomes for our clients.

And finally, I always wrap up with comments on our bedrock culture. I have to say I didn’t think it could get much stronger, but it is really thriving in this environment. I’m on the phone every day with our leaders around the world. There’s a genuine sense of energy about beating this virus and emerging in better shape than ever before. The sense of duty and advocacy for our clients, employees, underwriting partners and shareholders has served as our compass for over 90 years, and will continue to do so for many years to come. And I can’t end without complimenting everyone at Gallagher for being awarded our ninth straight World’s Most Ethical award. In good times and perhaps even more so in bad times, culture and ethics guide an organization, and our commitment to both of these for 92 years will serve us well in today’s challenges.

Okay. I’ll stop now and turn it over to Doug. Doug?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [3]

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Thanks, Pat, and good afternoon, everyone. I, too, extend my sincere appreciation to first responders and those on the front line. And also my thanks for our 34,000 colleagues. You had to navigate your own personal challenges presented by the pandemic, yet we’re up and running in a few days, delivering timely advice and service to our clients. That’s just simply amazing. So thank you.

Today, I’ll walk you through the COVID-19 impact table on Page 2 of the earnings release and how that impacts our organic and margins on Pages 4 to 7. I’ll address our expense savings initiatives. I’ll provide some thoughts on our capital and liquidity, and I’ll finish with a few short comments in the CFO Commentary Document.

So okay. Turning to the table on Page 2 of the earnings release. This table captures all of the COVID matters in our numbers. They are — they all fully hit our reported GAAP numbers, and we did not adjust any of them out where we show our non-GAAP adjusted numbers. You’ll see in the end, COVID didn’t have much impact on net earnings nor on EPS, but there are 4 moving estimates that have a noticeable impact on revenues and EBITDAC.

First, let’s address how it impacts revenues. And just as a reminder, about accounting standard 606 that drives our revenue accounting. We adopted that in 2008. Recall it requires us to estimate annualized ultimate revenues for contracts and policies with effective dates prior to closing the books, even if those annualized revenues are dependent on future events. We must make our best estimate. And as most of you know, there are a lot of insurance policies that have volume-like adjustments that can occur in the year after the policy effective date.

Lines like workers’ compensation, employee group medical plans, casualty lines that have adjustable premiums based on, say, future miles driven or flown. Those are just examples. And then you have experience-rated contracts. So there’s a lot, so on and so forth. In the past, historical patterns drove those estimates, and changes in volumes would emerge slowly as our clients’ businesses naturally evolved. That’s not today’s environment. Our customers’ businesses have been dramatically altered in a few short weeks. That’s the reality. So we need to make our best estimates of what will happen in the future for those pre-April 1 contract. It’s not easy, but we still must do it.

For those that closely follow the P&C sector, perhaps another way to think about it. We must estimate future adverse development on the revenues we booked when the contract was first effective. We must make that estimate change today versus having to develop over the next few quarters. To do this, we look at a ton of our internal data, we compare it to industry and economic data, we slice it by industry group, type of coverage, and we compare that to consumer spending patterns, et cetera. From that, we can make some informed estimates. So you’ll see in the impact table on Page 2 that about $15 million relates to P&C policies. Those are audits, cancellation, midterm adjustments, et cetera. About $18 million relates to group medical insurance policy, possible reduced monthly covered lives. And then there’s $8 million related to volume and loss ratio sensitive contingent contracts. That totals to about 80 — or excuse me, $41 million, but really, that’s only about a 2.5% impact on our first quarter revenues. And also, don’t forget, if we overshot the impact, it will reverse back into our revenues as new information becomes available. If we undershot, we would have to take further adverse development.

Next, you’ll also see there are some variable compensation offsets on that revenue impact, and also a reserve for bad debt for policies written, but for which we might not collect. We rarely have much bad debt historically. But given some of the moratoriums and cancellations and also that business might go out of business during that moratorium, we can’t chase down collections from an empty wallet.

Next in that table, you’ll see 2 noncash items, neither impacts our EBITDAC. First, a future decline in economic condition does impact the value of our intangible asset for acquired customer lists, a $45 million adjustment. But on a $2.2 billion asset, that’s just a 2% tweak, which makes sense given the life of customer lists can be 5, 10 years or even more.

Second, on the other hand, a short-term decline in economic conditions has a much greater impact on the amount of earn-outs for recent acquisitions. You’ll see about $87 million in the Brokerage segment and $4 million in the Risk Management segment. On a $530 million balance sheet liability, that’s just 6% of the — or excuse me, that’s just 16% percent of the current estimate. A much bigger percentage impact, but again, the measurement period is much shorter than the recoverability duration under intangible customer lists.

So once you digest the impact of COVID on Page 2, you can better navigate the tables on Pages 4 through 7. Here are the punchlines from those tables for the first quarter. Brokerage organic has shown at 3.1%, but COVID-related reestimates hurt that increase by 320 basis points. Have we not reestimated our revenues, our organic would have been a lot like fourth quarter 2019. Brokerage adjusted EBITDAC margin shows at 120 basis points down. The COVID impact hurts that by 220 basis points. Risk Management organic growth is shown at 4.1%, but COVID-related reestimates hurt that increase by 60 basis points, so that ends up about what we saw in the fourth quarter of 2019. The Risk Management adjusted EBITDAC margin was down 40 basis points, almost all due to COVID.

So with understanding the table, let’s go back to Page 3 of the earnings release. As Pat mentioned, starting in mid-March, we delved into adjusting our expense base. We are following the playbook from 2008 and 2009 Financial Crisis. Even though we are over 5x bigger today, we have considerably more consolidated information, systems and resources. So we have actually more levers we can quickly pull. We are implementing the changes to reduce our expense base by $50 million to $75 million per quarter. That will come from: reduced travel and entertainment and advertising expenses of $20 million to $25 million; reduced technology, consulting and other professional fees of $10 million to $20 million; reduced temporary labor and attrition, $10 million to $15 million; lower utilization of health and welfare benefits, $10 million to $15 million.

We’ve made great strides in April, and any further expense actions will be based on how we see revenues develop over the coming months.

Let’s stay on Page 3 for a second. You’ll see the last few sentences address our strong liquidity position. Today, we have approximately $1.1 billion of liquidity, considering available cash on hand of nearly $300 million, and we have access to another $800 million on a revolving credit facility. That doesn’t expire until June of 2024. So we’re in very safe shape on that one. Further, over the next 2 years, we only have $175 million of upcoming debt maturities, $100 million in 2020 and $75 million in ’21. So there’s no issues there either.

Leaving the earnings release, let’s go to the CFO Commentary Document we posted on our website. It’s fairly straightforward and consistent with what we’ve provided before. Three quick items to note. On Page 2, foreign exchange. The strong U.S. dollar is driving a $10 million to $20 million quarterly impact on our Brokerage revenue but only equates to about $0.01 drag on EPS. On Page 3, clean energy posted $52 million of net earnings this quarter, but we’re seeing a decline in electricity demand, but due to lesser economic activity and then also the tag along impact of lower natural gas prices, leading utilities to favor nat gas over coal. So we have brought down our full year estimate a bit and now expect $70 million to $90 million of net earnings for the full year. And also on Page 3, the corporate line came in better than we forecasted back in January, almost all of that due to a favorable FX adjustment.

So okay, those are my comments. We’re in solid financial position. We have quickly achievable plans in place to adjust our expense base. So we’re in strong position to weather the economic and operational challenges created by the pandemic.

So back to you, Pat.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [4]

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Thanks, Doug. I think with that, [operator], we’ll go to some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Mike Zaremski from Crédit Suisse.

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Michael David Zaremski, Crédit Suisse AG, Research Division – Research Analyst [2]

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First question. Pat, you talked about being prepared for the possibility that organic could go flat to even a bit negative for a couple of quarters, which I think makes sense to most investors given the backdrop. I just wanted to clarify that, that — is that inclusive of the Gallagher Bassett segment, which I believe you’re alluding to maybe having more of an organic growth impact versus Brokerage? And I guess should we be thinking then that — earnings then and margins then given the CFO Commentary, then we’ll also go — would go a bit negative if that scenario plays out.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [3]

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Well, again, Mike, as we try to be really clear that we don’t know and we put language in the prepared remarks to make sure we understood that it could be material. But I’ll be the perennial optimist, yes. We think that depending on what happens as these states begin to open up and make economic activity, we’ll see how deep and how long this recession goes. It could adversely impact just to the point, as we said, of a flat to down quarter or a number of quarters. I do think you’re right that the Gallagher Bassett numbers, which, yes, are included in those discussions, could be a little bit more hard hit, but we’ll just have to see how deep this thing goes.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [4]

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Yes. Mike, on margins, just so you know, even if we end up in a flat environment for a couple of quarters with the expense saves that we are seeing, we should easily hold EBITDAC margins at historical levels and actually can probably increase them.

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Michael David Zaremski, Crédit Suisse AG, Research Division – Research Analyst [5]

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Okay. So that — I guess I’ll use that as my follow-up, Doug. So $30 million of charges spread over the next 3 quarters. I typically think of — in the — typically think kind of a payback ratio and the payback ratio seems to be very large, $50 million to $75 million per quarter. So it sounds like a lot of these expense saves, should we be careful on our models not to kind of roll them over into future years because lots of this — some of these things are just going to be temporary?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [6]

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That’s right. I think that this will get us through the trough in revenues. And then I think you have to think about us more in 2021 and ’22, if we go back to organic growth, kind of where we were in ’19, you would probably see margins like you saw in ’19, maybe up 50 basis points for the year. Let’s say that we get back to 5% organic growth in 2021 by some hook or crook, you would see probably our margins up 50 to 100 basis points over where they were in 2019. So we can fill the hole this year. And then I think we can get back to normal business, hopefully, in 2021 and ’22, you would see it like the trends you saw going from 2018 to 2019. And then so just start with 2019 and pick 2021. That’s probably how you should be looking at it. And then in ’20, we just hope we can fill the hole.

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Operator [7]

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And our next question is coming from Greg Peters of Raymond James.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [8]

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Pat, can we go back to your comments where you segmented out the 20% higher impact, 60% in the middle and 20% lower impact? Just curious how you came up with that. I’d characterize — as I think about your business, for example, take the aerospace business, I don’t hear of a lot of rate in aerospace. And yet, I would characterize that as a higher-impact business. And so you seem to imply that you’re getting enough rate to offset exposure. But maybe you can give us some more color.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [9]

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Yes. Sure. First of all, what we did, Greg, is say, all right, let’s — we can now segment our book of business, as you said, into quite detailed chunks. So we sat down and said, what are the industries out there that we think are going to be really hard hit. And those were the ones that we would then lump into the higher impact. So our hotel business, for instance. We can get very granular about how much of our business over — the entire $5.6 billion to $6 billion revenue business is hotels. And it’s less than $100 million. That’s an example. So we took all those businesses that we — and we just had to bucket them. So it was down and dirty. Hotels, restaurants, those went into the very high impact. Moderate impact, some construction, some transportation, and then low impact would be things that would go on like our public entity business, any hospital business, that type of thing. So when we looked at that, we then went in, we can also segment out. We can look at what’s happening to the rates. And we can do that by account. We can do it by geography, and we can do it by type. And we looked and we said, all right, let’s take a look at the accounts that we put in each of those buckets.

And again, Greg, as we said throughout this whole thing, it’s very early information, but what has actually happened to those clients that we thought were in the most impacted bucket. Now again, we’re cautioning. We’re saying this is what’s happened in the first quarter and early days of April. So we’ve said clearly, hotels are going to show a lot more pain in the second and third quarter off of what happened to them in the first quarter. But nonetheless, what’s happening to hotel rates? Well, guess what? They’re not going down at the same time. So hotels are not going away. They are renewing their accounts. And those that are renewing their accounts are paying higher property rates. Now exposure units are down on renewal. But what we’re saying in our prepared remarks is that right now, this bar, you’ve got a pretty nice offset. And those rates are holding.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [10]

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And Greg, just to amplify that, we’ve got 150 SIC codes on a sheet that counts for our revenue all of last year. And it’s — there’s kind of that 20-60-20 distribution on it, both in terms of — most in terms of our last year’s revenues. And like Pat said, eating and drinking places. That’s in the high-impact one. You’ve got stone, clay, glass and concrete product manufacturers might be in the medium, and then you’ve got legal services that might be in the low. So you just pick out a SIC code, we can slice and dice our revenues exactly by that. And then we can tell you by the coverage across the 2. So not only do we weight it by the industry, but we also looked at the coverage lines, too, as it informed our positions.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [11]

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Got it. Do the supplemental and contingents get affected by volumes as well?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [12]

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Yes. In some case — supplemental is not so much. That automatically adjusts with the volumes in the quarter. So that’s not an issue. Our contingent — pure contingents, you actually might have a lift in pure contingents if loss ratios are down because of lack of activity. But we do have contracts where there is a double trigger on. There’s a volume expectation, and then there’s a loss expectation. And that’s the one, as we look at it going forward, we could have a little softness in that. And we put up about — I think that was about $8 million of possible estimate reserve for that.

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [13]

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Got it. I’m going to pivot to the balance sheet. Just two questions on that. First of all, given what the carriers are doing in terms of rebates, givebacks, delayed payments. I noted that your premium and fees receivable were up quite substantially from year-end. I’m wondering if there’s anything in there, and how you’re looking at that from a level of concern perspective. And then secondly, I just wanted to circle back on your intangible amortization charge. I think 30 — in excess of 30 million people filed for unemployment in the last 6 weeks, I got to believe there’s more potential risk in write-offs of customer lists than just that, but maybe you can add some color there.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [14]

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Let’s talk about the balance sheet. The big difference between December and March is that our reinsurance operations have a very heavy first quarter, and that’s what influences that. It should not be looked at as a collectibility issue. Our cash flows during April are still strong. And so we are not having collectibility issues on that. That’s not an indication that there’s collectibility on those receivables. We only put up a bad debt reserve of $6 million, something like that, $7 million, $8 million this quarter. So it’s — we’re not seeing that at all. And so you can’t read-through on the balance sheet for that. So that’s the reason why the balance sheet is up. The second part of your question was what?

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Charles Gregory Peters, Raymond James & Associates, Inc., Research Division – Equity Analyst [15]

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Around the intangible asset, the write-off of the customer lists. And just the fact that the balance of what’s going on in the economy seems like there’s more risk to goodwill and intangible write-offs than ever before. But we’re just sitting on the outside looking in, so you have better perspective.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [16]

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Yes. I can answer that. And first of all, we’re nowhere near any type of goodwill impairment on this. As for the customer lists, maybe on the surface, it appears to be that way, Greg. But when you got a — we got businesses that are really retaining 92%, 93%, 94% of their customers on an annual basis. Just because there’s a bunch of people that are out of work doesn’t necessarily mean that, that business is out of work. If they don’t come back immediately — don’t come back in the next 2, 3, 4 months, maybe there could be. But again, it’s a non — one thing, as you know, it’s a noncash charge, but we look very hard through hundreds and hundreds and hundreds of acquisitions during this quarter. And we do it every quarter anyway, and we just didn’t see where there’s massive falloff.

So when you come up with $40-some million across the board of all these acquisitions, that’s a pretty small tweak, like I said, it’s 2%. If it deteriorates further and we have prolonged business outages, sure, there’ll be some noncash write-offs on this, but it’s kind of a no, never mind.

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Operator [17]

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Our next question comes from Elyse Greenspan of Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [18]

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My first question is on the expense saves. So could you just give us a sense of like the geography by the segment? Or should we think about it in relation to the proportion of revenue between Brokerage and Risk Management? And then I guess to tie it together to that question. Doug, you [hesitate earlier] by saying, right through this expense focus, you could probably expand your margins even as books close. Was that a comment specific to both of your segments?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [19]

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All right. So let me break this down. And you were cracking just a little bit, at least. So let me see if I — is there a disproportionate cost-cutting opportunity between Gallagher Bassett and — or the Risk Management segment and the Brokerage segment?

Yes, I think in the Risk Management segment, you’re probably looking at 25% to 30% of those savings, whereas that business itself is somewhere around 20% of our total business. So there’s a slight skew to that business which would make sense because they’re the ones that have the more volume-sensitive — immediate volume-sensitive type business than the Brokerage business does. So that’s the first part of the question. It’s slightly skewed more towards that.

The margin question that you’re asking is that if we’re successful in achieving the expense savings to the level that we’ve planned for, you would actually see increasing margins in both segments on a quarterly basis.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [20]

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And you expect to be at this $50 million to $75 million quarterly kind of run rate figure for the full Q2, right, because you started working on this in the middle of March?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [21]

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Yes. We might not get — listen, here it is May 1 tomorrow. We’re going to get much of it this quarter. But if I — if we can get 90% of this quarter, then we’ll catch up in the third quarter.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [22]

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Okay. And then one more question on the COVID-related revenue adjustments. So just so I understand, so that’s on basically — it’s everything as it sits today. So even if we continue in this economic slowdown, you wouldn’t expect to see any further 606-related adjustments? Or I guess unless assumption changed materially from what you’re thinking today?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [23]

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All right. Two answers to that, is for — there should be none of that going forward, if customers adjust their exposure units for renewals beginning April 1, May 1, June 1. So they adjust down, then there would be no COVID-related type adjustment, right? They’re just going to buy less insurance, right? For contracts that were basically written — in January, we put all those to bed. We did all the work for it. We booked what we thought was the revenue that we’d get over the 12 months following that contract date. We had to reestimate what we think we’re going to get from those here in the last few weeks, almost a subsequent event-type evaluation of those revenues. Could there be further deterioration in that? Yes. Sure. There could be if the number of covered lives decreases further than our estimates, if we get more audits that come in afterwards, if there are more midterm cancellations, you could have a further COVID adjustment. But I hope that we’ve got it all at this point, but we’ll see. And we’ll track that for you, and we’ll show you how much it was.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [24]

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And just one last clarification. Your organic outlook of flat to maybe slightly down. That’s an all-in, including your contingency supplementals like you usually give guidance, correct?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [25]

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Yes. That’s right. And let’s make sure we understand that. Here we are chugging along and having good organic this quarter. If we have a dip next quarter, and we might have a little dip in the third quarter, our assumptions are by the fourth quarter that we would be back to a decent organic level. And if that pushes into 2021, what I’m saying is I don’t see us being negative for, at the most, a couple of quarters. Even then, I think I’d be a little bit surprised.

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Operator [26]

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Our next question comes from Yaron Kinar of Goldman Sachs.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [27]

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I guess first question, Doug, I think in your prepared comments, you said that you’d expect EBITDAC margins to be at historical levels maybe slightly above. When you talk about historical levels, what are we talking about here? Are we looking at last 3 years, last decade? Could you give us maybe a sense of what it is your thinking here?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [28]

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All right. So let’s go back to the margin comment. I think that probably the better way for you to do it is to just assume we’re going to get $50 million to $75 million of revenue. And if you just hold our revenue flat to last year for the second and third quarter, you can’t help but get margin expansion, right? If you just take the last year, so you’re going to get margin expansion even in a flat or in a slightly down organic environment if that happens. It will — if it reverts in the fourth quarter or into next year, then you’re going to be — I think Mike asked the question about it earlier, by the time you get to 2021, if we’re chugging out organic like we were in 2019, we’re going to put some of these costs back into the structure. So take your 2019 margin and grow it kind of what we did between ’18 and ’19 and ’21, and you’ll kind of be there.

So you’re going to get an increase in margin in the short term, and then it’s going to revert back a little bit more in the longer term. I want to make sure that I’m clear on something there. Does everybody understand? I don’t know if I misspoke. We think that we’re going to get $50 million to $75 million of expense savings each quarter going forward, not revenue saving. Whatever the revenue, it is what it is. But we’re adjusting our expense basis down $50 million to $75 million of expense. I may have misspoken on that, but…

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [29]

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I think I understand that. But if I look at the revenue base of 2019, that’s like over 4% of margins, right, in Brokerage and Risk Management.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [30]

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Say again, Yaron. Sorry, we just had some static on the line.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [31]

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Sorry about that. I think if I look at that $50 million to $75 million of quarterly expense saves, and I look at the revenue base for 2019, that’s over 4% margin.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [32]

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It could be.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [33]

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Okay. All right. And then I guess my second question is more around the capital, how you’re thinking about it here? I would think you have a lot of disruption in the space, maybe creating opportunity for M&A, besides the fact that you can’t really meet with anybody right now in this environment. Are you interested? Has your appetite for M&A increased here? Or would you say that maybe you have a greater — maybe as a precautionary measure, more interest in preserving capital and liquidity here?

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [34]

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No. This is Pat, Yaron. We are really interested in the acquisitions. This is a time for people now to sit back and take a look at what the competitive landscape was. There were an awful lot of competitors out there with great stories and lots of money in the bank. And now I think there’ll be a time for people to look and really think who do they want to be with. And if we can get people to sort of think through the acquisition of their life’s work, and where they want to have their people employed after the deal is done, we think we’ll do very, very well. So we are wide open for business, and we are not trying to preserve capital when it comes to acquisitions.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [35]

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You get a little bit of difficult rate and conditions out there in the marketplace, Yaron. And you sit there and say, would you rather do it alone? Or would you rather do it with us? I know where I’d be if I own my own agency. I’d be sitting there saying, how do I go to a strategic that can actually deliver capabilities and resources that will help me sell more business, that’s where I’d want to be right now. And we’re tightening our belt here on expenses, but we still have — we’re not cutting into the meat of our capabilities. We’re — we can tighten our belt and get through this trough in the revenues. If I were somebody selling, I’d be thinking pretty hard about coming to Gallagher right now.

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Yaron Joseph Kinar, Goldman Sachs Group Inc., Research Division – Research Analyst [36]

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So I think — in one of the more recent Investor Days, you had talked about targeting about $1.5 billion worth of acquisitions in 2020. So is that still achievable or something you could do?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [37]

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Listen, we have the capacity to do that type of ball. I just don’t think it will present itself. I think that there’s a lot going on right now, getting people back out to do due diligence, it’d be pretty hard for us to spend that amount of money between now and the end of the year. But does that mean we couldn’t catch up in 2021? If this is a V-shape recovery, there’ll be plenty of opportunities to buy, and we might be a little short for a quarter or 2. But by 2021, you could see us having a huge year.

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Operator [38]

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And our next question is from Mark Hughes of SunTrust.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division – MD [39]

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Doug, I’m not sure whether you touched on this, but your cash flow expectations for this year. If you undertake all these measures and it sort of plays out as expected, what does that do for free cash?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [40]

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Okay. Let’s say, I don’t know if I have a number right for you on how much could generate. But the fact is, if we have a little bit of a lull in M&A, right? If we have expense cuts of, let’s say, $75 million a quarter for 3 quarters, there’s another 2.25, right? And we typically — we’re probably starting with $500 million to probably $700 million even after paying the dividend. So you’ve got a lot of — you could have $1 billion of excess cash by the end of the year if organic doesn’t — if it’s flat for a couple of quarters or down just a little bit. I don’t know if I care either way. You could have a substantial amount of cash on the balance sheet at the end of the year.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division – MD [41]

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Any distinctions internationally, when you look at the different markets you’re in, any doing notably better or worse?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [42]

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We had really a great quarter in our U.K. operations. The organic was very strong in the U.K. So that business there seems to be holding in very well. Early April, returns on that don’t show a lot of stress either. So we’re having really terrific results in our U.K. operations. Canada had a great quarter also. I think that’s really doing well in Canada. Our operations there has really come together in the last few years, and we’re running really nice, upper 30 points of margin in it. Australia and New Zealand, they were coming off some pretty hard market. There’s — rate environment there for a while. We’ll see what happens with the fires happening, but there seems to be good organic growth there. And then in the U.S., we had terrific results, too. In April, I was surprised by our guys, to be honest, they’re selling a lot of business. We — I look at the new business sheet every day. And there are — our guys are selling a lot of new business out there still here in April.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [43]

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Yes. And I’d add to that, too, Doug, that if you take a look at places where we’re smaller around the rest of the world, very, very strong start to the year. Latin America, our operations and, as you said, Canada, the global picture looks really, really good so far.

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Mark Douglas Hughes, SunTrust Robinson Humphrey, Inc., Research Division – MD [44]

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And then last question. I just wonder on the claims count. You talked about the kind of high-frequency claims are down 50%. Anything that jumps out at you about things you might not have expected? Other types of claims that frequency is down, and I’m curious, any observations about workers’ comp, specifically. How you see claims there?

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [45]

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I think Mark… you go Doug, and then I’ll go ahead.

Go ahead, Doug.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [46]

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I think we’re surprised in the Gallagher Bassett unit about the strength of some of the industries like — especially like in the hospital sector right now. It’s — claims are still coming in. And we are starting to get more and more workers’ comp claims related to COVID also. So our customers are going to have workers’ comp claims related to COVID. But the kind of the recurring just manufacturing medical-only type “back to work in a day or so” type claims, if you don’t have a lot of people working, you just don’t have a lot of those arising. So I think that, to be honest, the severity claims are still there. The frequency is down. But again, it was — it’s 10% of our business. And that’s — it’s not all that margin fix. So we’ve got the ability to adjust our head count on that, and we’ve used a lot of temporary labor there. We used a lot of contracts on our contingent labor. So we have the ability to flex that labor pool pretty easily on it.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [47]

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I would add to that, though, Mark. One thing I was surprised at is how quickly on that side of claims side, it began to move. I mean as we saw unemployment requests go up very quickly in end of March, those claims came down very quickly as well.

People getting out of work were not filing claims, which is interesting.

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Operator [48]

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And our next question is from Paul Newsome of Piper Sandler.

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Jon Paul Newsome, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [49]

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I thought it was interesting in the CFO Commentary that the expected weighted average of EBITDAC acquisition pricing was down a tick or 2. Is that a reflection of what you perceive as the acquisition market? Or is that a reflection of just trying to be more disciplined in a difficult environment?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [50]

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I think really when you look at it, when you look at it, Paul, when you’re talking about doing 7 deals, mergers across $30 million of revenue, you’re talking about a nice bolt-on acquisition. We didn’t have any big larger ones in the quarter. Capsicum was already in our numbers, but we didn’t have a Stackhouse Poland for last year. We didn’t have a Jones Brown up in Canada. So it’s these nice tuck-in bolt-on acquisitions. We’re still doing nicely in the 8s in there. So that’s what you’re seeing there.

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Jon Paul Newsome, Piper Sandler & Co., Research Division – MD & Senior Research Analyst [51]

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And then I guess do you have expectations when you’re doing deals that you’ll also see similar drop-offs in revenues that you would experience?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [52]

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I think it certainly puts — the idea of growth in an acquisition has always been one of those things that the seller believes they’re going to grow x, we believe they’re going to grow at a percentage of x. And so we put part of purchase price on an earnout. And I think in this uncertain time, there will be considerably more sellers willing to take more on an earnout because I think they’re going to want to grow out of this environment. We’re going to want to help them grow. Nothing would make me happier for everybody to come in and hit their earnout. That means they’re growing well, and we’re all doing well then.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [53]

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Let me weigh in on that. As Doug had said earlier, if you’re going to be running a smaller brokerage right now, who would you like to partner with? I’d like to partner with the firm that’s going to help me make my earnout. When rates are going up and everything is dandy, making my earnout the way I did it all the time in the past might not be that difficult. All of a sudden, right now, capabilities make a difference.

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Operator [54]

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And our next question comes from Meyer Shields of KBW.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division – MD [55]

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Two really quick questions. First, it really sounds like, other than exposure units, that things are going full bore. I was wondering if you could comment on the producer recruitment that is accompanying that.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [56]

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Yes. We are wide open for producer recruitment. I mean this is — no matter what the day or the time is in terms of good economies, bad economies, we are always looking for solid production talent, and that’s no different now. But as we’ve talked about the acquisition process, I think that there’s going to be a little less competition. Or maybe let me put it this way. We’re still one of the few places of size and of capability that are happy to pay our producers on what they actually produce, what they’re buying and what they bill. And if I’m looking around at where I’m going to go, am I going to go down the street to the Jones agency or am I going to come to a Gallagher, who understands production from the standpoint that we are a broker run by brokers. Every single one of us, with the exception of the professionals, have been on the street. And I think that resonates right now. And we get a lot of people that are interested in. “Yes, really, how does this work?” Well, now they’ve got capabilities with us to go out and pick on the smaller guys and say, “no, no, no, you don’t understand. This is really something we can help you with.” And that resonates in today’s market. So I think that: number one, it’s a great time for us to be recruiting; and number two, we’re going to have lots of success with that.

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division – MD [57]

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Yes. No. That makes perfect sense. Maybe this is a question for Doug. Are we going to see any impact in 2021 from the expense pullbacks in 2020?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [58]

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So do you think we could have savings in 2021 versus what we put in this year and they got a carryover impact? Is that your question?

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Meyer Shields, Keefe, Bruyette, & Woods, Inc., Research Division – MD [59]

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No. The other way. In other words, obviously, you were spending this for a reason, which doesn’t preclude responding to sort of the weird situation, but are these loss, I’m thinking of them in terms of investments, are those going to show up at all in 2021?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [60]

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I think you’re asking, do we think we’re going to have a setback in our progress of building a better franchise as a result of these expense cuts. I think that’s really what you’re asking. We believe that most of these are immediately consumable type of expenses that if we’re not traveling today, I don’t know how that’s going to impact us next year. So when travel comes back, I don’t think that’s going to hurt us. I think that some of our other belt-tightening exercises that we’re doing right now have shown that really, we can bring some of this work that we’ve been doing in-house that maybe we’ve been using external consultants for. We actually can be using some things and doing some cost-saving measures that we didn’t realize that we have the opportunity to do by sharing across divisions, kind of breaking down some of those silos in terms of being better together internally. How much is it going to keep — hurt us going back? Maybe a little bit on the technology investment, but we’re cutting technology investments in nonclient-facing type areas. So are we going to refresh our website this year again? Maybe not. But if we do it next year, that’s probably okay. We still want to make those investments. But that would be an example of, is it going to really hold us back from selling more insurance? Probably not.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [61]

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Meyer, let me give you a bit of where I think this is going to carry over to next year, which are some things I’ve been seeing in the last 2 months that I’m really excited about. Number one, cross-selling. I think you’ve heard me say 100 times that that’s one of the things in the company that I’m always harping on. And this, all of a sudden has given a lot of light to that. People are saying from the property casualty side or the benefit side, wait a minute, my customers really do need help. So we’re seeing those opportunities grow. We’re also finding an opportunity to wipe out more of what we refer to as white space. We know that on average, we’re doing, I’ll make this up, 3 or 4 lines of coverage per client when they’re probably buying 10 to 12. Wait a minute, we’re doing 4 really well for you, and you need help on the other 8. We’re picking up those accounts. And the other thing is trading with ourselves. As we’ve been doing acquisitions, of course, they all come with their London broker they’ve been in business with for 100 years. And we explained to them why they should trade with us in London. And by and large, we’ve done a good job of moving some of that business. But today, when you get a crisis like this and you say, “Guys, this is really about making sure we do the right thing for the client, and we’ve got a better group of people in our London office than you’ve been trading with. No more excuses. Move it.” They’re doing it. So their benefits have come from these bad times that will, in fact, pull over into ’21 and 22.

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Operator [62]

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(Operator Instructions) Our next question is coming from Ryan Tunis of Autonomous.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [63]

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So I just wanted to talk a little bit about, thinking about the mousetrap for even like in ’19, when we were getting to mid-single-digit organic, clearly, to get there, there was quite a bit of new business that was being written. What was the new business volume? What’s kind of been the annual pace of new business?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [64]

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Ryan… go ahead, Ryan.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [65]

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Yes. No. No. I was just going to say in terms of on the revenue line. Yes, the number, sorry, Doug.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [66]

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There’s 2 different numbers in there. Some of it, if you just talk about new business relating to 1-shot type opportunities like a bond or something like that. You’ve got that, and then you’ve got the other, just what’s the annual — related to annual policies that you would expect to keep a client and keep renewing. The way to really think about this is the delta between the new and lost. And we’ve been getting probably about 2 or 3 points of limp from rate in the past. So our new business has been always outgrowing our lost business, call it, by 3%. And maybe it’s more 4% net new and 2% because of rate and exposure, we were kind of toggling to a point really at the end of last year, where almost all of that was — of the 2 to 3 points for June rate and exposure was really coming from rate, not from exposure. We had gone through the exposure growth period from 2012 to 2017, and we’re kind of — the other — that kind of declined a little or flattened out a little bit and we’re getting rate. What could happen as we come out of this? Well, you could see another growth in exposure units. It will recover from the contraction. And I still believe that there’s rate out there. That tends to — when there’s rate happening out there, you tend to get more looks at new business. And then it also — you got to make sure that you secure and hold on to your renewal business. So what do we see in next year? I would say maybe a new business in excess of lost business because we compete 90% of the time with somebody less than us, maybe you’ll see that widen out by 1 point at least in that spread.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [67]

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Yes, Ryan. Doug can give you the numbers in terms of the spread and what have you. What we saw in the last couple of years, which has been really heartening is that we bifurcated our business or trifurcated into the small business kind of medium and the large risk management stuff. And what we’re finding is we’ve had a lot more success the last couple of years on accounts that we would consider just slightly bigger than the norm in the past. So we have been — and those have not been coming from taking on our larger competitors. We do fine — when we compete against Marsh & McLennan, we do fine, they do fine against us. But as Doug just said, 90% of the time, we’re competing with somebody smaller. And what we found in the last 2 years is we are taking their bigger accounts. They’re actually — we’re having more success with accounts that are a bit bigger. So that does add up to a percentage of trailing book of business, which has grown nicely over the last couple of years.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [68]

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So then it’s fair to say that in your outlook for kind of flat to maybe slightly down, you’re assuming that you’re still going to be able to generate more new business than you lose for 2020.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [69]

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By far. Listen, here’s the thing, right. Right now, this is my calls every day. This is our time. This is difficult on our people, working at home, where half of them (inaudible) crazy, bunch of them have kids, it’s not easy. They’re still making calls. We’re picking up orders right now from clients we haven’t had a personal meeting with. We’re going through what we have in terms of communication capabilities, what we have in terms of capabilities, to help them through, whether it’s the CARES Act or what they’re doing with what’s going on in the market. And they’re not getting that help from the smaller local broker. So I’m very pleased with the new business that’s actually occurred over the last month. I mean we’ve actually had it — it’s held up comparative to January and February, which I’ve been amazed at. And of course, as Doug mentioned in his remarks, our retention is a bit stronger because when we’re in a normal environment, that local broker who’s got good markets, just doesn’t have the capabilities. They could beat us from time to time. So we’re seeing our lost business come down a smidge and our new business is up. So now what happens with exposure units and bankruptcies and unemployment and all the rest of that tends to suck the wind out of you. But I’m excited about new business right now. We’re a new business machine.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [70]

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So my other one is just on, I guess, thinking about your revenues, what percent of your revenues are tied to some sort of head count metric? Like I’m in the workers’ comp and employee benefits. And also what percentage of your revenues are — maybe — I don’t know if nonrecurring is the right question, but I’m thinking about like a construction project. So like to replace the construction project from last year, you need to write a new construction project this year.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [71]

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That’s right.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [72]

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That type of thing.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [73]

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Our entire bond book is exactly what you’re talking about. We look at it every year and budget the fact that the XYZ construction company who does infrastructure work is going to be able to continue to do that work. And of course, new projects are going to come up. Now you take those projects away, and they’ll drop. Now presently, the government is not withdrawing into those projects. So those that are doing hired infrastructure work, we’re going to probably continue right on with that. But you asked a question, a lot of the business, all workers’ compensation is predicated, as you know, on payroll. And by and large, what you’ve got in our entire benefits book, which is over $1 billion in revenue, is tied to employee headcounts. So we are subject to the decrease of employees or decrease in payrolls.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [74]

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How big is the bond book? I’m sorry.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [75]

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The bond book?

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [76]

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Yes.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [77]

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I don’t know. I’d have to take a look at. I got to see if I can dig that up for you quickly.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [78]

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We don’t have that.

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Ryan James Tunis, Autonomous Research LLP – Partner of Property & Casualty Insurance [79]

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My last one was just, obviously, on the carrier clients, there’s been a lot of discussion around business interruption. And I’m just curious how hectic is it in terms of talking to your clients? Are there a lot of claims coming in? Is there a lot of handholding? Or you feel like a lot of the coverages are pretty easy to explain. They kind of get it that type of thing?

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [80]

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Well, first of all, you’ve got to start with. There’s a tremendous number of clients who for their own reasons have chosen — this is why we’re getting some feedback. There’s a number of clients, of course, that have chosen not to buy business interruption. So we take them and move them aside. Then there’s different forms of business interruption throughout the marketplace. And those forms will dictate whether or not the carriers owe the coverage. And we represent our clients. We’re going to sit with our clients. And yes, there’s a lot of activity in this regard, and take them through what they bought, what the limits are that they bought, and whether or not it looks as though they have coverage because there are some coverages in the market that clearly cover pandemic. Now there are many others that simply say, there has to be a physical damage to the premises for it to be a covered loss. And there’s been strong leadership from the insurance company side, saying, look, we’re going to pay the claims that we know we have that are appropriate claims. We’re going to pay them quickly. But we’re not going to amend our contract, and we’re going to have to help our clients, which is what we do, go through that environment. And if they have a rightful claim, we’re going to do everything we can to make sure it gets paid.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [81]

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Ryan, just a follow-up, I did dig a couple of numbers out for you. Last year, we did nonrecurring type business, which would probably include our bonds and everything of about 1% of our total revenue. So if it all went away forever, our organic last year of 6% would have been 5%. Workers’ comp, and what we consider to be high-impact areas is also about 1%. So if 100% of all those employees went away and stayed away and never came back for an entire year, it would cost us another point on our organic.

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Operator [82]

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And our next question is from Elyse Greenspan of Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [83]

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I just had one last question. So you guys have, through the years, have spoken about the outsourcing operations that you have in India, it seems like the impact of COVID there has been lagging the U.S. by about 4 to 5 weeks. So I was just wondering if there was — we should be thinking about any impact on your business within India. And then I might have one other follow-up as well.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [84]

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Yes. I’ll take that. I think I just couldn’t be more pleased with our capabilities. Those folks have trained and planned and had actually done exercises of working from home. We knew that if any of those locations went down, we could move that work to their home with their laptops. We have not seen any delimitation at all in the service provided by our service centers. And remember, our service centers are now in India, small in the Philippines and also in Las Vegas in the United States. And those service centers have continued to provide absolutely impeccable service for the last 2 months, not even a noticeable change. And while it’s difficult for many of them as well to be at home, we don’t see that changing at all in the future.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [85]

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Yes. It’s really been a remarkable, Elyse. They — since day 1, they are trained and they rehearse to do all their work from home. We’re a paperless environment there, the laptops come home with them every day. We have — you get some brownouts there from time to time, where you have a little problem with electrical grid. So we’ve got experience with them being at home. Internet connectivity is required for them in order to have a job at as a home Internet connectivity. So I’m really impressed with the sturdiness of that operation that hasn’t missed a beat.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [86]

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Okay. That’s great. And then last question. In terms of the expense saves, is there — can you give us a sense of just by geography, if they might be more pronounced in the U.S., the U.K., obviously, Australia, New Zealand or even within India? How do you think about the geographic base of the expense save?

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [87]

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Yes. I can probably dig that out for you here if I get to the right piece of paper. I’m a little short on it. But I don’t see it disproportionately in any 1 location versus the other. So obviously, I would say it’s proportional to our revenues by geography. But I’ll look at it here if you have another question, but I’ll take a look at it as I dug this out. So…

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division – Director & Senior Analyst [88]

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Well, that was maybe the last.

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Douglas K. Howell, Arthur J. Gallagher & Co. – Corporate VP & CFO [89]

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I got it here. I don’t see it as being disproportionately different by country or by division, other than the Gallagher Bassett matter that we talked about.

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J. Patrick Gallagher, Arthur J. Gallagher & Co. – Chairman, President & CEO [90]

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I think that’s probably it for questions. Why don’t I just make a quick comment here and we’ll wrap it up. Again, thanks for joining us this afternoon. We really appreciate you being here.

As you can see from our comments, our focus is clearly now on the difficult, evolving operating environment. I’m confident that we have the right platform, people and strategy to manage through the current environment for the benefit of all of our stakeholders, our employees, our clients, our carrier partners and our shareholders. Thanks for being with us, and thanks to all of our teammates for delivering a great quarter again. Stay healthy, everybody.

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Operator [91]

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