Q2 2020 Arthur J Gallagher & Co Earnings Call

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Comments made during this conference call include the answers given in 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 cautionary statements and risk so.

Factors contained in the Companys 10-K, Thank you and 8-K filings for more detail on its forward looking statements. In addition for reconciliation 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 then Investor Relations section of the company's let's say it is now my pleasure to introduce J., Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher and company Mr. Gallagher you may begin.

Thank you. Good afternoon. Thank you for joining us for a second quarter 2020 earnings call.

Also on the call today's Doug dollar CFO as was the heads of our operating divisions.

We delivered an excellent second quarter. Despite the economic deterioration caused by cobot 19, our teams are executing at the highest levels. While we continue to place health and safety first your servicing our clients were selling new business. We continue to look at merger and acquisition opportunities in our bed.

<unk> culture keeps our teams working together, even while physically apart.

I would like to thank our 33000 Gallagher professionals around the globe for their constant and tireless focus on delivering the very best insurance brokerage consulting and risk management services to our customers more than ever. These are times, when our global capabilities and resources support our local professionals as they help our come.

Tumors navigate these challenging times and still generate strong new business that really truly is the Gallagher way.

Moving to our second quarter financial performance, we grew our combined brokerage and risk management revenues in the second quarter organically and through mergers and acquisitions and together with our expense control actions delivered excellent growth in EBITDAX and net earnings this demonstrates that our investments over the last decade.

We have enabled us to quickly adjust our workforce and expense base increased utilization of our centers of excellence efficiently work remotely improve our productivity, while always raising our quality.

Let me break down our results further starting with our brokerage segment.

Reported revenue growth was a positive 6.2% and even a bit better at 7.6, when leveling for foreign exchange of that 2.1% was organic revenue growth.

Net earnings.

Margin was up 364 basis points and adjusted EBITDAC margin expanded by 635 basis points to 32.6%.

Doug will provide some additional details on our expense control efforts, which was primarily responsible as we drilled net earnings of 38% and achieved adjusted EBITDAC up 34% clearly a very strong quarter employed at the team executed in a difficult environment.

Let me give you some sound bites about each of our brokerage units around the world.

Starting in the U.S., our retail PNC business held up very well during the quarter delivering organic growth of about 4%.

Still strong new business generation, the small drop in retention and nonrecurring business rate increases offset exposure unit declines cancellations were not up over first quarter levels and mid term policy modifications were still in that positive, but a bit lower than first quarter levels.

All in we are seeing similar trends in our domestic wholesale operations, but a bit of a tale of two cities are open brokerage business had mid teens organic growth benefiting from strong new business and rate or energy a program binding businesses were backwards about 5%, resulting from a slowdown in programs like.

Transportation amateur sports and construction. However, when we look at June alone or MGM program businesses were showing improvement over the lower in activities over the lower activity seen in April and May.

We had an excellent quarter in Canada at more than 5% organic driven by strong new business and higher rates UK delivered 4% organic and Australia, New Zealand were closer to flat, where we're not seeing as much tailwind from rate. So exposure declines are weighing just a little bit more on our organic so overall.

Our global PC operations reported about 4% organic in a quarter, a really strong result in a difficult environment.

Moving to our benefits business.

As anticipated we saw some second quarter weakness down about 3% on an organic basis.

New consulting and special project work declined in addition to a decrease in covered lives on renewal business, but we're not seeing covered lives decreasing as much as the headline unemployment numbers, it's what I bring our PC and benefits together the 2.1% organic here in the second quarter came in pretty close to where we thought it.

We'd be at our June Investor Day.

Looking forward so far in July nearly every metric we are monitored monitoring is trending better than the second quarter.

Accordingly based on what we're seeing today, we think third quarter brokerage organic an expense saves will be similar to the second quarter.

As we move into the fourth quarter. If the economy continues to recover feels like organic would equal or even be a bit better than third quarter, and we should be able to continue to deliver cost containment as well.

So lot of economic and governmental uncertainty, but that is where we are forecasting today.

Before I leave the brokerage segment, let me go a bit deeper on the PC pricing environment.

PC pricing continued to move higher around the globe with most geographies reporting 5% or greater price increases tighter terms and conditions and somewhat restrained capacity by line of business property remains the strongest up more than 10% next is professional liability up over 7%.

Other casually lines are up 5% to 10% with umbrella rate increases at least twice that level and workers comp is flat to down 2%.

By geography, Canada is seeing the greatest price increases of more than 8% US is up about 7% followed by the UK, including London specialty at about 6% and Australia, New Zealand between two and 3%. So PC pricing is up across the board, but client premium.

Changes are more modest due to lower exposure units higher deductible reduced limits and clients opting out of coverages.

Looking forward I see rates continuing to increase within an already from market and early indications from July point to continued increases in the third quarter before the pandemic began loss cost, we're outpacing rate and I see justice stronger case for underwriters to push or even more rate in this environment.

It is certainly a more difficult market today, but not yet a hard market because most risks and still find a home.

Jumping to mergers and acquisitions, we completed for brokerage mergers during the second quarter at fair multiples 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 [noise].

While second quarter mergers were lower than normal the number of conversations with potential merger partners is picking up so far the third quarter.

For gold market conditions in the pandemic are further highlighting the need for expertise and data driven tools. Our platform is an excellent fit for entrepreneurs looking to support their current clients use our tools and data to grow their businesses and advance their employees career.

As I look at our M&A pipeline, we have about 40 term sheets signed are being prepared representing around $300 million or so of revenue.

Based on the activity we are experiencing in July we are optimistic we will return to more normal levels of merger activity later this year.

Next I'd like to move to our risk management segment.

Second quarter revenue was in line with the guidance, we provided our June IR day with reported revenues down about 8.8% inorganic down about 9.6%.

This reflects a dramatic pullback and new claims arising due to higher unemployment and a reduction in overall business activity offset somewhat by an increase in coal would related claims. We think April was the worst of it and I'm encouraged that claim counts in the later half of the quarter in into July improved off the lows. However.

Our new claims arising are still well below pre co would levels.

Our risk management team also did a terrific job on cost containment budget adjusted EBITDAC was only $2.7 million lower in the quarter relative to last year and margins held which is also right in line with our expectation takes a little longer the churn. This ship first our brokerage segment. So we would.

Expect to see third quarter EBITDAC improve relative to second quarter, and then as our expense actions are fully realized even greater improvement in the fourth quarter, leading to full year adjusted EBITDAC at least equal to 2019, just fantastic job by the team to adjust our expense base and rebalancing.

Claim loads across adjusters, while maintaining our client service and quality levels.

So I want to combine our core brokerage and risk management segments together, despite the unprecedented economic challenges we grew our adjusted revenues 5.3%.

<unk> grew our net earnings and adjusted EBITDAC about 30%.

Thats truly an excellent quarter.

But before I turn it over to Doug Let me finish with some comments on our bed rock culture.

When times are tough teams can either break apart or band together since my grandfather started the company in 1927, we have consistently expected every leader in associated Gallagher to live our culture talk about our culture and promote our culture.

Culture matters culture prevails culture is important in the best time, but even more important during challenging times.

Our team has together, we respect and support one another no. One is an island. There are no second class citizens. We learn from each other everyone is important for those of you that have followed Gallagher since we came public more than 35 years ago, you'll recognize those statements as just a few of the 25 tenants are the game.

All right away.

This document puts our core values into words, which shapes and then guides our culture and we believe in it because it matters to us we live it every day in its guiding us through these challenging times I believe we will emerge on the other side, even stronger than we were before.

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

Hi, Thanks, Pat and good afternoon, everyone like Pat sat solid topline growth and truly remarkable bottom line performance, our combined brokerage and risk management adjusted EBITDAC is up nearly 30% over second quarter last year.

Thanks to all of our colleagues around the globe for you upon our cost control efforts all the while continuing to deliver unique insights and high quality service that our clients need even more in these times.

Today I'll spend most of my time on our expense savings give you some comments using the CFO commentary document and then finish what thoughts on cash M&A and liquidity.

All right, let's go to the earnings release pages four in SAP.

You will see both the brokerage and risk management segments expanded adjusted EBITDAC margins this quarter.

Our brokerage segment reduced compensation and operating cost by about $60 million versus prior year. When you adjust safir rolling impact of mergers closed after March 30, Onest 2019.

And the risk management side with the savings about into about $14 million. So in total we were able to adjust our expense base by about $74 million.

During the second quarter.

At the top end of our estimates that we provided in April and again that our June IR day.

Give you a breakdown of these savings.

We reduced travel entertainment is an advertising by about $24 million, we reduced technology consulting and professional fees $14 million.

Just outside labor and other for workforce actions saved about $13 million, we saved on office supplies consumables and occupancy costs of about $12 million and lower medical plan utilization by our employees saved about $11 million.

Well I look towards the third quarter, I think savings will be in the $65 million to $70 million range relative to last year again adjusting for rolling mergers.

This is a bit lower than second quarter separately, because our production staff is beginning to travel to see clients and prospects, we're increasing our advertising costs again and in June we did see a reversion to pre pandemic levels of our employees utilizing our medical plan.

As for the fourth quarter that all depends on what happens with organic.

If we were at plus two our plus 3% organic than our producers are likely traveling more and we may restart some of our postponed investments and thus we wouldn't see as much savings in areas like technology consulting and professional fees.

But of organic is flattish, we'd expect to see a similar level of savings as the third quarter.

Okay, Let's go to the CFO commentary document that we post on our IR website.

On page two most of the items are fairly straightforward and consistent with what we provided to you in our June IR day, there's two items to highlight which basically offset one another first foreign exchange in our brokerage segment was slightly unfavorable this quarter call at about a penny and second the broker in the brokerage second second.

Amortization that came in about a penny flat favorable again offsetting the FX.

Turning to page three into the corporate segment table relative to the midpoint of the guidance. We provided our June IR at our June IR day.

Interest in banking came in about a penny or so favorable the acquisition of off line came in just a little bit less than a penny but still favorable.

The corporate line is about a penny unfavorable but you'll read in footnote three.

Three that was simply due to foreign exchange rates bouncing around in the quarter.

Finally, clean energy with a penny below the midpoint of the range due to mild temperatures more use of natural gas and weaker electricity consumption due to covet.

A hot July is start off with a strong third quarter, but we're still seeing natural gas prices on the lower end and lower economic activity could likely dampen generation later in the second half of the year. So we have lowered a bad our full year range to $60 million to $70 million net after tax earnings.

Well, let's not forget the $1 billion of tax credit carry forwards we have on our balance sheet. That's effectively a receivable from the government that should allow us to pay lower cash taxes for many years to count.

All right, let me wrap up with some comments on cash M&A and liquidity.

Our our customer cash receipts for strong during the quarter rebounding in May and June after a slight slowdown in early April so far in July we're tracking back to pre pandemic levels. So we don't see any concerns at this time.

As of today, we have more than $1.3 billion on liquidity consisting of available cash on hand of nearly $275 million and we have access to over $1 billion on our revolving credit facility.

As for M&A as Pat mentioned, we did complete for acquisitions during the quarter.

A couple more tax free exchanges. So we used a little of our stock, but even then with an average multiple pay below eight times there was a nice arbitrage strong trading multiple.

More importantly, our pipeline is really heating up so we could have a strong finish to the air and a strong start early next year.

Okay. Those are my comments are great quarter by the team for them to continue growing revenues and executing on cost containment, let's keep the economy from another class, we should pull off an excellent full year back to your path.

Thank you, Doug operator, let's go to questions and answers.

Thank you the call is now open for questions. If you have a question. Please pick up the handset and press star one on your telephone at this time.

You are in the Speakerphone. Please proceed with assumption prior to pressing the star one to ensure optimum sound quality you maybe move yourself in the queue at any point by pressing Star channel again that is star one for questions.

Our first question is coming in from a lease Greenspan with Wells Fargo. Please proceed.

Hi, good evening on delay my parents Hi per year. My first question on maybe the.

And so that they have a few question here. The first one is well under your brokerage margin by 6.2%. So what I think maybe get a little bit lots in the number is if you adjust out the stadium and 2% organic revenue growth if my math right around 100 and.

20 basis point.

Margin.

So I am I thinking about that correctly.

Yep.

Pretty good margin improvement in your business away from Jefferies. Dave I think something that now you have about right I think thats right. We had to now we didn't give raises this quarter. So that would have dampened the 1.2% a little bit but.

Youre looking at the right way.

Okay.

Thank you like you just provided some color in terms of theme that we could be in the third and fourth quarter.

And your acute investor day.

Does that kind of post Colgate that about half of the seeds I believe.

Good day.

And ongoing maintenance again.

Given you provided some anything I wanted to make sure.

Yeah.

Yes.

Yes, I think probably when we looked at six weeks ago that probably would've been about right I think right now.

We are learning a lot as a result, this crisis and we are finding ways to lever service and advice clearly more cost effectively than pre pandemic, but I think what matters in the end as what we spend will be highly correlated at least at how our clients prospects and underwriting partners expect us to do business.

Now with the different determine really how much we travel how much we communicate virtually hi that they want to be entertained anymore. How much do we advertise and how do we how do we advertised in the market and then also all drives what investments in technology and technical resources. We are that we need in order to service and compete in the market.

It also goes further when you look at.

What it takes to attract and retain talent that will dictate a lot on how we leverage our work from home capabilities, maybe where we wrote reload, our where we locate our offices how we can figure them and then also will impact how we train develop and mentor our folks.

So that will influence the ultimate cost savings and then also one thing I have to say.

Yes, as being experts and employee benefits, we truly hope that our employees get back utilizing our medical health and well for our plans.

We need to everybody be doing their prevented exams and getting the services. They need nothing good comes from delays in getting your medical treatment and that save to several million dollars. This quarter. So when I bring it all back together over the long term could we be saving $30 million to $40 million a quarter. After we adjust the real estate footprint as we adjust.

The our post edge I Express office up occupancy cost.

Maybe higher some of the external resources that we were using externally yeah, maybe we could get to that number so it wasn't far off as a gas, but it will really depend a little bit on how our clients prospects in underwriting partners want us to do business.

Okay. That's helpful and then on the organic side.

Thank you.

Third quarter of local Sir.

You know seems to be trending in line with that CQH isn't little bit better than you're doing enough.

No we've been hearing.

Here is that there's some lag.

Right, so that does quarter could be one second quarter and that's one.

No that's helping to keep meeting.

So pricing.

Just a little bit more color.

Question.

Well first of all these as you know.

Lies a very big month for us so it's a good bell bellwether.

And we had it we did a very very strong July and so I think as we sit here today, if things don't completely fall off the table in August and September how we feel just exactly the way we phrases today.

Okay. That's helpful.

Thanks Louis.

And our next question is from Mike Tyson Ski with Credit Suisse. Please proceed.

Hey, Good afternoon, Mike first Hey, first question.

[noise], what well in terms of leverage levels.

Where do you go to temporarily what's the rating agencies. If there was kind of something chunkier larger that you've got to a kind of a materially higher level for a year or two and then and kind of work at work its way down if there's something became available.

Yes, I think they'd be receptive to.

That I think we've seen that with other brokers, so that would seem reasonable that they would would would.

Yes.

Willing to accommodate that do we have the appetite to do that we probably won't push our debt ratio is very much at all but I think they could be willing to listen to that.

Okay and along the same lines then like so in terms of kind of making inroads into maybe the mid to large accounts spaces result, as result of the merger. That's taking place is is it more of kind of winning RF pieces to clients look for a new potentially to September.

To find a another railcar because they have consolidated to one or is it more hiring or both and if its RFP processes that take place more kind of next year. When you come comes up for renewal after the merger.

Mike This Pat I think you touched on a very good very good subject, but let me go back to our Genesis I mean Gallagher Bassett was started 1962 basically to take care of the claims for features foods with a fortune 100 company at the time. So we've been in the large account risk management business since the sixties now over the past none.

We have years, we've gotten much much stronger that business as well both on the claim service side as well as on the brokerage side and yes, I think that the the fact that the four top players are going to consolidate to three is clearly given us more opportunities and as I said, our capabilities have gotten stronger and stronger we feel really good about arch.

Chances to expand that business.

Okay, Great and just lastly back to a Lisa's question, given just the phenomenal quarter on in terms of margins.

So so again it sounds like does to your answer about kind of the there was.

There was.

Margin improvement beyond just the expense savings and.

Doug It sounded like you were saying you know that there was over 100 basis points of margin improvement beyond it and it sounded like that could recur.

Unless you know.

And just kind of gets back to usual in terms of entertainment and and more people feel uncomfortable employees still uncomfortable going back to the doctor's offices. It. So it sounds like that that kind of underlying net of expenses positive trend could could continue I guess, it's just it's I think.

So you know cell site essences be now having kind of come up enough because it's just it's such great margin improvement during what is you know.

Fairly muted organic growth times.

Just want to make sure. We're understanding died suffered let's go back what are we thinking about future in the third quarter. We think there would be $65 million to $70 million and things we won't give some of that back up because there are some costs coming back into the structure in the fourth quarter might be closer to.

60 to 70 million we might have.

I have to get back another 5 million there somewhere but that's that's the way we sit today the margin expansion that at least talked about is two things as.

We did have some strengthen our supplementals and contingents this quarter, which probably drove a little bit of that margin expansion.

Longer term up we think we're learning a lot about our business and so I think there could be opportunities here for us to do things differently, because our clients expectations have changed or in this four month period and the question is what they stay that way or will they expect to see five.

People showing up for a meeting.

For an hour or are they okay with our industry experts not getting on a plane traveling today for a half hour presentation, finding some really good success in that that we can put our niche experts at the point of sale and our customers are much more willing to two except a a virtual.

Now face to face versus a real face to face. So there is going to be some savings on on that that that survive. So your margin expansion. We've always said, it's hard to expand margins. If there if it's below 3% and we okay at 2% with a little strengthen supplementals and contingents, we got a path.

Don't have margin expansion hot event in the near term I think it'd be pretty hard to post 2% organic growth for the next 3% and expand margins a percentage points a year I think that would be difficult give us over 3%. We can hold in their get us over five four or five will expand them. So I don't see that change too much.

From what we provided in the past, but yes, there is opportunity there but.

Yeah, I think that this in the near term, 1% organic growth or excuse me margin expansion on 2% organic is a pretty darn good core.

Yes, I agree the well thank you hi, thanks, Mike.

Our next question is from those Stephano with Deutsche Bank. Please proceed.

Yes, I was hoping you could give a little thoughts on contingents and supplementals the into the extent that you have any hoard view into them I guess.

Were there any catch ups in first quarter second quarter that we should kind of trying to normalize out.

In my mind, Illinois, a six of six world.

This isn't supplementals will be a bit more wax.

But then maybe what we've seen or at least.

Actual versus what I'm effective.

Yeah, I think there's probably a little bit a small little bit of a cat shop in the second quarter lot of these things get paid in the first quarter, we have like.

Hundreds and hundreds of contingent commission.

Contracts on even several hundred up supplemental contract. So we probably will have some positive development.

In our second quarter, a little bit but might be talking a couple of million Bucks on announcements on the team doesn't really good job of making estimates I think.

What happens in the future because of the pandemic.

Loss ratios are hanging in there pretty well so and it's you know our our cost in value that we will deliver.

Right now I think that we're earning our contingents and earning our Supplementals and I think I think we've got a pretty fair.

Series of contracts I think the carriers.

Yes that will hold up well with the carriers. So I don't see anything out of ordinary Ines.

HM.

[laughter] just to go back to the you expense saves and I don't have beat the two months, but I guess in my mind thinking about the 60 to 70 million. We can expect third quarter fourth quarter and then the idea that bringing this altogether and maybe we could be 30 or 40, a quarter who knows what the.

Normal looks like moving forward.

You can you give us a sense for how quickly that gap closes and his 2020, a pivotal year, where things back come come back relatively quickly or or does it really depends on the economy and shelter in place than.

The fall out of co bid and all those with.

Probably more of the second it is highly dependent on that I wish I had a quick crystal ball and I think all of us with kind of hope that they come back a little bit faster if that means the economy gets back to zooming people are back to work I mean zooming face to face I'm kind of kind of be [laughter], moving fast and forward. Our guys. I think you want to have some expenses coming back in.

And to our number I felt it money hit that tusa pets, we haven't gone to see a client and three months.

I'm going to hold up.

So don't be pop they'll be pumping your models full of no travel no face to face no entertainment no new people.

We are right a lot of new business. So we're going to service that business and there is pressure in the field to take a trip to see a client. We do have clients that are back at work now centers come see us.

And we've got very stringent restrictions for health and safety reasons about whether even letting our people do that believe me we get it we get a vaccine and our people are going back to O'hare myself included I've been on the ground. This long since I was 11 years old.

Well I I think the outlook looks great and I look forward you guys zooming in anyway.

Thanks, Phil Thanks, Phil.

Our next question is from Ryan Tennis Smith autonomy with research. Please proceed.

Hi, Thanks.

I guess, just thinking about the third quarter organic thinking it's going to be somewhat similar to this.

You can look behind out when you assuming our organic revenue gains is gonna be for employee benefits to get a 2% again.

I think it'd be much the same as what we've got now I don't see a lot of difference between the third quarter and the second quarter from for our PNC business or our benefits business.

And if it goes back up 3% the score.

And at this point Workers' comp revenues were down what.

He said, 10% through mid June.

Rates are down to two ish, maybe 3% something like that but.

If you talked about exposure units being down right.

Right dig that out here for you on the second plenty of work on that.

Right.

What I'm getting as always trying to understand what ultimately you're not to we'll have some convergence of of the employee benefits, which is only down three you know.

Obviously, you're still collecting on for load workers Cobra that type of thing in the workers comp. That's just based on your level of payroll.

So if were down like 10 on exposures in workers' comp I'm trying to understand why wouldn't you.

I think that health and benefits will be down a bit more in the third quarter.

Well I think that might have to do at the mix of our business to Azure as you know we look at doesn't high medium and low impact industries and when we look at that and stacking up you know we have a lot of business, it's been very low impact industries. So.

Right now you're not seeing.

The decreases in workers' comp and benefits in those industries at this point even in the medium categories, we're not seeing it so.

There could be a convergence on it that big part of the drop and benefits is also related to project work in one time stuff that we do in the economy's robust then people are willing to spend on come in and how they communicate with my people right. Now there are more willing to not necessarily communicate as well they'll take that burden on themselves. So its projects and things like that that.

That also diminished in the quarter that we'll have to see a return to prior growth to get that kind of project work back, but the underlying health and welfare business, those probably looked more like where comp.

Got it and then you had I guess my follow up is on its still safe to say that pricing increases are offsetting exposure declines yes.

So is it fair to say then that essentially on average accounts are renewing at basically a flat premium.

Or down because one of our key jobs is to help those clients and difficult environment navigate what they spend so people will take limits down.

Are you to it had 100 billion dollar umbrella. This this renewal or this expect exploration do you need a 100 next year, maybe it should be 50.

Your retention was 150 should we take it to Twofifty. There's a lot of work that we do around that that helps our clients mitigate.

The cost of their insurance, while at the same time protecting their future.

Yes.

Two.

Our workers comp business was down 2% in the quarter, so up and if our benefits business about 3%, we're seeing it there but it's.

Got it so that pad you can give sustainable yeah, you know.

Good.

Pricing can continue to offset exposure declined since that feel like something that can happen, if we really aren't.

In a recession.

Yeah, I do I mean for now if you'd asked me that maybe March thirtyth I might not have been as bullish.

Okay.

Alright, Thanks, guys appreciate.

Thanks Ryan.

Our next question is from Yaron Kinar with Goldman Sachs. Please proceed.

Hi, good evening everybody.

My first question Hi.

First question was is with regards to cost saves just want to understand when you're looking at $60 million to $70 million in the third quarter.

Doug you highlighted a few bad guys. There are there other kind of positive that you haven't yet achieved in the second quarter that you think you can sell dial up.

Or is that 60 to 70 million simply a decline and the positive that he had no second quarter without any also side just a couple of clarification, we can't wait for our employees to get back to using their medical plans I wouldn't call that necessarily a bad guy we want our folks did did to access our medical mindset, we do not I apologize.

Okay.

But we all that we don't want to severity problem coming out at the end of the year because people aren't getting their annual exam. So if you know if that cost us a five to 10 million Bucks a corner, we're happy to spend I think that other other bad guy that wouldn't call travel the hedges. So I won't quibble on that so we have some other good guys that come could come through I.

Think that we've done a pretty good job in the near term of getting down to a number that's going to be harder to keep than it is harder to create more of them. So I think that were about where we are in this environment.

So I wouldn't expect too many good guys offset the bad guys using your your terminology coming through in the third and fourth quarter.

So I think I'll pass or pretty close and you know if you think about it. We gave you have an estimate between 50 and 75 million. When we came out of the gates here in April 30 days into it we hit 74. So I think we've got a pretty good insight about where we're spending money and what's going to stick and what's going to.

Come back again.

Right Okay.

And again I apologize for phrasing that I.

I just brightree.

Yep.

And then my second question just goes back to be the buckets.

And maybe I meant that low impact.

Six months into this situation.

As you look back do you think how much of those buckets just like how much of the when you. Initially thought was a high impact bucket ended up being in a low end back bucket or vice versa right. So if you look at it let's say to our 25, Rob sic codes in there what we picked in the second quarter.

Of the high impact 25, we got 20 of them right now.

Oh excuse me 21 of them right and then we had three of them in the medium category that probably moved up to high when you get to the low kind of the same thing and the medium that much and so our pick on low medium and high coming out of the gate three weeks ended as saying I would say as pretty damn good and so I feel fairly comfortable.

Now that.

Those are the impact businesses than we forecasted in the near term, we'll see what happens over the next longer term and whether our picks are going to be right again, but we did a pretty good job of it. So I think that we've got to a good insight into the nature of our business.

Great. Thank you.

Our next question his from Mark Hughes with Suntrust. Please proceed.

Yeah I'm just another good afternoon to crack at the expense question. When we think about Twoq. You next year do we is this the kind of right run rate. So on a go forward basis kind of a step function on Twoq you and so next year, we go back to your usual template.

3% or better we get some margin expansion.

That's the right way to think about it.

Yeah, I think if you've got to go back and re sat and take US basically if you think about we are expanding margins about a point a year and we've been doing that 70 basis points a year for the last five or six years, if we get into a 5% organic growth environment, you're going to see us give back some of these savings and then you're going to also see us just our Nash.

Continued.

Margin improvement programs, you would be back into kind of that 50 to 70 basis point margin expansion on on 5% organic growth. So you're looking at the right way, but would there be a reset compared to second quarter. It next year, probably you know because if we're back to put in.

$30 million or $40 million of expenses and your and your you're taking 70 basis points on 6 billion, you're getting 40 man, it's about a portion maybe a little expansion.

Okay, and then on the benefits business it sounds like.

Most measures are improving.

That you talked about July being very very strong I'm not sure if that was completely focused on PNC, but it sounds like threeq you organic in benefit.

The prospects of being better is that a ferry.

No I'd say that I think I was referring more to PC and my comments on the on July Mark that it's only fair to say I think what you're seeing in benefits now is systemic.

And I think that will continue now I will tell you from getting into the Salesforce dataset or whatever you. We did have a good July and new business. So people are still looking at needing help around both their health and welfare and retirement and all the other aspects. So I think new business will be good but I do think you have an underlying softness.

And what's going forward with employment et cetera, So I would I would not be predicting a stronger third quarter and one thing we are seeing mark we're seeing a lot of people on our Webinars and we're doing a lot of joint webinars with between the benefits in our PNC business. So there is interest in learning or we did a back to work so.

In the workplace Webinars. So we are getting customers that are interested in.

Thinking about how they are 2021 medical plans and health and welfare plans should luck in this environment, so that could lead to some better growth in the fourth quarter or first quarter next year as people are trying to redesign their plans.

Third quarter I don't know if you will see it quite yet, but you know that you've heard the set us up thousands that.

90% of the time, when we compete we're competing with smaller local brokers.

And believe me there there wondering now what else is out there and those relationships are strong for sure I mean or new business would even be higher we don't when all the time, but just to put this in perspective in the second quarter, our Webinars, where would as Doug said, we combine property casualty and benefits and many of them around things like.

Returned to work unprecedented attendance with 60000 people attend webinars in the second quarter on content and materials that were putting out.

And at 60000 people tend in 10 years.

Yeah.

Interesting one final question. This question about Furloughs, you know one so maybe some of these.

Stimulus packages, the furloughs expire and maybe businesses just won't higher no no cut the lose the number of employees at that point and that will impact your employee benefits business do you have any perspective on the.

No one of things, we don't have that many people that actually been tactically for allowed maybe maybe there's a 100 and a half something like that that weve for allowed so I think that you know what will happen I'm thrilled for.

For a lot, we're hoping to bringing it back now I think mark are you talking about our clients.

Correct that's right.

I think yes, I think that that is a possibility I think that when the furlough support in the in the and the the unemployment support erodes, Yes, I do think you could see.

Those people, who actually have their jobs disappear.

Any sense on the magnitude of the risk there.

No.

Thank you.

Thanks Mark.

And our next question is from Meyer Shields with KBW. Please proceed.

Okay. Thank you Ive two questions on reinsurance one is a big picture question. Pat you talk to you I don't know given.

Insurance company Ceos, and I'm wondering whether you could give us their sense on concerns over reinsurance brokerage consolidation and then secondly, just hoping you could update us on how cap in performed over the course in the second quarter.

Well, let me take number two first a I think I've said this publicly a number of times Capsicum is this is the signal best startup I've been involved with in my career.

And we were very pleased to get the of the final acquisition of the remaining equity over the line that team is an excellent team they've had an excellent first half and continue to do just a terrific job of expanding that business and so we know what we started with a five seven years ago literally from dead scratch.

Today is is really it's remarkable so that team is doing it is doing a great job.

And they'll continue to the opportunities.

I guess I've been in my career I've seen an awful lot of consolidation Garrido I've gone through if you look at who is out there competing with us.

You know 30 years ago 20 years ago.

And how many of those of consolidated down or consolidation offers this opportunity.

And I think capsicum is very well positioned to take advantage that then I'll be brought with it the big buyers reinsurance don't like it.

Yeah, Mark we are well over 10% year to date organic growth capsicum.

Okay. That's all I had thanks, so much alright, thank buyer.

[noise], Okay, operator, I think that's it and let me just make a quick comment will will say good evening. Thank you again for joining us this afternoon.

As we said over and over we delivered an excellent quarter, it's a difficult economic environment, but I remain confident that we have the right platform and strategy in place to successfully navigate these challenging times for the rest of this year and hopefully in better times next year. Thank you all for being with US. This afternoon, we really appreciate it.

This does conclude today's conference call you may disconnect. Your lines at this time and thank you for your participation.

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Good afternoon, and welcome to Arthur J., Gallagher and company's second quarter earnings Conference call.

Participants have been placed in the listen only mode. Your lives will be open for questions. Following the presentation. Today's calls for being recorded if you have any objections you may disconnect at this time.

Some of the comments made during this conference call, including answers given in response to questions may constitute forward looking statements within the meaning of the security laws.

Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially please refer to cautionary statements.

Factors contained in the company is 10-K, thank you and 8-K filings for more detail on its forward looking statements. In addition for a reconciliation of the non-GAAP measures discussed on this call as well with other information regarding these matters.

Please refer to the earnings release and other materials in the Investor Relations section of the company's website.

It's now my pleasure to introduce J., Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher and company Mr. Gallagher you may begin.

Thank you. Good afternoon. Thank you for joining us for a second quarter 2020 earnings call.

Also on the call today's Doug dollar CFO as well as the heads of our operating divisions.

Were delivered an excellent second quarter. Despite the economic deterioration caused by cobot 19, our teams are executing at the highest levels. While we continue to place health and safety first your servicing our clients were selling new business. We continue to look at merger and acquisition opportunities and our bed.

<unk> culture keeps our teams working together, even well physically apart.

I would like to thank our 33000 Gallagher professionals around the globe for their constant and tireless focus on delivering the very best insurance brokerage consulting and risk management services to our customers more than ever. These are times, when our global capabilities and resources support our local professionals as they help our costs.

Tumors navigate these challenging times and still generates strong new business that really truly is the Gallagher way.

Moving to our second quarter financial performance, we grew our combined brokerage and risk management revenues in the second quarter organically and through mergers and acquisitions and together with our expense control actions delivered excellent growth in EBITDAX and net earnings this demonstrates that our investments over the last decade.

They do have enabled us to quickly adjust our workforce an expense base increased utilization of our centers of excellence officially work remotely improve our productivity, while always raising our quality.

Let me break down our results further starting with our brokerage segment.

Reported revenue growth was a positive 6.2% and even a bit better at 7.6, when leveling for foreign exchange of that 2.1% was organic revenue growth.

Net earnings.

Margin was up 364 basis points and adjusted EBITDAC margin expanded by 635 basis points to 32.6%.

Doug will provide some additional details on our expense control efforts, which was primarily responsible as we drilled net earnings up 38% Ella Ji adjusted EBITDAC up 34%.

Really a very strong quarter imported the team to execute in a difficult environment.

Let me give you some sound bites about each of our brokerage units around the world.

Starting in the U.S., our retail PNC business held up very well during the quarter delivering organic growth of about 4%.

Still strong new business generation, the small drop in retention and nonrecurring business rate increases offset exposure unit declines cancellations were not up over first quarter levels and mid term policy modifications were still in that positive, but a bit lower than first quarter levels.

All in we are seeing similar trends that are domestic wholesale operations, but a bit of a tale of two cities are open brokerage business had mid teens organic growth benefiting from strong new business and rig or energy a program binding businesses were backwards about 5%, resulting from a slowdown in programs like try.

He asked rotation amateur sports and construction. However, when we look at June alone RMG, a program businesses were showing improvement over the lower in activities over the lower activity seen in April and May.

We had an excellent quarter in Canada at more than 5% organic driven by strong new business and higher rates UK delivered 4% organic and Australia, New Zealand were closer to flat, where we're not seeing as much tailwind from rate. So exposure declines are weighing just a little bit more on our organic.

So overall, our global PC operations reported about 4% organic in a quarter a really strong result.

The difficult environment.

Moving to our benefits business.

As anticipated we saw some second quarter weakness down about 3% on an organic basis.

New consulting and special project work declined in addition to a decrease in covered lives on renewal business.

We're not seeing covered lives decreasing as much as the headline unemployment numbers, it's what I bring our PC and benefits together the 2.1% organic here in the second quarter came in pretty close to where we thought it would be at our June Investor day.

Looking forward so far in July nearly every metric we are monitored monitoring is trending better than the second quarter.

Accordingly based on what we're seeing today, we think third quarter brokerage organic an expense saves will be similar to the second quarter.

As we move into the fourth quarter. If the economy continues to recover feels like organic would equal or even be a bit better than the third quarter and we should be able to continue to deliver cost containment as well.

So lot of economic and governmental uncertainty, but that is where we are forecasting today.

Before I leave the brokerage segment, let me go a bit deeper on the PC pricing environment.

PC pricing continued to go higher around the globe with most geography is reporting 5% or greater price increases tighter terms and conditions and somewhat restrained capacity by line of business property remains the strongest up more than 10% next is professional liability up over 7%.

Other casually lines are up 5% to 10% with umbrella rate increases at least twice that level and workers comp is flat to down 2%.

By geography, Canada, seeing the greatest price increases of more than 8% U.S. is up about 7% followed by the UK, including one in specialty at about 6% and Australia, New Zealand between two and 3%. So PC pricing is up across the board, but quiet premium.

Changes are more modest due to lower exposure, that's higher deductible reduced limits and clients opting out of coverages.

Looking forward I see rates continuing to increase within it already from market and early indications from July point to continued increases in the third quarter before the pandemic began loss cost, we're outpacing rate and I see justice stronger case for underwriters to push or even more rate in this environment.

Certainly a more difficult market today, but not yet a hard market because most risks and still find a home.

Jumping to mergers and acquisitions, we completed for brokerage mergers during the second quarter. It fair multiples 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.

While second quarter mergers were lower than normal the number of conversations with potential merger partners is picking up so far as a third quarter.

Gold market conditions, and the pandemic there further highlighting the need for expertise and data driven tools. Our platform is an excellent fit for entrepreneurs looking to support their current clients use our tools and data the grow their businesses and advance for their employees career.

Look at our M&A pipeline, we have about 40 term sheets signed are being prepared representing around $300 million or so of revenue.

Based on the activity we are experiencing in July we are optimistic we will return to more normal levels of merger activity later this year.

Next I'd like to move to our risk management segment.

Second quarter revenue was in line with the guidance, we provided our June IR day with reported revenues down about 8.8% inorganic down about 9.6%.

This reflects a dramatic pullback in new claims arising due to higher unemployment and a reduction in overall business activity offset somewhat by an increase in code related claims. We think April was the worst of it and I'm encouraged that claim counts are the later half of the quarter in into July improved off the lows. However.

Never new claims arising are still well below pre coded levels.

Our risk management team also did a terrific job on cost containment.

Adjusted EBITDAC was only $2.7 million lower in the quarter relative to last year and margins held which is also right in line with our expectation takes a little longer to turn this ship for stock brokers segment. So we would expect to see third quarter EBITDAC improve relative to second quarter.

It is our expense actions are fully realized even greater improvement in the fourth quarter, leading to full year adjusted EBITDAC at least equal to 2019, just fantastic job by the team to adjust our expense base and rebalanced claim loads across adjusters, while maintaining our client service in KWE.

Polity levels.

So I want to combine our core brokerage and risk management segments together, despite the unprecedented economic challenges we grew our adjusted revenues 5.3%.

Through our net earnings and adjusted EBITDAC about 30% that's truly an excellent quarter.

But before I turn it over to Doug Let me finish with some comments on our Ben Brock culture.

When times are tough teams can either break apart or band together since my grandfather started the company in 1927, we have consistently expected every leader and associated Gallagher to live our culture talk about our culture and promote our culture culture matters culture prevails culture is important in that.

Last time, but even more important during challenging times.

Our team is together, we respect and support one another no. One is an island there are no second class citizens, we learn from each other everyone is important.

Those of you that have followed Gallagher since we came public more than 35 years ago, you'll recognize those statements. It's just a few of the 25 tenants are the Gallagher way.

This document puts our core values into words, which shapes and then guides our culture and we believe in it because it matters to us we live it every day and its guiding us through these challenging times I believe we will emerge on the other side, even stronger than we were before.

Okay, I'll stop now and turn it over to Doug Doug [laughter].

Thanks, Pat and good afternoon, everyone like Pat said solid topline growth and truly remarkable bottom line performance, our combined brokerage and risk management adjusted EBITDAC is up nearly 30% over second quarter last year.

Thanks to all of our colleagues around the globe pretty deep on our cost control efforts all the while continuing to deliver unique insights and high quality service that our clients need even more in these times.

Ill spend most of my time on our expense savings give me some comments using the CFO commentary document and then finish my thoughts on cash M&A and liquidity.

All right, let's go to the earnings release pages four in south.

Both the brokerage and risk management segments expanded adjusted EBITDAC margins this quarter.

Brokerage segment reduced compensation and operating cost by about $60 million versus prior year, when you adjust safir role and impact of mergers closed after March 30, Onest 2019.

And the risk management side with the savings about into about $14 million. So in total we were able to adjust our expense base by about $74 million.

During the second quarter, that's off the top end of our estimates and we provided an April and again at our June IR day.

Let me give me a breakdown of these savings.

We reduced travel entertainment as an advertising by about $24 million, we reduced technology consulting and professional fees $14 million reduced outside labor and other workforce actions saved about $13 million, we saved on office supplies consumables and occupancy costs of about 12 million.

In dollars and lower medical plan utilization by our employees saved about $11 million.

When I look towards the third quarter, I think savings will be in the $65 million to $70 million range relative to last year again adjusting for Roland mergers.

This is a bit lower than second quarter separately, because our production staff is beginning to travel to see clients and prospects, we're increasing our advertising costs again and in June we did see a reversion to pre pandemic levels of our employees utilizing our medical plan.

As for the fourth quarter that all depends on what happens with organic.

Plus two or plus 3% organic than our producers are likely traveling more and we may restart some of our postponed investments and thus we wouldn't see as much savings in areas like technology consulting and professional fees.

But of organic is flattish, we'd expect to see a similar level of savings as the third quarter.

Okay, Let's go to the CFO commentary document that we post on our IR website.

On page two most of the items are fairly straight forward and consistent with what we provided to you in our job June IR day.

There's two items, a highlight which basically offset one another first foreign exchange in our brokerage segment was slightly unfavorable this quarter call at about a penny and second the broker in the brokerage second segment amortization that came in about a penny flight favorable again offsetting.

Facts.

Turning to page three to the corporate segment table relative to the midpoint of the guidance we provide our June IR at our June IR day.

Interest in banking came in about a penny or so favorable acquisition loss line came in just a little bit less than a penny but still favorable.

The corporate line is about a penny unfavorable but you'll read in footnote three.

Three that was simply due to foreign exchange rates bouncing around in the corner.

Finally, clean energy with a penny below the midpoint of the range due to mild temperatures more use of natural gas and weaker electricity consumption due to covenants.

Hi July ill start off with a strong third quarter, but we're still seeing natural gas prices on the lower end and lower economic activity could likely dampen generation later in the second half of the year. So we have lowered a bad our full year range to $60 million to $70 million net after tax earnings.

Well, let's not forget the $1 billion of tax credit carry forwards, we haven't our balance sheet, that's effectively a receivable from the government that should allow us to pay lower cash taxes for many years to go.

All right, let me wrap up with some comments on cash M&A and liquidity.

Our our customer cash receipts from a strong during the quarter rebounding in May and June after a slight slowdown in early April so far in July we are tracking back to pre pandemic levels. So we don't see any concerns at this time.

As of today, we have more than $1.3 billion on liquidity consisting of available cash on hand of nearly $275 million and we have access to over $1 billion on a revolving credit facility.

As for M&A as Pat mentioned, we did complete for acquisitions during the quarter.

A couple of more tax free exchanges. So we use a little of our stock, but even then with an average multiple paid below eight times there was a nice arbitrage strong trading multiple.

More importantly, our pipeline is really heating up so we could have a strong finish to the air and a strong start early next year.

Okay. Those are my comments on great quarter by the team for them to continue growing revenues and executing on cost containment.

The economy from another class, we should pull off an excellent for here back to your path.

Thank you, Doug operator, let's go to questions and answers.

Thank you the call is now open for questions. If you have a question. Please pick up the handset and press star one on your telephone at this time.

You are in the Speakerphone. Please proceed with assumption prior to pressing the star one to ensure optimum sound quality you may remove yourself in the queue at any point by pressing star Tim.

Hi, this Taiwan for questions.

Our first question is coming in from a lease Greenspan with Wells Fargo. Please proceed.

Hi, good evening.

Hi, how are you my first question Pat.

Maybe this is I guess.

Yes.

So that they have a few questions here, but the first one is well under your brokerage margin by 6.2%. So what I think maybe getting a little bit lot from the number if you had jumped out the stadium.

2% organic revenue growth, if my math right.

Around.

Point.

Margin.

So I am I thinking about that correctly.

And then I guess there Jeff.

Hey, good margin improvement in your business away from just the state I think something that now you have about right and I got it right now.

Now, we didnt give raises this quarter, so that would have dampened the 1.2% a little bit, but oh youre looking at the right way.

Okay.

Thank you like you just provided some good color in terms of just saying that we could be in that Doug.

Corner and I remember from your June Investor Day.

That kind of post Colgate that about half of the seeds I believe.

Dan.

Ongoing maintenance.

Hey, given you provided some might be thinking I wanted to make sure.

Joel.

Yep.

Yeah, I think probably when we looked at it six weeks ago that probably would've been about right I think right now.

We are learning a lot as a result, this crisis and yeah, we are finding ways to lever service and advice.

Early more cost effectively than pre pandemic, but I think what matters in the end as what we spend will be highly correlated at least.

How our clients prospects and underwriting partners expect us to do business.

Now with the term determine really how much we travel how much we communicate virtually hi.

I want to be entertained anymore, how much do we advertise and how do we how do we advertised in the market and then also drives what investments in technology and technical resources. We are that we need in order to servicing compete in the market.

It also goes further when you look at.

What it takes to attract and retain talent that will dictate a lot on how we leverage our work from home capabilities, maybe where we wrote reload, our where we locate our offices our configure them and then also will impact how we train develop and mentor our folks.

South so that will influence the ultimate cost savings and then also yeah, one thing I have to say.

Yes, as being experts and employee benefits.

We truly hope that our employees get back to utilizing our medical health and welfare plans.

We need to everybody be doing their prevented exams and getting the services. They need nothing good comes from delays in getting your medical treatment and that same to several million dollars. This quarter. So when I bring it all back together over the long term could we be saving $30 million to $40 million a quarter. After we adjust the real estate footprint as we adjust.

Postage I Express office up occupancy cost.

Maybe higher some of the external resources than we were using externally yeah, maybe we can get to that number so it wasn't far off as a gas, but it will really depend a little bit on how our clients prospects and underwriting partners want us to do business.

Okay. That's helpful and then on the.

Hi.

Thank you.

Third quarter welcome Sir.

You know seems to be trending in line.

Which is a little bit better than the junior enough.

No we've been hearing.

Here are some lag.

Right, so that does quarter could be worth second quarter, and that's what end.

Thats, helping to keep meeting.

So frightening.

Just a little bit more color.

Well first of all these as you know.

July's, a very big month for us so it's a good bell bellwether and we had it had a very very strong July.

So I think as we sit here today, if things don't completely fall off the table in August and September we feel just exactly the way we phrases today.

Okay. That's helpful.

Thanks Louise.

And our next question is from Mike Tyson Ski with Credit Suisse. Please proceed.

Hey, Good afternoon, Mike first Hey, first question.

What well in terms of leverage levels.

Where do you go to temporarily what's the rating agencies. If there was kind of something chunkier larger you've got to a kind of a materially higher level for a year or two and then and then kind of work at work its way down if there's something became available.

Yes, I think they'd be receptive to.

That I think we've seen that with other brokers, so that would seem reasonable that they would.

Good.

Yeah.

Willing to accommodate that do we have the appetite to do that we probably won't push our debt ratios.

The much at all but I think they could be willing to listen to that.

Okay.

And along the same lines then like so in terms of kind of making inroads into maybe the mid to large accounts spaces result, as result of the merger. That's taking place is is it more of kind of winning RF piece as to clients look for a new potentially to set to find another.

Broker because they have consolidated to one or is it more hiring or both and if its RFP processes that taking place more kind of next year. When it comes up for renewal after the merger.

Well, Mike This pet I think you touched on a very good very good subject, but let me go back to our Genesis I mean Gallagher Bassett was started 1962 basically take care of the claims for Beatrice Foods with Fortune 100 company at the time. So we've been in the large account risk management business since the sixties now over the past.

Number of years, we've gotten much much stronger that business as well both on the claim service side as well as on the brokerage side and yes, I think that the the fact that the four top players are going to consolidate into three is clearly given us more opportunities and as I said, our capabilities have gotten stronger and stronger we feel really good about.

Our chances to expand that business.

Okay, Great and just lastly back to a Lisa's question, given just the phenomenal quarter in terms of margins.

So so again it sounds like does to your answer about kind of the there was.

There was.

Margin improvement beyond just the expense savings.

Doug It sounded like you were saying that there was over 100 basis points of margin improvement beyond that and it sounds like that could recur.

Unless you know business kind of gets back to usual in terms of entertainment and and more people feel uncomfortable employees feel uncomfortable going back to the doctor's offices and so it sounds like that that kind of underlying net of expense save positive trend could could continue.

Yes, it's just it's I think sell sell set essences be now having kind of come up enough because it's just such great margin improvement during what as you know.

Fairly muted organic growth times.

Just want to make sure we're understanding.

So first let's go back what are we thinking about future in the third quarter, we think RMB $65 million to $70 million and things, we won't give some of that back up because there are some costs coming back into the structure in the fourth quarter might be closer to.

60 to 70 million we might.

I have to get back another 5 million there somewhere but that's that's the way we sit today the margin expansion that at least talked about a two things as.

We did have some strengthen our supplementals and contingents this quarter, which probably drove a little bit of that margin expansion.

Longer term.

Yeah, We think we're learning a lot about our business and so I think there could be opportunities here for us do things differently, because our clients expectations have changed.

Four month period, and the question is what they stay that way or will they expect to see five people showing up for a meeting.

For an hour or are they okay with our industry experts not getting on a plane traveling today for a half hour presentation find some really good success in that that we can put our niche experts at the point of sale and our customers are much more willing to to accept a a virtual.

Face to face versus a they pay a real face to face. So there is going to be some savings on NAFTA.

Survive. So your margin expansion, we've always said, it's hard to expand margins if there if it's below 3%.

And we okay at 2% with a little strengthened Supplementals and contingents, we got a point of margin expansion Hot event in the near term I think it'd be pretty hard to post 2% organic growth for the next 3% and expand margins a percentage point here I think that would be difficult give us over 3% we can hold in their cut us off.

Five four or five will expand them, so I don't see that changing much.

From what we provided in the past, but yes, there's opportunity there but.

Yeah, I think that this in the near term, 1% organic growth or excuse me margin expansion on 2% organic is a pretty darn good core.

Yes, I agree with the well thank you.

Thanks, Mike.

Our next question is from no stephano with Deutsche Bank. Please proceed.

Yes.

Looking you could give a little thoughts on contingents and supplementals into the extent that you have any hoard view into them I guess.

Were there any catch up some first quarter second quarter that we should kind of trying to normalize out.

In my mind and as a six of six world.

Supplementals will be a bit more slacks.

Than maybe what we've seen or at least.

Actual versus whatever method.

Yes, I think there's probably a little bit a small little bit of.

Catch up in the second quarter lot of these things get paid in the first quarter, we have like.

Hundreds and hundreds of contingent commission.

Contracts.

You know several hundred supplemental contract. So we probably will have some positive development.

Our second quarter, a little bit but might be talking a couple million bucks on announcements on the team doesn't really good job, making estimates I think.

What happens in the future because of the pandemic.

No loss ratios are hanging in there pretty well so and it's.

Our our cost and value that we will deliver.

Right now I think that we're earning our contingents and earning our supplementals and I think.

I think we've got a pretty fair.

Series of contracts I think the carriers.

Yes that will hold up well with the carriers. So I don't see anything out of the ordinary enough.

[music].

[laughter].

Just to go back to the.

Ladies and I don't have beat the two months, but I guess in my my thinking about the 60 to 70 million, we can expect third quarter fourth quarter.

And then the idea that bringing this altogether and maybe we can be 30 or 40, a quarter, who knows what the normal looks like moving forward.

Good can you give us a sense for how quickly that gap closes.

And is 2020, a pivotal year, where things back come come back relatively quickly or does it really depends on the economy and shelter in place and.

The fall out of cobot and all those with.

More of the second it is highly dependent on that I wish I had a quick crystal ball and I think all of us with kind of hoping they come back a little bit faster is that means the economy gets back to zooming be more back to work I mean zooming face to face I mean the economies.

Moving fast and forward on guys. I think you want to have some expenses coming back again to our number I felt it money that is a pet.

We haven't gone to see a client and three months.

I think going to hold up.

So don't be pop they'll be pop in your models full of note travel no face to face no entertainment no new people.

We are right a lot of new business or we're going to service that business and there is pressure in the field to take a trip to see a client. We do have clients that are back at work now centers come see us.

And we've got very stringent restrictions for health and safety reasons about whether even letting our people do that believe me we get it we get a vaccine and our people are going back to O'hare myself included have been on the ground. This long since I was 11 years old.

Well I I like the outlook looks great and I look forward you guys zooming in many ways.

Thanks, Phil Thanks.

Our next question is from Ryan tenets that autonomy. This research. Please proceed.

Hi, Thanks.

I guess, just thinking about in the third quarter or again thinking it's going to be somewhat similar to this.

You can find out what are you assuming our organic revenue growth is going to be from employee benefits to get a 2% again.

I think it'd be much the same as well we've got now I don't see a lot of difference between the third quarter and the second quarter from for our PNC business or our benefits business. So.

Yes, it was back about 3% score.

And at this point Workers' comp revenues were down in what.

You said, 10% through your June.

Rates are down to two ish, maybe 3% something like that but.

Talking about exposure units being down correct.

Dig that out here for you in a second but let me work on that.

Yes.

What I'm getting everything is trying to understand what ultimately.

And we'll have some convergence of a of the employee benefits, which is only down three you know.

Obviously, you're still collecting on for load workers Cobra that type of thing in the workers comp. That's just based on a level of payroll.

So if were down like Ted on exposures in workers' comp I'm trying to understand why we wouldn't it.

I think that health and benefits will be down a bit more in the third quarter.

Well I think that it might have to do at the mix of our business to measure as you now we'd look at doesn't high medium and low impact industries and when we look at that and stack. It up we have a lot of business and very low impact industries. So right now you're not seeing.

The decreases and and workers comp and benefits in those industries at this point even in the medium categories, we're not seeing it so.

There could be a convergence on it that big part of the drop and benefits is also related to project work and onetime stuff that we do in the economy's robust then people are willing to spend on come in at helmet communicate with by people right. Now there are more willing to not necessarily communicate as well they'll take that burden on themselves. So its projects and things like that that.

That also diminished in the quarter that we'll have to see a return to prior growth to get that kind of project work back, but the underlying health and welfare business those probably looked more like were comp.

Got it and then I guess my follow up is on its still safe to say that pricing increases are offsetting exposure declines.

So is it fair to say then that essentially on average accounts are renewing at basically a flat premium.

Or down because one of our key jobs is to help those clients in a difficult environment navigate what they spend so people will take limits down.

Are you to it at 100 billion dollar umbrella this renewal or this expect exploration do you need a 100 next year, maybe it should be 50.

Your retention was 150 should we take it to Twofifty. There's a lot of work that we do around that that helps our clients mitigate.

The cost of their insurance, while at the same time protecting their future.

Yes.

Two.

Our workers comp business was down 2% in the quarter, so up and if our benefits business about 3%, we're seeing it there but it's.

Got it so that part of you can give sustainable.

No.

Pricing can continue to offset exposure declined since that feel like something that can happen, if we really aren't.

In a recession.

Yeah, I do I mean for now if you'd asked me that maybe March thirtyth I might not have been as bullish.

Okay.

Thanks, guys appreciate it.

Thanks, Ron.

Our next question is from Yaron Kinar with Goldman Sachs. Please proceed.

Hi, good even when we buy.

Hi, guys question Hi.

First question is with regards to the cost saves just want to understand you know when you're looking at $60 million to $70 million in the third quarter I think w. highlighted a few bad guys. There are there other kind of positives that that you haven't yet achieved in the second quarter that you think you can sell dial up.

Or is that 60 to 70 million simply a decline and the positives that you had the second quarter without any offsets side just a couple of clarification, we can't wait for our employees to get back to using their medical plans I wouldn't call that necessarily a bad guy we want our folks did to access our medical mindset, we do not.

As part of it.

Yes.

But we all that we don't want to severity profit coming out at the end of the year because people aren't getting their annual exam. So.

If that cost us a five to 10 million Bucks a corner, we're happy to spend it I think that other other bad Guy and I wouldn't call traveled you guys. Just so I won't quibble on that do we have some other good guys that come from come through.

I think that we've done a pretty good job in the near term of getting down to a number that's going to be harder to keep that it is harder to create more on them. So I think that were about where we are in this environment.

So I wouldn't expect too many good guys offset the bad guys using your year terminology coming through in the third in the fourth quarter.

So I think our patents are pretty costs and if you think about do we gave you have an estimate between 50 and 75 million. When we came out of the gates here in April 30 days into it we hit 74. So I think we've got a pretty good insight about where we're spending money and what's going to stick and what's going to.

Come back in.

Right Okay.

Hey, guys I apologize for phrasing that.

Hi, just brightree.

Yep.

And then my second question just goes back to be the buckets kind of high impact medium manpack low impact.

Six months into this situation.

As you look back you took the how much of those buckets shift stays like how much of the what you. Initially thought was the high impact bucket ended up being in a low end back, but that or vice versa. Right. So if you look at it lets say there are 25.

Sic codes in there what we picked in the second quarter.

Of the high impact 25, we got 20 of them right.

Excuse me 21 of them right and then we had three of them in the medium category that probably moved up to high when you get to the low kind of the same thing and the medium not much has so our pick on low medium and high coming out of the gate. Three weeks ended a thing I would say as pretty damn good and so I feel fairly comfortable.

Now that.

Those are the impact businesses than we forecasted in the near term, we'll see what happens over the next longer term and whether our picks are going to be right again, but we did a pretty good job of it. So I think that we've got to a good insight into the nature of our business.

Great. Thank you.

Our next question is from Mark Hughes with Suntrust. Please proceed.

Yeah, just another good afternoon to crack at the expense question. When we think about Twoq. You next year do we is this the kind of right run rate on a go forward basis kind of it step function on to Q and so next year, we go back to your usual template.

3% or better we get some margin expansion.

Is that the right way to think about it.

Yeah, I think if you've got to go back on re SAP and take US basically if you think about we are expanding margins about a point that year and we've been doing that 70 basis points a year for the last.

Five or six years, if we get into a 5% organic growth environment, you're going to see us give back some of these savings and then you're going to also see US just our natural continued.

Margin improvement programs, you would be back into kind of that 50 to 70 basis point margin expansion on on 5% organic growth. So you're looking at the right way, but would there be a reset compared to second quarter. It next share probably because if we're back to put in.

$30 million or $40 million of expenses and your and your you're taking 70 basis points on 6 billion, you're getting 40 man, it's about a portion maybe a little expansion.

Okay, and then on the benefits business it sounds like.

Most measures are improving.

As you talked about July being very very strong I'm not sure if that was completely focused on PNC, but it sounds like threeq you organic in benefit.

Has the prospects of being better than a ferry.

I'd say that I think I was referring more to PC and my comments on the on July Mark that that's only fair to say I think what you're seeing in benefits now is systemic.

I think that will continue.

I will tell you from getting into the Salesforce data set over heavier we did have a good July and new business. So people are still looking at needing help around both their health and welfare and retirement and all the other aspects. So I think new business will be good but I do think you have an underlying softness in what's going forward with employment et cetera. So.

I would I would not be predicting a stronger third quarter.

I think we RCM, our we're seeing a lot of people on our Webinars, we're doing a lot of joint webinars with between the benefits in our PNC business. So there is interest in learning we did a back to work safety in the workplace Webinars. So we are getting customers that are interested in.

Thinking about how they are 2021 medical plans and health and welfare plans should luck in this environment, so that could lead to some better growth in the fourth quarter or first quarter next year as people are trying to redesign their plans.

Third quarter I don't know if you will see it quite yet, but you know that you've heard the set us up thousands that.

90% of the time, when we compete we're competing with smaller local brokers.

And believe me there there wondering now what else is out there.

Those relationships are strong for sure urban or new business would even be higher we don't when all the time, but just to put this in perspective in the second quarter, our Webinars with as Doug said, we combined property casualty and benefits and many of around things like returned to work.

Unprecedented attendance with 60000 people attend webinars in the second quarter on content and materials that were putting out.

Minutes 60000 people tend and 10 years.

Yeah.

Interesting one final question. This question about furloughs once a maybe some of these.

Stimulus.

Packages, the furloughs expire or maybe businesses just won't higher though those cut the lose the number of employees at that point and that will impact your employee benefits business do you have any perspective on that.

No one of the things we don't have that many people that actually have been tactically for allowed maybe maybe there was 100 and a half something like that that weve for alone. So I think that what will happen I'm thrilled.

For a lot were open or bringing them back now I think mark are you talking about our clients.

Correct.

I think yes, I think that that is a possibility I think that when the furlough support in the and the the unemployment support erodes, Yes, I do think you could see.

Those people, who actually have their jobs disappear.

Any sense on the magnitude of the risks there.

No.

Thank you.

Thanks Mark.

And our next question is from Meyer Shields with KBW. Please proceed.

Okay. Thank you Ive two questions on reinsurance what is the Big picture question. Pat you talk to you I don't know given.

Insurance company Ceos, and I'm wondering whether you could give us their sense on concerns over reinsurance brokerage consolidates and then secondly, just hoping you could update us on how captain performed over the course in the second quarter.

Well, let me take number two first I think I've said this probably a number of times Capsicum is this is the single best startup I've been involved with in my career.

And we were very pleased to get the the final acquisition of the remaining equity over the line that team has an excellent team they've had an excellent first half and continue to do just a terrific job of expanding that business and so what we started with the five seven years ago literally from scratch.

Today is really it's remarkable so that team is doing it is doing a great job.

And they'll continue to the opportunities.

I guess I've been in my career I've seen an awful lot of consolidation.

I've gone through you look at who is out there competing with us.

30 years ago 20 years ago.

And how many of those of consolidated down.

Consolidation offers us opportunity.

I think capsicum is very well positioned to take advantage of that then I'll be brought with it the big buyers reinsurance don't like it.

Yes, Mark we are well over 10% year to date organic growth caps.

Okay. That's all I had thanks, so much hi, thank buyer.

Yes.

Okay, operator, I think that's it and let me just make a quick comment and we'll we'll say good evening. Thank you again for joining us this afternoon.

As we said over and over we delivered an excellent quarter, it's a difficult economic environment, but I remain confident that we have the right platform and strategy in place to successfully navigate these challenging times for the rest of this year and hopefully in better times next year. Thank you all for being with US. This afternoon, we really appreciate it.

This does conclude today's conference call you may disconnect. Your lines at this time and thank you for your participation.