Q3 2020 Arthur J Gallagher & Co Earnings Call
[music].
Arthur J. Gallagher <unk> Companys third quarter 2020 earnings conference call.
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Please refer to the cautionary statement and risk factors contained in the company's 10, daqing tend that Q and 8-K filing for more detail on its forward looking statements.
In addition.
Reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures we refer to the earnings release and other materials in the Investor Relations section of the call.
News website.
It's now my pleasure to introduce J., Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher <unk> Company Mr. Gallagher you may begin.
Thank you. Good afternoon. Thank you for joining us for our third quarter 2020 earnings call also on the call today is Doug Howell, our Chief financial Officer, as well as the heads of our operating division.
We delivered a very strong third quarter. Despite the current global health crisis, and the related economic slowdown, resulting from COVID-19, our teams continue to execute at the highest level. While we continue to place health and safety first we're selling new business, we're servicing and retaining our clients. We continue to look at me.
Merger and acquisition opportunities and our bedrock culture keeps us working together, even while physically apart.
These are times, when our global capabilities niche expertise and product specialist support our local professionals as they help our customers navigate these challenging times I'd like to thank our 30000, plus Gallagher professionals for their efforts and relentless focus on delivering the very best insurance brokers consulting and risk.
Management services to our customers that is the Gallagher way.
Moving to our third quarter financial performance, we grew our combined brokerage and risk management revenues in the third quarter organically and through mergers and acquisitions and together with our expense control efforts delivered excellent growth in EBITDA and net earnings. These results demonstrate our operating flexibility, which has enabled us to quickly.
We adjust our expense base optimize our workforce to improve our productivity, while also raising our quality let.
Let me break down our results further starting with our brokerage segment.
Supported revenue growth was a positive 8.3%.
That more than half were 4.2% was organic revenue growth. We did have some favorable timing I'll discuss that more in a minute net.
Net earnings margin was up 334 basis points and adjusted EBITDAC margin expanded 632 basis points to 33.4% net earnings up 37% and adjusted EBITDAC up 32%. So.
So another excellent quarter during a global pandemic, a fantastic job by the team.
Let me walk you around the world and give you some sound bites about each of our brokerage units and I'll start with our PC operations [noise].
In U.S. retail another strong quarter with organic growth of about 4%, we saw solid new business and slightly better retention versus last years third quarter.
Rate increases are more than offsetting exposure unit declines mid term policy modifications, including full policy cancellations are similar to prior year levels and.
And our U.S. wholesale operations risk placement services organic was 8% and our open brokerage business, even better than that or LNG. A program binding businesses returned to positive organic in the quarter tier two rate increases are more than offsetting exposure unit declines move.
Moving to the UK around 2% base organic with stronger growth in our London specialty business due to firmer pricing.
In Australia, and New Zealand combined.
Also around 2% organic with New Zealand slightly stronger than Australia, New business is down a touch in Australia and <unk> up in New Zealand rate increases there remain positive, but not enough to offset exposure declined and finally, our Canadian retail operations posted organic up 8% another terrific new business quarter.
And stable client retention [laughter]. So overall, our global PC operations reported about 4% organic in the quarter again, an excellent result in a difficult environment and on the higher end of our mid September expectations.
Moving to our employee benefit brokerage and consulting business third quarter organic was positive 6%. This.
This includes a large life insurance pension funding product sale that we expected to close in the fourth quarter, otherwise new consulting and special project work remains soft while covered lives under employer sponsored health plans continue to be more resilient than headline unemployment numbers, so when I bring PC and benefits together.
Our organic of 4.2% and even allowing for the big benefits when a great quarter.
Looking forward to our fourth quarter first recall, we had a terrific fourth quarter last year, 6% plus organic so we're starting off with a tough compare second I just discussed some favorable timing here in the third quarter. So I don't see us hitting 4% again, but thus far in October PC Retentions.
New business full policy cancellations and other mid term policy adjustments are in line to slightly better than the third quarter. So perhaps we can be nicely in the 2% to 3% range that would deliver full year 2020 around 3% organic which would be a great year in this environment.
While there's still a lot of economic and governmental uncertainty, which makes forecasting organic a challenge we can control we spend we've demonstrated over the last seven months that we can execute on our cost containment playbook that makes us highly confident we can deliver another quarter and full year of really strong EPS.
That growth.
Now, let me give you an update on the PC rate environment.
Great again continue to move higher around the globe during the third quarter.
Globally caught up nearly 7% with tighter terms and conditions and increasingly restrained capacity by geography, Canada has seen the greatest rate increases of more than 9%. The us is up about 8% followed by the UK, including London specialty at about 6% and Australia, and New Zealand or.
3%.
By line of business property remains the strongest up 12% next is professional liability up over 10%. Other casualty lines are up 5% to 10% with umbrella rate increases at least twice that level and workers compensation is flat.
So while PC rates are moving higher as total amount of premium increases our clients are paying our more modest. This is the result of reduced exposure units higher deductibles lower limits and clients opting out of coverages looking.
Looking forward October results are already indicating continue increases during the fourth quarter and the carriers in the face of catastrophe. The pandemic rising casualty loss costs low investment returns are making a case for from rates to persist.
But remember that's where we excel our job is to make sure our clients get a well structured insurance program at a fair price rugs.
Regardless it is.
They certainly a more difficult market today than last quarter, and we are seeing some pockets of a hard market in certain lines and geographies I see that continuing into 2021 next year organic should be better than we are seeing this year play out.
Moving on to mergers and acquisitions, we completed five brokerage mergers during the third 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.
As I look at our M&A pipeline, we have more than 40 term sheets signed or being prepared representing around $350 million of annualized revenues.
And our pipeline continues to grow difficult market conditions in the pandemic or further highlighting the need for expertise in 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 careers.
Right now it feels like it will be a more active finished to the year as merger prospects have concerns over possible 2021 tax changes.
Next I'd like to move to our risk management segment Gallagher Bassett.
Third quarter organic revenue at minus 5.3% was a bit better than what we said at our September IR day.
This is a really nice sequential improvement from second quarter organic being down nearly 10% and.
And our risk management team also did a fantastic job managing its workforce in controlling costs delivering third quarter adjusted EBITDAC higher than last year by $1 million.
Looking forward, we are seeing October claim counts trending similar to September.
While we have experienced a steady climb out of the second quarter bottom. Many clients are still operating at partial capacity and plame counts have not yet fully rebounded to last year's level.
So we are seeing fourth quarter organic revenues in our risk management segment, similar or slightly better than third quarter and just like our brokerage segment, we expect to grow our EBITDAC again in the fourth quarter due to expense savings that means we should deliver on our goal of full year 2020, adjusted EBITDAC coming in better than 20.
19, that's just an amazing job by the team.
Before I pass it to Doug ill finish with some comments on our bedrock culture display.
Despite the pandemic challenges our global colleagues together as a team continued to deliver the very best service expertise and advice to our clients.
I believe it's our unique Gallagher culture that is guiding our team through these challenging times, specifically I'm reminded of Tami tenant number 20 of the Gallagher way, we run to our clients problems not away from them since.
Since my grandfather started the company more than 90 years ago, our people have been solving problems and working hard for clients in both easier and more difficult times.
And I can tell you this about our culture. It will guide us through the global pandemic Hurricanes wildfires and any other obstacle in front of us throughout Gallagher is history, we have emerged as a better more cohesive company I believe we will emerge from today's difficult environment stronger than ever.
Okay, I'll stop now and turn it over to Doug Doug.
Thanks, Pat and Hello, everyone.
Got set another excellent quarter.
Two I would like to extend my appreciation to all of our Gallagher colleagues around the globe on a remarkable job you are doing in these challenging times servicing our clients generating new business, all the while executing our cost control playbook.
Today I'll begin with some comments on organic.
Interplay with our cost.
Seem to get a lot of questions. During our July earnings call and again during our September Investor Day call. So I'll spend a little more time on that today.
And provide a few observations from our CFO commentary document and finish with some thoughts on M&A cash and liquidity.
All right, let's go to the earnings release page four to the brokerage organic table.
Pat said, a great quarter, with 4.2%, all inorganic which equates to about $50 million of organic growth.
And when you turn to page six brokerage EBITDAC table C that we grew adjusted EBITDAC by $105 million. This quarter. So how do we do remember that 105 million on $50 million of organic.
First about $13 million of EBIT Act came from M&A net of divestitures, Matt I noticed a bit over $30 million.
$50 million of organic.
So that means we saved about $16 million from our cost control playbook.
From a margin perspective, all in we grew adjusted EBITDAC margin about 630 basis points.
And then when you do the math you will see that even without the additional expense savings, we expanded margin about 150 basis points, which is impressive and in viacell.
And the risk management segment, a little easier to compute revenues were backwards about 10 million, but even add grow about a million so cost savings were about $11 million.
Combine both segments, you get about $70 million of cost savings, which is at the top end of our estimates provided during our September IR day.
And cost are we saying to the second quarter.
Let me give you a breakdown of these savings.
From reduced travel entertainment and advertising down about 26 million reduced consulting and professional fees down 15 million reduced outside labor and other workforce actions 14 million reduced office supplies consumables consumables and occupancy costs about 11 million and reduced employee benefit and medical.
Land costs about 4 million.
Now I look towards the fourth quarter were starting to see a slight increase in our producers <unk> producers traveling more to see clients and prospects. We are executing on some targeted marketing and advertising programs and our medical plan utilization continues to return to pre pandemic level.
But even with that we're still seeing savings in that $65 million to $70 million range relative to last year again, given pro forma EPS that for Rowan mergers.
Now moving to the CFO commentary and commentary document we posted on our Investor website.
On page two most of the items are consistent with what we provided to you during our September Investor day.
Then on page three in total.
In the corporate segment came in about two pennies better than the midpoint of our September estimate.
The interest and banking line about a penny favorable.
Acquisition cost line also slightly favorable the corporate adjusted line. That's in line with our September midpoint, and you'll also see we have a small adjustment for a onetime tax expense related to Brexit, we describe that a little bit more on footnote six on that same page.
Then in terms of clean energy third quarter came in a bit better and you'll also see our fourth quarter estimate is also a bit better.
Then on page four you will see that we provided our first look at our 2021 estimates based on the preliminary forecasting from our utility partners.
Like 2021 can be a lot like we're seeing here this year.
And then when.
When you get back to page 14 of the earnings release.
See that we have about a billion dollars of credit carry forwards on our balance sheet at September 30.
Remember those credits are fully earned and while we are using some currently a big return comes between 2022 and say 2028 one.
And we will use those credits and thereby harvest about $170 million to $200 million of annual cash.
Sure bulk our GAAP earnings of $60 million to $65 million or go away in 2022, but instead, we will have that $150 million to $200 million of cash earnings in those years.
As for M&A, you heard Pat say, we're really strong pipeline I think there could be a flurry of activity between now and year end, given what could happen with taxes. So we're really well positioned for that we have more than $1.6 billion of liquidity consisting of available cash on hand of nearly $550 million in more than a billion dollar.
As of borrowing power on our revolving credit facility.
Okay. Those are my comments, thanks to the team for another great quarter, I think we are well positioned to pull off a terrific 2020 back to you. Thanks.
Thanks, Doug and operator, I think we're ready for questions.
Thank you.
The call is now open for questions. If you have a question. Please pick up your handset and press star one on your telephone at this time if.
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And our first question is from those defined we Deutsche Bank.
Please proceed with your question.
Yes, Thanks, I start with a quick numbers question, the the timing impact of the the large life pension fund product did.
Did that have any margin bump to it in the quarter or any any onetime impact there.
No more or less any other our business that was in that $30 million, we had $50 million of organic growth that included the one time or the.
Sale that we have there and if you if you assume about 60 points of margin on that business, you get about $30 million, so no more or less than what the rather out of business.
Okay got it and so on.
I think it was in your initial comments you made the Mart remark that next year organic should be better than where we're seeing this year play out and I was I was hoping you could talk a little bit about the extent to which stimulus plays a role in that and how government support might be a moving mechanism or at least how you felt the impact did you through 2000.
20 to use as a as for us to contemplate in 2021.
Well I think for sure in 2020 in terms of a pressure release for our clients as we got into the summer was huge we adjusted it made a huge difference in terms of giving businesses an ability to keep their employees and to keep their business is going and and quite honestly to pay their insurance bills. So I do hope.
And do believe that stimulus will be.
We'll be brought about in the new year, and I think that again will be viewed as a very strong positive for the economy and for our individual businesses I can't put a specific number on that bill, but anything that keeps the economy chugging along as you well know our entire business is predicated on exposure units.
Okay and the last one I got for you and it's an unfair question, so I apologize, but I.
We're getting a lot of questions from our end about the concept of brokerage margin expansion and the extent to which expectations should be up flat or down for next year and if I mean, it's something of a crystal ball question, depending on how the economy unfold and such but I know that this question is something that's important to invest.
As mine. So if you have any thoughts about how we should contemplate this that would be appreciated.
All right.
I don't know if it's an unfair question or not but I don't know if it's an easy answer so let me see if I can help you with that.
Let's take a couple of things that we now first as I said in my prepared remarks.
We should build a whole most of the expense savings that we're seeing here in the third quarter, when we hit our fourth quarter and in our fourth quarter right now.
Then the next question is let's call it one more quarter, let's say to first quarter 2021.
Absent a mirror our call I, just don't see that quarter much different than what we're seeing here in.
The fourth quarter, so, let's say that we can hold $60 million to $70 million of that that the savings that we're seeing now.
But for now for vast now you got to jump way out to 2022, So let's just go to 2022. Thanks.
I think that we're turning that.
Pandemic adversity into a real advantage for Gallagher we've.
We've heard a lot about in the short period of time.
Our business and our clients are operating so over the next 15 months, we've we believe a good portion.
Those savings that we're seeing now could become permanent so let's call that half or $30 million.
So that leaves really what happens in the second third and fourth quarters of 2021 to fill out.
The answer to that I believe kind of lies somewhere in between.
I should have a better answer when we get to our December IR day, but most of what we'll stick of $60 million to $70 million of 65 to 70 million.
We'll figure that out here over the next six weeks and have a better answer for you in December regardless.
If you get out to 2022, we believe there could be over $100 million of savings annualized savings that we might not have realized by 2022 had there not been a pandemic. So want to have pulled together our efforts to re look at our business.
And change some of the ways that we operate felt better and will be permanent savings there relative to where we would have gotten on our on our own let's say without a pandemic by 2022, how that actually emerges and 2021 I'll have a better idea as we go through our our our budget to employ.
Planning process over the next six weeks so.
I hope that helps get you have part way I don't know if it's a complete answer but that's what we know right now.
That's better than I have four thank you that's perfect.
Thanks Bill.
Our next question is from East Greenspan with Wells Fargo. Please proceed with your question.
Hi, Thanks. Good evening My first question I guess kind of picking up on that margin question on.
Hello.
So does that help.
Thanks Ben.
Then the second question right.
You know Adam.
21, it feels like it should be better than 2020 right now.
Thanks, and up 3% and so this quarter right.
50 basis points of margin improvement right.
Your organic revenue as well so how do we think of that.
Margin right, so you're growing organically over 3% next year, what that some point in the underlying margin improvement.
You should think about adding on whatever expenses can be.
I think that you will see if we had 3% organic growth next year absent. All these savings there's there's a half a half a point to three quarters, a point of margin expansion in that 3% number next year.
And it's 4%, maybe we get back closer to a full point, which isn't all that dissimilar to what we are running pre.
Pandemic, if you draw a line between 2017, we are marching up in margin every year and a drawn out and out to 2022 or whatever you would have gotten in 2022.
Add another $100 million to $120 million of savings to that and you'll get pretty close to where we think the margin would be in 20 to 22.
Our March forward hasn't changed.
On the base organic fees.
Is there anything more than that with one off that you saw 50 basis points. This quarter I mean, obviously that could be put any seasonality.
Hi, I guess well presented data suite.
Let me present, a one time item.
Well I think we're in around 4.2% organic this quarter I think you did we would see over a point of margin expansion, that's probably not out of whack for other quarters in the passwords for too, but nothing that really pops out at me. We did have some headcount savings and there are hiring hasn't been as robust as it has in the past.
Raises have been different alone.
That might influence a little bit there's nothing onetime in there that that I would point to.
Okay. That's helpful on that a couple questions on M&A.
First one I believe that your.
Well our day to day Q Dumb luck.
Like modestly larger deal came at $25 million range on that is often come to fruition.
Looking at the activity this quarter that hasn't happened. So I know some of the deals I guess that you guys alluded to that maybe things come to fruition in the fourth quarter as you will get done in advance.
Yeah, you bet.
Thats right, yes, there are two nice $25 million revenue acquisitions, there were nearly done with due diligence on we've had board approval on it and we hope to get them wrapped up between now and end of year.
Okay and then my last question on so you think about larger M&A in here right Gallagher fan beat internationally failure easy line, Canada, and the UK on and so if you guys are going to consider another larger transaction.
Yeah Rudy.
The.
You have is there was a sizable beyond the market that perhaps he chose to use more of your equity than you have seen them, we said fine.
Would there be next great <unk> revenue earnings appreciate or something.
That was a more sizable transaction that essentially meant by Andy.
[music].
Yes, we do the traditional review of that to make sure there wasn't dilutive and that there were synergies that we can take out of it but really to be.
To be honest I believe we like our tuck in merger strategy. This is our opportunity to pick every single one that wants to join the family. We have that we have fair multiples on those that were paying for them.
We integrate much better into one another we like our small.
Tuck in strategy at this point and there's lots and lots of opportunity for that so I think that's a key point solution. This is Pat.
If you look at the top 100 in business insurance in the United States alone that doesn't recognize the rest of the world.
We still have another 19 to 25, maybe even 30000 firms out there that are not in that top 100.
A good portion of those are still owned by baby Boomers. So are the the opportunity to do these tuck ins is just way way greater than that.
The no large play.
Okay. Thank you I appreciate all the color thanks, guys.
Thanks, Thanks Lou.
Our next question is from Greg Peters with Raymond James. Please proceed with your question.
Hi, Good afternoon, I'm, just a couple of follow on questions.
If you are pointing to I think page five or six of your press release, six where are you.
Go through the adjusted EBITDAC margin that I think through the nine months dog you reported a 33.6%.
Hi, EBITDAC margin on adjusted basis.
And I know you you're doing a good job of chronicling how much of the savings sorry can Ed you know should extend themselves beyond just.
The opportunity you've had this year.
At what point do you hit that threshold, where you can't grow margins because you have to invest in the business or put it another way. It. Some point you can't turn this into a 50% margin business or maybe you can you just haven't mapped it out for us yet.
Yes, it wasn't trees don't grow to the Moon I think that there are quite a plateau is that when you reach them I think when you get into that 30% to 32% type range as an annual margin in a brokerage segment.
Across the globe, a that's a pretty fair margin to have but scale does bring advantages and this is this is a.
The brokerage business is showing that size can be helpful.
Question on its size and the same fairway that your plane if you can get more.
Acquisition.
Acquisitions that are right down the middle of the fairway using the technologies that weve developed using our offshore centers of excellence. Our centralization that we've worked on for 15 years, we think that they're still terrific opportunity for us to roll in and have a nice steady margin improvement if we're growing over 3% or four.
<unk> percent.
Well I think there can be you can eke out a little margin just because of scale.
And Scott it depends on what wage inflation too I mean, we are a people company and.
We are lucky that after the great recession that that wage inflation remained in check perhaps here in the pandemic, we'll keep wage inflation in check a little bit, but we are a people company. So you know raises are something that we want to give and so but if we can keep wage inflation in check I think you can eke out some margins.
Just as a follow up to that comment when do when when do wage or salary increases typically happen for staff is that a beginning of the year event, a midyear event when does that generally hit kind.
Kind of late second quarter early third quarter, it's a little bit later this year, we'll do that here in December.
Got it.
In the balance sheet.
I noticed that the premiums and fees receivable jumped up.
From year end and I'm just.
I'm curious if you're if there was anything in that increase that is troublesome or if that's expected on plan or just some color behind that and then the numbers I'm looking at you know.
On the balance sheet, the 670 2.5 versus the five four want one 9.2, yes.
Okay. Good question first of all we look at our cash receipts everyday we're not having any slow down at all.
Premium payments.
Coming in so we don't have a liquidity issue there and again I just looked at the reported two o'clock. This afternoon and our October is equal or since the pandemic. Our cash flows have been equally if not better.
Than what they were.
Pre pandemic time, so that isn't yet we do have some as we have a reinsurance operation now you can get some significant reinsurance premiums that flow through that can cause some of that to be a little more volatile on that but there is nothing there that I would say that is that all in taking of any type of slowdown in payments by our.
And by our customers.
So in other words Dsos have remained fairly stable this year relative to previous year, Yes, that's right got.
Got it.
I guess the final question and I know you've already provided a lot of commentary.
Around M&A.
But I cant help myself, but go back to that well.
Well first of all you know Pat when you are talking culture I know, it's very important to you <unk>.
Are you when you're looking at M&A opportunities are you are you willing to consider M&A that has a slower organic growth profile or you know.
Another way is that the deals that you've done in the last couple of years have they boosted your or have they been in that game to organic revenue on a consolidated basis or is it been neutral or been a headwind.
As I call. It certainly hasn't been a headwind in and if the nice thing about tuck ins. Greg is that if you if you get the right folks on sometimes they can be terrifically accretive, but by and large I think when you add all those it's probably right in line with the rest of our organization.
And we're seeing lots of opportunities, but again Youve you followed us for years, it's not brain surgery culture is absolutely critical.
And I would like to sell more sophisticated we try to find people who care about their feet people love This business and run a good business. So they can't make money for themselves are not going to make money for us and our shareholders, but once they cross that hurdle, it's really got to be about are they going to fit culturally.
And are they going to really be able to take advantage of the things that we bring to the table and I think you've heard me talk about this before I tell them that when we bring them here to rolling those are they join one of our officers out there we opened the curtain and show them the candy store.
And they they're like no I've got all this to work with now.
And when that happens it opens up in many instances accounts that are local to them and we're very strong in our local communities. We want to help them build that strength and accounts that they never had a chance to touch because of their size.
Now open to them because really there's nothing that we can help them tackle and frankly that gets them excited so for us are they going to stay do they love selling insurance, which I know sounds crazy, but there are some of those that were born to do that and the fact is those people end up being with US a long time building great businesses, having a go.
Great time doing it and it really does come down to cultural fit.
Right well I know you've described it before I don't think you've used the word or the phrase candy store with me, but it doesn't mean you haven't used it before but you understand what I meant right, Greg all apps absolutely.
So the the final piece on M&A, obviously, there is a lot of.
You know stuff going around the election anticipation of maybe a change in tax cuts you out tax rates in the U.S. et cetera that may.
Lead to accelerating deal flow.
Are you seeing any activity.
In Europe are you seeing any change in the the.
In the flow of potential deals outside the U.S., yes, yes, and I'll tell you why it's exactly what we told you in 14, when we did our transactions in the UK, Australia, and Canada in particular, and and now in Europe and Latin America.
Once weve got a platform that gives people confidence that we're really there to stay.
Then the smaller broker has something to look at but there's not just getting a new name or or you know changing where they send their reports they get the benefit of the fact that we've got scale. We've got brand recognition, we have capabilities. So yes, our pipeline in the UK our pipeline in Australia Latin America.
New Zealand and and Continental Europe are are stronger than they've ever been.
Got it thank you for the answers.
Thanks, Greg.
Your next question is from Mike Zaremski with Credit Suisse. Please proceed with your question.
Okay, Great maybe we can talk about risk management, a little bit I think from the prepared remarks, it sounded like claims counts, where we're continuing to improve but still down or maybe you can put some numbers around that work comp and GL are those still do.
Hi, double digits year over year, what but what do you guys any update on the outlook for the risk management segment margins improved more than we thought probably maybe you can talk why why margins improve more more than expected it as well.
Yes, I think the question is what type of claims I think the more difficult claims that are rising that they're the kind of the China business is still down maybe.
Maybe 20% to 30% on a small, but we don't make a lot of money off of those anyway. So they're kind of low margin. So that doesn't hurt us. So much I think we have had a little bit of boost in settling claims that have been that have risen because of current and so these are complicated claims or are there still there and so that has helped this business.
Even more resilient if you think about it might be more of a lost revenue story that is lost profits as you can see by the margins. So.
The advantage we have is that we've held on pretty well being the only down 5% this quarter on a revenue basis as as you know as we get a vaccine as things start to improve you will have that business come back again and again.
And hopefully be wealth nicely into positive organic space next year.
Okay.
Maybe.
Stepping back and thinking about brokerage again one of your.
Competitors today can you kind of hinted at.
Maybe pricing had reached a point that you know had reached its limit at least you know there's definitely some businesses that I are are experiencing some early yeah high double digit rate increases and I think that your competitor alluded to maybe the carriers have somewhat similar getting enough rate and.
Maybe we're at peak rate any any thoughts about oh about kind of what you're hearing and seeing from the carriers and I know it feels like there is some new capital coming into the space is as well.
Well, there's clearly new capital coming in and I will tell you that there is zero.
Interest from the people that work the the partners were talking to at modifying rate increases at all.
They're not getting any rate of return on new invested dollars sold.
Social inflation is killing them a lines of coverage that are that have been under attack for years, while the markets stayed soft.
Our our raising the continue to raise their head. This is I see nothing in the way of a softening or or stopping that the momentum now remember again, we tried to give you some detail in our prepared remarks workers' compensation is about flat they make good money on workers comp worker's workers comp is competitive in the United States.
And our clients benefit from that and remember our job is to make sure. We do everything we can for our clients to to to make sure. The hard market doesn't crippled. So it's not like I'm sitting here, saying Hey. This is you know its getting harder by the minute, but I can tell you when you talk to the to the to the people that are the actual providers of capital they're not seeing light.
At the end of the tunnel being Yahoo, we're back to softening that's for sure.
Okay, Great and just lastly, just making sure does nothing supplementals and contingents that was an unusual this quarter.
No not no not this quarter I'm not this year at all.
Thank you very much.
Thanks, Mike.
And as a reminder, if anyone has any questions. You May proceed star one on your telephone keypad.
Our next question is with Josh Shanker with Deutsche Bank. Please proceed with your question.
Yeah, good evening everyone. Thank.
Thanks for taking my call.
Nice job.
So I was curious you know historically I guess for a number of years, we've been in a middling market.
And and I think that benefit brokers, we have a lot of visibility on pricing and maybe it disadvantages carriers and then negotiate why.
As things are perhaps changing is there any benefit being given to the carriers in that negotiation, where the client demand for wood encouraged some more competitive fees.
Fees structure from the broker is there any is there any renegotiations going on at that level.
Oh fees are one of the things that that always happen yet and this is.
Since 2006 in the United States in particular, Weve been completely transparent with our clients on what we make.
And we have we're not feeling huge pressure on the income that we make for the extra work that we're doing today and that's another reason when you look at fees and what have you that if even if rates were up 25%, you're not going to see our revenue jumped 25%.
That wouldn't that wouldn't be an affair transaction, but at the same time, there's a lot more work and it's our expertise now that we're selling that sells a lot better and a hard market that it does this off market. So in a soft market the person on the street the hangs a shingle out can get your five quotes well you're not getting five quotes today.
And you better work hard with somebody Who's got some real dedicated inside clear understanding of your business that can differentiate your risk and your approach to risk to that underwriting community or you're going to get away Act and so are our services are more valuable than ever and you're right. We went for about 10 years.
As you recall in my conversations on these conference calls I always alluded to the fact that I don't like hard markets.
I never would say were and when the rates were up one down to up three sideways flat that was perfect for clients that gave them a chance to choose it gave us a chance to be able to say this market or that one put them together. This way build the tower this way and it was really another way to shore expertise now.
This is a time, where we've got to give good counsel and they've got to understand that in many respects, it's a sellers market and we'll get them through it.
No it won't last forever, but now's the time to make sure you're partnering with some of the knows what they're doing.
Then we're getting paid I've been very clear and then on Gallagher Bassett can you talk about throughput of workers comp claims.
And and what the market place is shaping up to be with lower employment or without work at home and how how that changes.
The services you provide there.
Well the services, we provide there josh or not they're not different in the sense that if you have a workers comp claim we're going to handle it theres all kinds of protocol state by state rules regulations et cetera there.
There are fewer claims.
When you're not in the office, you're not in the factory, you're working from home or there are clearly fewer claims and fewer accidents and when economic activity regains itself when people come back to the places of work. We expect that those claims will reflect that but in terms of how you deal with someone it gets hurt.
It's we still have to file those state rules and we still have to adjusted adjudicate the claim which we think if you use Gallagher Bassett will give you a better outcome.
And in terms of a flow of acquaintances.
I'm, sorry, you broke up Josh what was that.
Claims incidents during during the pandemic, how how's that shaping up.
Incidents are down.
Significantly down that's the whole reason when we talk about claim counts that's that's incidents.
Yep.
And so does that change the.
Service or the visit fees. If they were lucky you know, we we don't in in terms of your interaction with the client for Gallagher Bassett has that changed or what you can charge or change the negotiation at all or is it no. We are the personnel.
Uh huh.
That doesn't at all.
Okay great.
Thanks, Josh thank.
Thank you.
Our next question is from Yaron Kinar with Goldman Sachs. Please proceed with your question.
Hi, good afternoon, thanks for taking my questions.
Few timing questions if I could one.
You're talking about M&A, maybe being a little bit the pipeline being robust here as we head into 2021 because of the potential tax impact. There do you think that could mean that there is a bit of a low and M&A as 121.
I don't think so I mean, you know when I look at it it really is a very interesting market, which is why you see you know it was not that long ago that there were very few billion dollars brokers today, there's about 11 or 12 of us by that I mean revenue that's.
Thats why private equity has been so prevalent in the business, which is good for us because private equity smart money, telling the investment community were great bet.
But the fact is there are thousands and thousands of independent agents and brokers.
Ultimately have a chance to capitalize their life's work.
And.
I think that's not going to stop.
Okay.
And then can you remind us when in 2021 do the plenty 11 clean coal plants Sunset does the tax credit.
Ken its two answers to that our plan that we operate will sunset mostly in late November early December absent an extension.
For those plants that we don't operate at our kept my God Philly yet that we own a substantial piece of that gets a royalty off those could those could stopped production sometime more in the late third quarter.
Early fourth quarter. It just depends on its 10 years from the date that they were placed in service.
So if they were placed in service before December of 2000.
Then they would be they would subside a little bit earlier, so that's why on page five of the.
Our CFO commentary, you'll see that our our not a royalty income is just we're forecasting that just to be down a little bit relative to 2000.
20, because some of those will sunset just a little bit earlier.
Okay, Okay, and those last kind of couple of months or the or don't tend to be very large amounts from clean coal perspective, right. I know it can be that you get a cold December and you can you can you know that.
The southern plants that are dependent on baseboard eat electric heat would be and again.
I can't Miss the opportunity to reinforce just because $60 million to $70 million of GAAP earnings go away that's.
Right away, we'll flip in 2022 and to to harvesting all the credits than Weve been generating over the last 10 years. So thats you might almost double the amount of earnings.
On a cash basis versus then on a GAAP basis.
Right.
And then final timing question. The the contract that you pulled forward into the third quarter and brokerage does that get renewed in the third quarter of next year.
First of all that I wouldn't say, we pulled it forward and they just got to close sooner. So that was great work by the guys into that they've been working on that product profit that's going to be an occasional sale I don't think that it's something that would repeat year in and year out it would be another customer that would happen to see that real Oh smarts in this product.
And decide to close it in and in third quarter next year, but that would be hit method is a little bit more elephant hunting on that so call. It that you now have you closed one every 18 months that'd be great.
Who knows it's a it's a terrific. It's a terrific product that it's getting some momentum so we might see a little bit more frequently but I'd be happy with one of those every 18 months.
Okay. Thank you.
Thanks Sharon.
And our next question is from Ryan Tunis with auto.
Autonomous. Please proceed with your question.
Hey, Thanks, Good evening I just had one since.
I'm still employee benefits I might have missed since that I thought you said it was plus six but that included the one off transaction.
What what was your organic excluding that within the employee benefits unit.
Well on flat to 2% I mean somebody else called it's called one 1.3% I look at my notes.
Got it.
And then just you just looking for an update obviously that is a business that economically impacted it and a lot of the other brokers, we've had three quarters of a country because of the recession.
Learning anything new.
You know that would change your organic outlook for employee benefits or is it still kind of the same the same story you've been talking about in previous quarters that.
Yes, the mid quarter update, but I think the thing that's probably most beneficial to our business that we learn it and first of all thanks for the question around when we when we look at the business in general and say what have we learned over the last seven eight months about what can happen. How this business can be run where people can do it.
How expertise can be exported around the world I mean, we've got experts in verticals that are.
World Class and you want to try to get them to a prospect to our client you can use up a whole day or two days a travel today. They can drop in by by video call and ban there there and people except that so we've learned a lot and there's lots of opportunities for our business because of that but I think probably the thing that reemphasize is why.
We are so high and the benefits businesses, even in this pandemic and even with the recession that hit.
The amount of employees that stay employed the employers holding onto their people.
It's incredible I mean, we thought in March and April get ready the floor is going to drop out everybody's going to let everybody go and I'm of course, I'm being facetious, but the fact is this.
This war for talent ongoing long term, what's your product I don't care, if you're making big steel drums.
You're a people business and.
And people are holding onto their folks and our censuses by account by account have not dropped through the floor.
And people are saying and as we come out of this.
To me it just makes that business, even better which demands incredible expertise to balance all the costs and all that covers and to make sure that you are in fact, providing what the client with the with the employees need but that you also make sure through communication that they understand that they are better off with you.
So it's basically it's really put us in a spot to want to double down on that business.
Got it.
Understood. Thanks.
Thanks Ryan.
And last question from me or shoes with KBW. Please proceed with your question.
Great. Thanks.
Small question I, just I feel like I missed the amount.
Of the of the employment contract that was signed earlier than expected. If you can quantify the actual revenue.
No. We really haven't I think you probably do the math it was about $12 million to $15 million.
Yeah, I can do the math now.
[laughter], thanks for making it easy teacher [laughter].
The second question I know, there's been sort of a long term strategy Gallagher moving clients along health insurance overtime.
The pending interrupted that at all.
No I mean in fact, if anything it's made it more of a crucial conversation.
Because it's crunching businesses and you know when the economy is good and employees are being hired and there's there's fight over employs over because of a.
The full employment.
And but those times are heady times for many many people and yes financially we can always point out to those businesses why considering a large self insured retention, bringing gallagher bassett in getting better outcomes on your claims makes for better control of not only your insurance purchase, but your entire risk management program and we do.
Good job of selling that.
You put a buyer against the wall.
They're all ears, and we're really good at moving people from first dollar cover into a form of risk management risk retention group captives et cetera that is our that's our heritage typically when you have increasing pricing a account that no customer that.
That's really good loss experience is more willing to let you know self as a component of the program being your self insurance and as prices go up that gets their attention and we do a lot of workers comp in Essen workers comp has had rate cuts recently, it's flat right now I think that its workers comp goes goes hard I think you'll see.
Considerably more folks with good experience or companies wanting to to to look at alternative risk transfer well Doug hit on some of them, but I think this has been the dilemma that really wasn't talked about during that eight to 10 year period, where the market was relatively soft or <unk> was flat.
When the market starts to from one of the dilemmas for the insurance carriers as they need the entire base to give a more rate the better units of risk look to move out of that buying a community.
And so now you're taking from the ensuring community, they're better units of risk, leaving them to to fight over what is maybe not the best units and even needing more rate.
And that is when the competition thins because there just aren't thousands of people that can do what we do.
Okay, no that makes perfect sense and.
That was very helpful final question and I mean, it just been modeling modeling it incorrectly.
But the investment income in the brokerage the investment income and gains on divestitures ticked up.
So like $2 million in the second quarter to third quarter should we expect that sort of seasonality or is that just randomness.
All right. So there's two questions. There is what happened when investment income right.
Mhm, what you're saying well, let's first some of that some of the numbers running through there I have to do with our premium finance business down in Australia, and New Zealand, but let me give you the punch line on it as we are down somewhat.
Somewhat in investment income just untrue investment income that is.
That we earn on on on.
The premium trust accounts et cetera, we are down probably in the third quarter somewhere around $4 million three and a half million dollars from from where we were last year. So you wouldn't be seeing that right.
Okay. That's very helpful. Thank you.
Thanks Mark.
And we have reached the end of the question and answer session well now return.
The call back over to Pat current color. Thank you very much let me give you just a quick comment again, thanks, everybody for joining us this afternoon.
We delivered an excellent quarter and first nine months of the year in the face of a difficult economic environment, and then again I'd like to thank our 32000, plus Gallagher professionals for their relentless efforts and dedication.
I remain confident that we can deliver another outstanding year financial performance and successfully navigate these challenging times. Thank you again for being with US we really appreciate it.
And this does conclude today's conference call you may disconnect. Your line at this time.
You can have a good day.
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