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[00:00:06] Good afternoon and welcome to Arthur J. Gallagher & Co. third quarter Twenty twenty earnings conference call participants have been placed on a listen only mode. Your lines will be open for questions following the presentation. Today's call is being recorded. If you have any objections, you may disconnect at any time. Some of the comments made during his conference call, including actually giving in response to questions, may constitute for the statement within the meeting of the security of these conflicting statements are subject to risks and uncertainty that could cause actual results to differ material. We refer to the cautionary statement and risk factors containing the companies and asking that you ask for more detail on its forward looking statement in addition, or reconciliations of the non gap measures discussed on this call, as well as other information regarding these may be referring to the earnings release and other materials and investor relations section of the company's Web site. It is now my pleasure to introduce Tea Party chairman, president and CEO of our energy gathering company. Mr. Gallagher, you may begin.
[00:01:10] Thank you. Good afternoon. Thank you for joining us for our third quarter Twenty twenty 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 levels while we continue to place health and safety. First, we are selling new business. We are servicing and retaining our clients. We continue to look at merger and acquisition opportunities, and our bedrock culture keeps us working together, even while physically apart. These are times when our global capabilities, niche expertize and product specialists support our local professionals as they help our customers navigate these challenging times. I'd like to thank our 3000 plus Gallagher professionals for their efforts and relentless focus on delivering the very best insurance, brokerage, 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 adjust our expense base, optimize our workforce, improve our productivity while also raising our quality. Let me break down our results further, starting with our brokerage segment reported revenue growth was a positive eight point three percent. Of that, more than half or four point two percent was organic revenue growth.
[00:02:56] We did have some favorable timing. I'll discuss that more in a minute. That earnings margin was up thirty four basis points and adjusted EBITDA margin expanded 632 basis points to thirty three point four percent. Net earnings up thirty seven percent and adjusted EBITDA up 32 percent. 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 bytes about each of our brokerage units. And I'll start with our PC operations in U.S. retail, another strong quarter with organic growth of about four percent. We saw solid new business and slightly better retention versus last year's third quarter. Rate increases are more than offsetting exposure unit declines. Mid term policy modifications, including full policy cancelations, are similar to prior year levels and our US wholesale operations risk placement services organic was eight percent and our open brokerage business even better than that. Our Mejía program Vimy businesses return to positive organic in the quarter tier two rate increases are more than offsetting exposure unit declines moving to the UK around two percent based organic with stronger growth in our London specialty business due to firmer pricing in Australia and New Zealand combined, also around two percent organic, with New Zealand slightly stronger than Australia. New business. It's down a touch in Australia and up in New Zealand. Rate increases there remain positive, but not enough to offset exposure decline. And finally, our Canadian retail operations posted organic of eight percent, another terrific new business quarter and stable client retention.
[00:04:48] So overall, our global PC operations reported about four percent 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, six percent. 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. Well covered lives under employer sponsored health plans can. You need to be more resilient than headline unemployment numbers. So when I bring EPS and benefits together organic of four point two percent 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, six percent 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 four percent again. But thus far in October, PC Retention's new business, full policy cancelations and other midterm policy adjustments are in line to slightly better than the third quarter. So perhaps we can be nicely in the two to three percent range that would deliver a full year twenty twenty around three percent organic, which would be a great year in this environment. Well, 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.
[00:06:31] That makes us highly confident we can deliver another quarter and full year of really strong growth. Now, let me give you an update on the PC rate environment rate. Again, continue to move higher around the globe during the third quarter globally. Call it up nearly seven percent. With tighter terms and conditions and increasingly restrained capacity by geography, Canada has seen the greatest rate increases of more than nine percent. The US is up about eight percent, followed by the UK, including London, especially at about six percent in Australia and New Zealand, around three percent by line of business. Property remains the strongest, up 12 percent. Next is professional liability, up 10 percent. Other casualty lines are up five to 10 percent, with umbrella rate increases at least twice that level. And worker's compensation is flat. So while EPS rates are moving higher, the total amount of premium increases our clients are paying are more modest. This is the result of reduced exposure units, higher deductibles, lower limits and clients opting out of coverages. Looking forward, October results are already indicating continued 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 firm 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. Regardless, it is a certainly a more difficult market today than last quarter. And we are seeing some pockets of a hard market in certain lines and geographies.
[00:08:15] I see that continuing into Twenty twenty one next year. Organic should be better than we are seeing this year playout. Moving on to mergers and acquisitions, we completed five brokerage mergers during the third quarter, if 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, a professional as I look at our M&A pipeline. We have more than 40 term sheet signed or being prepared, representing around three hundred and fifty million dollars of annualized revenues. And our pipeline continues to grow. Difficult market conditions in the pandemic are further highlighting the need for expertize 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 careers. Right now, it feels like it will be a more active finish to the year as merger prospects have concerns over possible Twenty twenty one tax change. Next, I'd like to move to our risk management segment. Gallagher Bassett. Third quarter organic revenue at minus five point three percent was a bit better than what we said at our September IRR day. This is a really nice sequential improvement from second quarter organic being down nearly 10 percent. And our risk management team also did a fantastic job managing its workforce and controlling costs, delivering third quarter adjusted EBITDA higher than last year by one million dollars. Looking forward, we are seeing October claim counts trending similar to September, but we have experienced a steady climb out of the second quarter bottom.
[00:09:57] Many clients are still operating at partial capacity in place. Accounts have not yet fully rebounded to last year's levels. So we're seeing fourth quarter organic revenues and a risk management segment similar or slightly better than third quarter. And just like our brokerage segment, we expect to grow our EBITDA back again in the fourth quarter due to expense savings. That means we should deliver on our goal of full year Twenty twenty adjusted EBITDA coming in better than 2019. That's just an amazing job by the team. Before I pass it to Doug, I'll finish with some comments on our bedrock culture. Despite the pandemic challenges, our global colleagues together as a team continue to deliver the very best service, expertize 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 Tenet number 20 of the Gallagher way we run to our clients problems, not away from them. 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's history, we have emerged as a better, more cohesive company. I believe we will emerge from today's difficult environment stronger than ever. OK, I'll stop now and turn it over to Doug. Doug.
[00:11:32] Thanks, Pat. Hello, everyone. Like that said another excellent quarter. I too would like to express my appreciation to all of our Gallagher colleagues around the globe. What 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 and the interplay with our crossable that 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. Sorry, let's go to the earnings release page for to the brokerage organic table. As Pat said, a great quarter with four point two percent, all in organic, which equates to about fifty million dollars of organic growth. Then when you turn to page six to the Brokerage EBITDA Act, you see that we grew adjusted even to act by one hundred and five million dollars this quarter. So how do we deliver that one hundred and five million on fifty dollars million of organic first about thirteen dollars million of even that came from M&A, not of divestitures, not now, just a bit over thirty million dollars at fifty million dollars of organic. So that means we saved about sixty million dollars from our cost control playbook. From a margin perspective, all land, we grew adjusted EBITDA margin, about 630 basis points, and then when you do the math, you'll see that even without the additional expense savings, we expanded margin about 150 basis points, which is impressive by itself. And the risk management segment, a little easier to compute. Revenues were backwards, about 10 million, but even I grew about a million. So cost savings were about 11 million dollars combined. Both segments, you get about 70 million dollars of cost savings, which is at the top end of our estimates provided during our September IRR day and close to what we saved in the second quarter.
[00:13:40] Let me give you a breakdown of these savings. Reduce travel, entertainment and advertising down about twenty six million, reduce consulting and professional fees down 15 million. Reduce 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 plan costs about four million. Now, and I look towards the fourth quarter, we're starting to see a slight increase in our producer 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 prep endemic level. But even with that, we're still seeing savings in that 65 to 70 million dollar range relative to last year. Again, given pro forma for that, Baroin mergers now moving to the CFO commentary and commentary document we post on our investor website on page two. Most of the items are consistent with what we provided to you during our September Investor Day. That on page three, in total, the corporate segment came in about two pennies better than the midpoint of our September estimate. Then the interest in banking line about a penny favorable acquisition cost line also slightly favorable.
[00:14:59] The corporate adjusted line that's in line with our September midpoint. And you'll also see we have a small adjustment for a one time tax expense related to Brexit. We just cried out a little bit more in 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'll see that we provided our first look at our twenty twenty one estimate based on the preliminary forecasting from our utility partners. And it looks like Twenty twenty one could be a lot like we're seeing here this year. And then when you get back to page 14 of their earnings release, you'll see that we have about a billion dollars of credit carryforwards on our balance sheet at September 30. Remember, those credits are fully earned. And while we are using some currently, the big return comes between twenty, twenty two and say twenty twenty eight when we will use those credits and thereby harvest about 150 to 200 million dollars of annual cash.
[00:16:04] Sure, broker gap earnings of 60 to 65 million will go away in Twenty twenty too. But instead we'll have that 150 to 200 million dollars of cash earnings in those years. As for M&A, you heard that say we have a really strong pipeline. I think that 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 one point six dollars billion of liquidity consisting of available cash on hand of nearly 550 million and more than a billion dollars of borrowing power on our revolving credit facility. Ok, those are my comment, thanks to the team for another great quarter, I think we're well positioned to pull off a terrific twenty twenty. Back to you.
[00:16:49] Thanks, Doug and operator, I think we're ready for questions.
[00:16:55] Thank you. The call is now a few questions. If you have a question, please pick up your handset in Pakistan, one on your telephone at this time. If you're on speakerphone, please disable that function prior to press start one to ensure an optimum sound. While you may remove yourself from the two at any point, my person starting to again star one for questions. And our first question is from Phil Stefano with Deutsche Bank. Please proceed with your question.
[00:17:26] Yes, start with a quick numbers question the timing impact of the the large life pension fund product, did that have any margin bump to it in the quarter or any any one time impact there?
[00:17:41] No more or less any of our business that was in that 30 million that we had 50 million dollars of organic growth that included the one time or the on sale that we had there. And if you're if you assume about 60 points of margin on that business, you'd get about 30 million dollars. So no more or less than what the other other business has.
[00:17:59] Ok, got it. And so I think it was in your initial comments, you made the remark that next year organic should be better than we're we're seeing this year play out. And that 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 that impacted you through Twenty twenty to use as as for us to contemplate in Twenty twenty one?
[00:18:26] Well, I think for sure and twenty twenty in terms of a pressure release for our clients as we got into the summer, it was huge. It just it made a huge difference in terms of giving businesses an ability to keep their employees and keep their businesses going and and quite honestly, to pay their insurance bills. So I do hope and do believe that stimulus will be will 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, you know, OK, and the last one I got for you and it's an unfair question, so I apologize. But we are getting a lot of questions from our end about the concept of brokerage margin expansion and the extent to which expectations should not be flat or down for next year. And I mean, it's something of a crystal ball question, depending on how the economy unfolds and such. But I you know, I know that this question is something that's important to investors minds. Do you have any thoughts about how we should contemplate this? That would be appreciated.
[00:19:42] 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 know. First, as I said in my prepared remarks, we should be able to hold most of the expense savings that we're seeing here in the third quarter when we had our fourth quarter and our fourth quarter right now. Then the next question is, let's go out one more quarter, let's say, to first quarter to Twenty twenty one.
[00:20:11] You know, absent of miracles, 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 to 70 million of that, that the savings that we're seeing now, the finance is vast. Now you've got to jump right out to twenty, twenty two. So let's just go to Twenty twenty two. I think that we're turning the pandemic adversity into a real advantage for Gallagher. We've learned a lot in this short period and about our business and our clients are operating. So over the next 15 months, we we believe a good portion of those savings that we're seeing now could become permanent. So let's call that half or thirty million more. So that leaves really what happens in the second, third and fourth quarters of Twenty twenty one to fill in. The answer to that, I believe kind of lies somewhere in between. I should have a better answer when we get to our December IRR day. But most of what we'll stick of a 60 to 70 million dollar, a 65 to 70 million, we'll figure that out here over the next six weeks and have a better answer for in December, regardless if you if you get out to Twenty twenty two, we believe there could be over one hundred million dollars of savings, annualized savings that we might not have realized by Twenty twenty to had there not been a pandemic. So it has pulled together our efforts to relook at our business and change some of the ways that we operate. So there will be permanent savings there relative to where we would have gotten on our on our own, let's say, without a pandemic by twenty twenty to how that actually emerges in Twenty twenty one. I'll have a better idea as we go through our our are our budget and planning process over the next six weeks. So I hope that helps gets you partway. I don't know if it's a complete answer, but that's what we know right now.
[00:22:14] That's better than I have for. Thank you. It's perfect.
[00:22:18] Thanks, Bill.
[00:22:22] Our next question is from Elyse Greenspan with Wells Fargo. Please proceed with your question.
[00:22:28] I think it evening on my first question, I guess kind of picking up on that margin question, so does that kind of help us think through the offensive? But then the second portion, right, that, you know, had a little debate, organic revenue growth in Twenty twenty one he feels like should be better than Twenty twenty. Right. Which you guys said stand up at around three percent. And so this quarter, right. You saw about 150 basis points of margin improvement by of your organic revenue growth. So how do we think of that component of the margin? Right. So they're growing organically over three percent next year. What's the component of underlying margin improvement that we should think about adding on to whatever expenses can be realized?
[00:23:17] I think they you'll see if we have three percent organic growth next year. Absent all these savings, there's a half a half a point to three quarters of point of margin expansion in that three percent number next year. If it's four percent, you know, maybe we get back closer to a full point, which isn't all that dissimilar to what we were running pre pandemic. And if you draw a line between 2017, we're marching up and margin every year and you draw that line out to Twenty twenty to whatever you would have gotten in Twenty twenty to add another 100 to 120 million dollars of savings to that. And you'll get pretty close to where we think the margin would be in 20 to 22. So our march forward hasn't changed on the on the base organic piece.
[00:24:06] Was there anything more than that was one off that you saw one hundred and fifty basis points this quarter? I mean, obviously there could be quarterly seasonality on, I guess, four percent organic or three three percent as the one time item.
[00:24:21] Well, I think we're here at four point two percent organic this quarter, I think you did we would see over a point of margin expansion that's probably not out of whack to other quarters in the past where it's four two, but nothing that really pops out at me. We did have some headcount savings in there are hiring hasn't been as robust as it has in the past. Raises have been deferred to look at that might influence. Well, there's nothing one time in there that that I would point to.
[00:24:50] Ok, that's helpful then a couple questions on M&A, the first one, I believe it, your last day was alluded to some more like modestly larger deals. I want to say that. Twenty five million dollar range that you thought would come to fruition by looking at the activity this quarter, that hasn't happened. So are those some of the deals, I guess, that you guys alluded to that maybe could come to fruition in the fourth quarter as you'll get done in advance of potential dangers? That's right.
[00:25:23] There there are two the nice 25 million dollar revenue for acquisitions that we're nearly done with due diligence on. We've got board approval on it and we hope to get them wrapped up between now and the end of the year.
[00:25:35] Ok, and then my last question. So as we think about larger M&A, it's been a few years, right, expanded internationally, Australia, New Zealand, Canada and the UK. And so if you guys were going to consider another larger transaction, does it add to the debt? The fact that you have is there was a sizable deal in the market that perhaps you chose to use more of your equity than you had in the recent times. Would there be certain that the revenue, earnings, accretion or something that you guys would be looking to if it was a more sizable transaction that potentially required the use of your own equity?
[00:26:21] Yeah, we do the traditional review of that to make sure that wasn't dilutive and that there were synergies that we could take out of it. But really, to be to be honest, at least we like our tuck in merger strategy. And 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 we're 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.
[00:26:54] So I think that's a key point. This is, you know, when you look at the top 100 in business insurance in the United States alone that doesn't recognize the rest of the world, you still have another 19 to 25, maybe even 30000 firms out there that are not in that top 100, that a good portion of those are still owned by baby boomers. So our the the opportunity to do these tuck ins is just way, way greater than than the than the large play.
[00:27:26] Ok, thank you, I appreciate all the color. Thanks, guys. Thanks. Thanks, Lou.
[00:27:35] Our next question is from Greg Peters with Raymond James, please proceed with your question.
[00:27:41] Good afternoon. Just a couple of follow on questions. If you were pointing to, I think, page five or six of your press release, six, where you go through the adjusted EBITDA margin. And I think through the nine months, Doug, you reported to thirty three point six percent. EBITDA margin on adjusted basis, and I know you you're doing a good job of chronicling how much of the savings are going to, 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, at some point you can't turn this into a 50 percent margin business. Or maybe you can. You just haven't mapped it out for us yet.
[00:28:36] No, listen, trees don't grow to the moon. I think that there are plateaus when you reach them. I think when you get into that 30 to 32 percent type range as an annual margin in a brokerage segment across the globe, that's a pretty fair margin to have. But scale does bring advantages. And this is this is a you know, the brokerage business is showing that size can be helpful, especially in its size, in the same fairway that you're playing. If you can get more acquisitions that are right down the middle of the fairway using the technologies that we've developed, using our offshore centers of excellence, our centralization and we've worked on for 15 years, we think that there's still terrific opportunity for us to roll in and have nice, steady margin improvement if we're growing over three percent or four percent. I think there can be you can eke out a little margin just because of scale. And so depends on wage inflation, too. I mean, we are a people company. And, you know, we are lucky that after the Great Recession that that wage inflation remained in check, perhaps here in the pandemic will 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 if we can keep wage inflation in check, I think that you can eke out some margins.
[00:30:05] Just as a follow up to that comment, when do when do wage or salary increases typically happen for staff? Is that a beginning of the year event, the midyear event one? Does that generally hit kind of late second quarter, early third quarter?
[00:30:20] It's a little bit later this year. We'll do that here in December.
[00:30:24] Got it in the balance sheet, I noticed that the premiums and fees receivable jumped up from year end and I'm just, you know, curious if there's anything in that increase that is troublesome or if that's expected on plan or, you know, just some color behind that. The numbers I'm looking at are, you know, on the balance sheet, the six seven zero two point five versus the five four one nine point two.
[00:30:58] Yeah, OK, good question. First of all, we look at our cash receipts every day. We're not having any slowdown at all for premium payments coming in. So we don't have a liquidity issue there. And again, I just looked at the report at two o'clock this afternoon and our October is equal. Since the pandemic, our cash flows have been equally, if not better than what they were in pre pandemic time. So that isn't it. 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 that is at all indicative of any type of slowdown in payments by our and by our customers in that.
[00:31:46] So in other words, DSOs have remained fairly stable this year relative to the previous year.
[00:31:51] Yes, that's right.
[00:31:52] Got it. I guess the final question, and I know you've already provided a lot of commentary around M&A, but I can't help myself but go back to that. Well, first of all, you know, Pat, when you're talking culture, I know it's very important to you. 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, put it another way is that the deals that you've done in the last couple of years, have they boosted your or, you know, have they been a net gain to organic revenue on a consolidated basis or is it been neutral or been a headwind? Does that make?
[00:32:40] Certainly hasn't been a headwind. And the nice thing about tuck ins, Greg, is that, you know, 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 this, it's probably right in line with the rest of our organization. And, you know, we're seeing lots of opportunities. But again, you've you followed us for years. It's not brain surgery. Culture is absolutely critical. And I'd like to sound more sophisticated. We try to find people who care about their people, love this business and run a good business. If they can't make money for themselves, they're 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 Meadows or they join one of our offices out there, we open the curtain and show them the candy store and they're like, whoa, 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 are 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 or do they love selling insurance, which I know sounds crazy, but there are some of us 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 great time doing it. And it really does come down to cultural fit.
[00:34:23] Right, well, I know you've described it before, I don't think you've used the word the phrase candy store with me, but doesn't mean you haven't used it before. But you understood what I meant, right, Greg? Oh, absolutely. So the final piece on M&A, obviously there's a lot of, you know, stuff going around the election, anticipation of maybe a change in tax cuts, in the tax rates in the US, et cetera, that may lead to accelerating deal flow. Are you seeing any activity in Europe or are you seeing any change in the data in the flow of of potential deals outside the U.S.? Yes, yes.
[00:35:05] And I'll tell you why. It's exactly what we told June 14 when we did our transactions in the U.K., Australia and Canada in particular, and and now in Europe and Latin America. Once we've got a platform that gives people confidence that we're really there to stay, then the smaller broker has something to look at that is not just getting a new name 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 and we have capabilities. So, yes, our pipeline in the U.K., our pipeline in Australia, Latin America, New Zealand and and continental Europe are are stronger than they've ever been.
[00:35:49] Got it. Thank you for the answers.
[00:35:51] Thanks, Greg.
[00:35:53] Our next question is from Mike Zaremski with Credit Suisse. Please proceed with your question.
[00:36:00] And maybe we could talk about risk management a little bit, I think from the prepared remarks, it sounded like claims counts were continuing to improve, but still down. Maybe you can put some numbers around work comp and those still down double digits year by year. What what are you guys any update on the outlook for the risk management segment? Margins improve more than we thought. Probably maybe can talk. Why? Why? Margins improved more than expected as well.
[00:36:36] Yeah, I think the question is what type of claims? I think the more difficult claims that are rising that, you know, the kind of churn business is still down maybe 20 to 30 percent on the 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 a boost in settling claims that have been that have risen because of current and some of our complicated claims are they're still there. And so that's that has helped this business be more resilient. If you think about it, it might be more of a lost revenue story than it is a lost profits, as you can see, by the margin. So the advantage we have is that we've held on pretty well, being only down five percent this quarter on a revenue basis. As far as you know, as we get a vaccine, as things start to improve, you will have that business come back in and and hopefully be, well, nicely into positive organic space next year.
[00:37:37] Ok, maybe stepping back and thinking about Brokers' again, one of your competitors today kind of hinted that maybe prices had reached a point that, you know, it reached its limit, at least, you know, suddenly some businesses that I are are experiencing some fairly high double digit rate increases. And I think that your competitor alluded to maybe the carriers of some are some are getting enough freight and maybe we're at peak rate. And any any thoughts about the about kind of what you're hearing and seeing from the carriers? And, you know, it feels like there's some new capital coming into the spaces as well.
[00:38:26] Well, there's clearly new capital coming in, and I will tell you that there is zero interest from the people that work that the partners we're talking to at modifying rate increases at all. I mean, they're not getting any rate of return on new invested dollars. Social inflation is killing them. Lines of coverage that are that that have been under attack for years while the markets stayed soft, are raising it, continue to raise their head. This is I see nothing in the way of a softening or stopping 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. Workers worker's comp is competitive in the United States. And and our clients benefit from that. And remember, our job is to make sure we do everything we can for our clients to to make sure the hard market doesn't cripple them. So it's not like I'm sitting here saying, yeah, this is you know, it's 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 something, that's for sure.
[00:39:38] Ok, great, and just lastly, just making sure Doug nothing supplementals and contingency that was unusual this quarter?
[00:39:48] No, not no, not this quarter, not this year at all.
[00:39:54] Thank you very much. Thanks.
[00:39:58] And as a reminder, if anyone has any questions, you may press star one on your telephone keypad. Our next question is from Josh Hancher with Deutsche Bank. Secrecy with your question.
[00:40:09] Yeah, good evening, everyone. Thank you for taking my call. Thanks. Yes. 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 who have a lot of visibility on pricing and maybe it disadvantages carriers and then negotiates with a client as it are, perhaps changing. Is there any benefit being given to the carriers in that negotiation where the client demand or would encouraged some more competitive fee structure from the broker? Is there any is there any renegotiation going on at that level?
[00:40:50] Officer, one of the things that always happened, and this is, you know, since 2006 in the United States in particular, we've been completely transparent with our clients on what we make. And we have we are 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 even if rates were up 25 percent, you're not going to see our revenue jump 25 percent, that would that would be a fair transaction. But at the same time, there's a lot more work. And it's our expertize now that we're selling that sells a lot better in a hard market than it does a stock market to the stock market. The person on the street that hangs his shingle out can get you five quotes. We're 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 whacked. And so our services are more valuable than ever. And you're right, we went for about 10 years. And you recall my conversations on these conference calls. I always alluded to the fact that I don't like hard markets. And I would say where and when the rates were up one down to up three sideways flat, that was perfect for clients. It 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 show our expertize. 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 seller's 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 them knows what they're doing. And we're getting paid very clear.
[00:42:44] And on Gallagher Pathic, can you talk about throughput of workers comp claims and and what the marketplace is shaping up to be with lower employment or without work at home and how that changes the services you provide there?
[00:43:02] Well, the services we provide there, Josh, are not they're not different in the sense that if you have a worker's comp claim, we're going to handle it. There's all kinds of protocol, state by state rules, regulations, etc. There are fewer claims. When you're not in the office, you're not in the factory, you're working from home, there are clearly fewer claims and fewer accidents. And when economic activity regains itself and 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 that gets hurt, it's we still have to follow state rules and we still have to adjust and adjudicate the claim, which we think if you use Gallagher, Bassett will give you a better outcome.
[00:43:46] And in terms of flow of claims, Cincinnati's.
[00:43:51] I'm sorry you broke up, Josh, was that?
[00:43:54] Claims incident during during the pandemic? How's that shaping up?
[00:43:58] Incidents are down, significantly down. That's the whole reason. When we talk about claim counts, that's that's incidents.
[00:44:07] And that's that changed the service or the things they said. Well, look, you know, we we don't in in terms of your interaction with the clients regarding your messages that change what you can charge or change the negotiation at all or.
[00:44:24] No, we no, no, that doesn't at all.
[00:44:29] OK. Right.
[00:44:31] Thanks, Josh, thank you.
[00:44:35] Our next question is from Yaron Kinar with Goldman Sachs. Please proceed with your question.
[00:44:41] Hi, good afternoon and thanks for taking my questions. Few timing questions, if I could. One, you're talking like Eminem maybe being a little bit of the pipeline, being robust here as we head into twenty twenty one because of potential tax impact there. Do you think that could mean that there's a bit of a lull in M&A as one hundred twenty one?
[00:45:02] 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 dollar brokers. Today there's about 11 or 12 of us. By that I mean revenue. That's why private equity has been so prevalent in the business, which is good for us because private equity, smart money, telling the investment community we're a great bet. But the fact is there are thousands and thousands of independent agents and brokers that ultimately have a chance to capitalize their life's work and I think that's not going to stop.
[00:45:41] Ok, and then you remind us what when in twenty twenty one do the 2011 clean coal plant sunset, the tax credit gets two answers to that.
[00:45:55] Our plants that we operate will sunset mostly in late November or early December. Absent an extension for those plants that we don't operate at our command affiliate that we own, a substantial piece of that gets a royalty off those could those could stop production some time more in the late third quarter or early fourth quarter. Just depends on it's 10 years from the date that they were placed in service. So if they were placed in service before December of 2007, then they would be they would sunset a little bit earlier. So that's why on page five of the CFO commentary, you'll see that our our royalty income is just we're forecasting that just to be down a little of that relative to 2000 20, because some of those will sunset just a little bit earlier.
[00:46:53] Ok, OK. And those last couple of months of the year don't tend to be very large months from clean coal perspective, right?
[00:47:02] I know it can be a cold December and you can you can the you know, the southern plants that are dependent on baseboard heat, electric heat would be. And again, you know, I can't miss the opportunity to reinforce just because 60 to 70 million dollars of gapper earnings go, that's, you know, right away will slip in 2022 and to harvesting all the credits that we've been generating over the last 10 years so that it might almost double the amount of earnings on a cash basis versus been on a gap basis at that time.
[00:47:37] 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?
[00:47:50] Well, first of all, I wouldn't say we pulled it forward and they just got it closed sooner. So that was OK work by the guys that they've been working on that product. 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 smarts in this product and decide to close it in and in third quarter next year. But that would be hiddenness. It's a little bit more elephant hunting on that. So call it that. You know, if you close one every 18 months, that would be great. But who knows? 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 month.
[00:48:36] Ok, thank you.
[00:48:38] Thanks Yaron.
[00:48:40] And our next question is from Ryan Tunis with Autonomous. Please proceed with your question.
[00:48:48] And good evening. I just had one since the employee benefits I might have missed since. I thought you said it was plus six, but that included the one off transaction. What was your ganic excluding that within the employee benefits unit on five to two percent?
[00:49:08] I mean, somebody else has got one one point three percent. I look at my notes on it and they're just just looking for an update.
[00:49:16] Obviously, that is a business that economically impacted a lot of the other brokers. We've had three quarters of a consequence in the recession. Are you learning anything new, you know, that would change your organic outlook for employee benefits or is it still kind of, you know, the same the same store you've been talking about in previous quarters at the mid-quarter updates?
[00:49:42] I think the thing that's probably most beneficial to our business that we learned and first of all, thanks for the question around. And 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 expertize can be exported around the world? I mean, we've got experts in in verticals that are world class, and you want to try to get them to a prospect to a client. You can use up a whole day or two days of travel today. They can drop in by video call and bam, they're there and people accept 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 reemphasizes is why we're so high on the benefits businesses, even in this pandemic. And even with the recession that hit the amount of employees that stay employed, the employer's holding on to 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 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 people are holding on to their folks. And our census's by account, by account, have not dropped through the floor. And people are saying and as we come out of this, it to me, it just makes that business even better, which demands incredible expertize to balance all the costs and all the covers and to make sure that you are, in fact, providing with the client, with what the employees need, but that you also make sure through communication that they understand that they're better off with you. So it's basically it's really put us in a spot to want to double down on a business.
[00:51:41] Understood. Thanks.
[00:51:44] Thanks, Ryan.
[00:51:47] And our last question from Mayor Shields with KBW. Please proceed with your question.
[00:51:54] Great, thanks. Just a small question, I feel like I missed the amount of the of the employee benefits contract that was signed earlier than expected, if you can quantify the actual revenue.
[00:52:06] Now, we really have and I think you probably do the math that it was about 12 to 15 million dollars.
[00:52:11] I can do the math now.
[00:52:17] Thanks for making it easy teacher.
[00:52:18] The second question. I know there's been sort of a long term strategy, Gallagher, of moving clients along self-insurance over time. Has a tendency interrupted that at all?
[00:52:32] 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's good and employees are being hired and there's there's a fight over employees over because of a, you know, full employment. And 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 a 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 captains, et cetera. That is our that's our heritage.
[00:53:30] Typically, when you have increasing pricing a account, that customer that has really good loss experience is more willing to do self as a component of their program being through self-insurance. And as prices go up, that gets their attention. And we do a lot of workers compensation. Workers comp has had rate cuts recently. It's flat right now. I think that if workers comp goes and goes hard, I think you'll see considerably more folks with good experience or companies wanting to to look at alternative restaurants for dug in on something.
[00:54:04] And 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 was flat. When the market starts to firm, one of the dilemmas for the insurance carriers is they need the entire base to give them more rate, the better units of risk look to move out of that buying community. And so now you're taking from the insurance community, they're better units of risk, leaving them 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.
[00:54:46] Ok, no, that makes perfect sense, and that was very helpful. Final question, and I mean, it's just been model modeling this incorrectly, but the investment income in the brokerage, the investment gains on divestitures, picked up something like three million dollars from the second quarter to third quarter. Should we expect that sort of seasonality or is that just randomness?
[00:55:09] So there's two questions, there's what happened with investment income, right? What you're saying, well, first, some of that some of the numbers running through there have to do with our premium finance business down in Australia and New Zealand. But let me give you the punch line on it is we are down somewhat in investment income, just in through investment income, that is that we earn on the premium trust accounts, et cetera. We are down probably in the third quarter, somewhere around four million dollars, three and a half million dollars from from where we were last year. So you would be seeing that, right?
[00:55:49] Ok, that's very helpful, thank you. Thanks for.
[00:55:55] And we have reached the end of the question and answer session. Now we turn the call back over to Pat for inclusion.
[00:56:02] 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 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.
[00:56:35] And this does conclude today's conference call, you may disconnect your lines at this time. Thank you. Have a good day.