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

Good morning, and welcome to Arthur J. Gallagher & Company's quarterly investor meeting with management [Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time. Some of the comments made during this investor meeting, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are provided in the spirit of the SEC's request that companies provide investors with as much forward-looking information as possible in the midst of the COVID-19 crisis. They are subject to certain risks and uncertainties discussed during this meeting or described in the company's most recent earnings release and Form 10-Q filing. In particular, COVID-19 has created significant volatility, uncertainty and economic disruption that may impact our forward-looking statements. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

Thank you, Sherry. Good morning, and thank you for joining us today for our quarterly investor meeting. It's nice to resume our regular meetings with management, albeit doing it virtually and with a slightly condensed format. Today, each of our business leaders will be speaking for about 7 to 8 minutes, touching on topics like the rate environment, our views of organic margins, our merger and acquisition pipeline and our efforts to improve our productivity and invest in our quality. Our leaders will also go deeper into what they are seeing real time related to the pandemic. Then Doug will wrap up with some financial commentary. Our prepared remarks should last about an hour in total, and then we'll open up the line for questions and answers from the group. Before we start, let me reiterate that health and safety of our colleagues remains our top priority. We've had a very limited number of COVID-19 cases among our 34,000 employees around the globe. So we consider ourselves fortunate, and we remain -- and want to remain a healthy group. As a management team, we're incredibly proud of our associates as they continue to serve our clients and actively seek new business. Together, our objectives remain unchanged from when we held our earnings call at the end of April. First, as I said, is to ensure the safety of our employees. We're refining our plans to return our colleagues back to the workplace, although we're not in a hurry. Our technology team has done a fantastic job of ensuring our people have access to tools and systems in order to deliver high-quality service that our clients have come to expect. With our people working remotely, we haven't missed a beat or experienced any significant periods of disruption. Our multiyear journey to standardize and streamline work across common systems has paid off tremendously. Our culture is strong in good times and it has even been stronger during these times of challenge. Second, now is our time to shine by helping our clients navigate the current crisis. The pandemic has negatively impacted our clients' businesses and yet loss costs continue to rise, causing the cost of risk to increase. Our talented professionals excel in times like these. Our customers can see the creativity of our advice, our deep product and industry know-how, our data-driven insights and our access to markets, most of our competitors can't match. Remember, about 90% of the time, we're competing against a smaller broker. We believe the pandemic, combined with an already difficult pricing environment, will expose weaker competitors' inability to deliver. Our third objective is to generate adjusted EBITDAC during the year even better than last year. So by early April, we were executing on our cost control playbook. During our first quarter earnings call, we stated that we had already identified quarterly cost savings of $50 million to $75 million that we could remove from the organization almost immediately. These proactive actions included eliminating discretionary spending; reducing travel, entertainment and advertising expenses; limiting the use of temporary help and consultants; increasing utilization of our centers of excellence; and implementing a support layer hiring and wage freeze. The team has been hard at work. And with April and May in the books, I feel confident we will be able to deliver closer to the upper end of that range here in the second quarter. Doug will dive deeper into our progress during his comments, but needless to say, I'm pleased with our team's execution. Each member of management will give you detailed thoughts on their business, but let me go a bit deeper on 2 topics. First P/C pricing environment; and second, exposure unit changes due to COVID. P/C pricing around the globe is going up and going up faster as each month goes by. Exceptions to this include U.S. workers' compensation, where rates are still flattish to down a couple of percent. And also in Australia, New Zealand where rates had been up nearly double digits in 2018 and 2019 and those are not rising as much here in 2020. All low single digit increases. Terms and conditions are becoming more difficult. Capacity is shrinking. You can still get risk placed. So when I look at our P/C global book, pricing is up about 6% to 7%. Property remains the strongest line of business, up 10%; next is professional liability, up nearly 7%; and other casualty lines are up low mid-single digits. Looking over the next year or 2, I see rates continuing to increase within the already firm market. Entering 2020, loss costs were already outpacing rate, and many carriers are now quantifying COVID-19 as the largest catastrophe loss in history. I see a strong case for underwriters to push for even more rate. Some are calling it a hard market, but I might call it more and more a difficult market as nearly all risk can still find a home. Turning to the impact of the pandemic on exposure units, here's what we are seeing over the last 75 days. First, we're not seeing any meaningful number of outright business failures leading to policy cancellations. Second, the amount of negative endorsements, downward premium audits and other midterm policy adjustments are also not meaningful. Third, the impact of unemployment has not caused a significant drop in covered lives in our customer base. Fourth, client retentions are still at pre pandemic levels and in some cases, better. Fifth, new business is down 1 point or 2 but is still surprisingly good. Sixth, we are seeing some green shoots as customers that might have pressed the pause button are beginning to restart their businesses. So I'll now foreshadow some punch lines, you'll hear from the team today. You'll hear Mike Pesch say that our U.S. retail P/C business is holding up very well in this environment, aided by rate, continuing to mitigate exposure unit declines, workers' comp being the exception. Tom Gallagher will tell you that our international businesses are holding up well, particularly well in Canada, followed by Australia, New Zealand and then the U.K. A similar story is our U.S. retail P/C business. Rates are offsetting much of the exposure unit declines. You'll then hear Joel Cavaness say that our excellent trends in our open brokerage wholesale intermediary risk placement services. However, in our MGA and program binding businesses, there's been a bit of a lull in activity based in the casualty lines during April and May, but green shoots are now being seen. Bill Ziebell will then talk about our employee benefits business. Surprisingly, we are not yet seeing a massive decrease in covered lives despite the headline unemployment rates. Looks like employers are continuing to provide employees benefits throughout the furlough periods or under COBRA. Finally, Scott Hudson will take you through our claims paying business, Gallagher Bassett. The number of new claims arising from workers' compensation and general liability injuries like slips and falls by customers at retailers, restaurants, hotels, et cetera, pulled back dramatically with the pandemic, but we are seeing some upticks here in June, and we are also seeing influx from COVID-related claims. Doug will then bring it all together in how all this will financially impact our second quarter and what we are seeing for the balance of the year. In the end, we feel highly confident we can cost save our way through a lull in organic growth. Before I wrap up, mergers and acquisitions remains a key value creation driver for Gallagher, and we continue to look at attractive tuck-in merger opportunities around the globe. Yes, due diligence can be a bit tough, which might lead to a slowdown in the near term. But we've seen some downturns in the past from tax law changes, et cetera, and we then catch up. Remember, the dynamics are still there. So many family-owned brokerages are owned by baby boomers, now add the pandemic and difficult market conditions. Smart owners are seeing that being part of Gallagher might be a safe port in a storm. When I look at our M&A pipeline, we have about 30 term sheets signed or being prepared, representing approximately $200 million of revenues. And over the past few weeks, the level of developing mergers has increased significantly to approximately $1 billion of revenue. Okay. Those are my comments. From my vantage point as CEO, I believe we are executing extremely well as an organization on behalf of our colleagues, our clients, our carrier partners and our shareholders. I'll stop now, turn it over to Mike Pesch, who's going to discuss our U.S. retail P/C brokerage operations. Michael?

Thanks, Pat, and good morning, everyone. As Pat said, my name is Mike Pesch, and I'm the leader of our U.S. Retail Property/Casualty Brokerage operations. It's great to be speaking to this group again, and I look forward to seeing folks face-to-face again at future IR meetings. Today, I'm going to discuss 3 topics. First, I'll give you an overview of our U.S. retail P/C business. Second, I'll discuss the current rate environment. And third, I'll conclude with some observations from April and May. So let me start by dimensioning our retail P/C business in the U.S. In 2019, we finished the year with almost $1.6 billion in revenues, which positioned us as the third largest P/C retail broker in the country according to Business Insurance. We placed more than $10 billion of premium annually through almost 200 offices and have approximately 6,900 employees, including almost 1,800 in our centers of excellence. Our operations are focused on middle to upper middle-market clients, including commercial enterprises, public entities and non-for-profit businesses. Typically, we are placing between $100,000 and $2.5 million of premium for our clients, meaning we are generating between $10,000 to $250,000 of annual commission or fee revenues. This means our clients range from mid-market businesses to large risk management accounts. We also have a decent-sized small commercial personal lines and affinity customer base as well. We find that our core middle-market clients typically don't have an internal or dedicated risk management team to buy or handle their insurance coverages, and that's important because those folks align nicely with our value proposition. They have needs for an outsourced risk manager. This makes for a more consultative sale versus just placing insurance coverage. For us, our retail value proposition for property/casualty is called CORE360. It's the approach we take when we evaluate our clients' risk management program. We focus on 6 key cost drivers of a company's total cost of risk, including program structure, coverage gaps, uninsurable losses, loss prevention and claims, contract liability and of course, premiums. CORE360 embeds Gallagher inside our clients' businesses and gives us an opportunity to say this is why we're different. This is why being with Gallagher makes a difference, and that truly resonates with our clients. Our retail brokerage operations are organized around 30 niche practice groups, specific industries in which we have developed depth and expertise. We see these specialized groups as a competitive advantage, allowing us to better understand our clients' businesses and develop value-added products and services unique to those industries. Our niche leaders are there to help and support our producers to make sure that we're addressing specific risks and challenges that those industries are facing on a day-in and day-out basis. For example, take a higher education account. You simply can't handle an account like this if you don't know anything about the unique needs and risks that a college or university are facing. So we attract and retain customers over the long haul by providing highly tailored industry coverage and risk solutions. That's nearly impossible for smaller brokers. In fact, our primary competitors are regional or local brokers. We know, as Pat said, from our data that around 90% of the time, we are competing with brokers that are smaller than us. We bring expertise through our niches and data-driven insights that smaller brokers just can't match. This superior competitive positioning and our differentiated value proposition has led us to really nice organic growth and margins. In fact, over the past couple of years, organic has been around 5%. And our retention consistently tracked in the low to mid-90s with double-digit new business production as a percentage of our trailing revenue. Further, we are growing with a very high level of profitability. Adjusted EBITDAC margins are around 30% as our businesses capitalize on scale and the utilization of our centers of excellence. Moving on to mergers. As Pat mentioned, M&A is a key driver for our business, and we completed more than 75 acquisitions over the past 5 years, including 16 in 2019 and 3 during the first quarter of 2020. Our M&A pipeline is solid, and we're growing as we continue to talk to more and more firms interested in joining a strategic like Gallagher. We have a lot of people out there who are building relationships with potential merger partners, including our 10 regional presidents, the 200 branch managers beneath them and a dedicated team of M&A professionals. Our sweet spot is with firms generating between $5 million to $10 million of annualized revenues. While we think merger opportunities will increase in this environment, our #1 priority is getting the culture right. We are not in any hurry, and we are not rushing. We are looking for the right fit and the right partners that want to be with Gallagher for the long term. Operationally, I believe our U.S. retail P/C business is in great shape. We've devoted significant time and resources over the past 15 years, streamlining and standardizing processes across offices, moving into a common agency management system and leveraging our centers of excellence. It's also been phenomenal watching our folks adapt to this new working environment. As Pat mentioned, effectively all of our colleagues are working from home and that move happened in just a matter of days. All of it was possible because of the hard work of years past, and we haven't experienced any noteworthy service disruptions. And our producers have adapted to the new environment as well. They are not sitting idle. They are staying true to the Gallagher sales culture, being both proactive and aggressive. New client appointments generally start with a phone call and that hasn't changed. However, we are adding more external content like our recent return-to-workplace webinar, which highlighted our expertise across the organization and has led to some new business wins. We are seeing more and more instances where we are winning without meeting clients face-to-face, where conversations, presentations and proposals are delivered and agreed upon all in a virtual setting. Bottom line, our entrepreneurial culture is showing through this pandemic. Now moving on to my second topic, the market and the pricing environment. I would describe the U.S. market as firm with terms and conditions becoming more difficult. Overall, first quarter price increases in the U.S. were close to about 6% to 7%, with strengthening in property and umbrella. And thus far, here in the second quarter, we are seeing very similar rate changes. For example, property is up about 10%; professional liability, 9%; commercial auto, up 5%; casualty, up 4%; and then as you heard from Pat, workers' compensation is down about 3%. But remember, not all of this will show up in our organic. Our job is to help our clients mitigate increasing prices by shopping their coverages and also showing them how to tailor their programs such as increasing deductibles or reducing limits to ensure their risk management programs fits their budgets. And finally, I'll conclude with some specific thoughts on the impact of COVID here in April and May on organic and on EBITDAC. First, organic growth. To provide some context, our organic growth in 2019 was about 5.5%, give or take, about the same in the first quarter of 2020 as well. Based on what we are seeing thus far, I think second quarter might be about half that, and here is why. New business is running about 1.5 points lower. Retentions, however, are running about 0.5 point better. Midterm policy adjustments are running about 1 point lower than before COVID. And finally, workers' compensation is costing us about 1 full point. I'm really pleased that we are not seeing a significant amount of cancellations, which means our clients are weathering the storm. In fact, most of the midterm adjustments seem to be companies pressing pause on some of their business activity rather than canceling coverages entirely. Part of what we are seeing on our renewals, too, is that for most of our customers, to the extent we are seeing exposure units decline, rate is offsetting all or a large part of the exposure unit decline. For example, when we break our business into high-, medium- and low-impact COVID industries, the high category is running closer to flat, while medium and low impact are positive here in the second quarter. Primary exception, again, to that is workers' compensation. That's down 10% across the board when you combine both rate and exposure. Of our $1.6 billion of revenues, about $150 million comes from workers' compensation. In terms of EBITDAC profit, as Pat mentioned, we have taken steps to manage our expenses, taking great care to maintain our ability to provide high-quality service and not reduce our ability to grow in the future. Our playbook includes: clamping down on operating expenses and use of external resources, accelerating several cost containment and automation projects already underway, and we have implemented a hiring freeze for nonproducers. And we have adjusted our workforce, which, frankly, is just further use of our centers of excellence and voluntary attrition is a big portion of that. These actions should more than offset the reduced level of organic here in the second quarter. So we would expect to see our EBITDAC margin profits increase more than organic. But despite some of the obvious headwinds, we actually feel pretty good about our business. And thus far, results have been trending in line with our expectations. I'm confident that we have the right platform, people and tools to capitalize on an economic recovery. Okay. I'll stop and turn it over to Tom Gallagher, who's going to discuss our international P/C brokerage operations. Tom?

Thanks, Mike, and good morning to all of you on the call. This is Tom, and I lead our Global Property and Casualty Brokerage units. Mike took the domestic piece. So today, I'll tackle the international portion of our P&C operation. Let me begin by dimensioning our businesses, then speak to our recent performance, the pricing environment, and then I'll close with a few data points from April and May. Our international P&C operations finished 2019 with approximately $1.6 billion in annual revenues, and we placed more than $10 billion of premium on behalf of our clients through about 300 offices, and we have 8,600 employees outside of the United States. While we operate in wholly owned or substantially owned brokerages in 45 different countries, our retail brokerage business is predominantly in the U.K., Canada, Australia and New Zealand. As in the U.S., we're focused on middle-market clients. We also have small business, personal lines, affinity and a very strong risk management practice. Beyond retail, we also have a large London-based specialty lines brokerage and now our 100% owned reinsurance brokerage operation. So frankly, a very diverse group of businesses around the world. Let me speak to our business and break it down by geography, starting with the U.K. We're a top 5 retail broker in the U.K., generating about $400 million of revenue annually. Like our U.S. counterparts, we utilize a niche specialist network and have more than 100 offices, mostly in smaller cities. Our London specialty and reinsurance operation is another $400 million of revenue. Here, we operate both as a retail and wholesale broker. Moving to Australia and New Zealand, combined, these operations generate around $350 million of revenue annually. We're the largest retail broker in New Zealand and a top 5 retail broker in Australia. Lastly, our Canadian operation generated close to $200 million of revenue during 2019. We're a leading franchise in Canada, operating in 7 of the 10 provinces through more than 40 different offices. For the most part, we are building our international businesses following a similar path paved by our U.S. operations. We are leveraging best practices across our global retail businesses to drive organic growth, source and integrate M&A opportunities and use our operational expertise to capitalize on scale advantages without geographical constraints. For example, we've implemented CORE360 as our global go-to-market strategy and value proposition. What Mike is doing in our U.S. business can be tailored, applied and delivered to our retail clients around the world. It also goes the other way around. Creative sales ideas and niche specialisms are being adopted by our U.S. operations from their international colleagues. Our culture is strong and it resonates internationally too. I echo Mike's sentiment that our producers are adapting to the new environment, and it's evident to me that the Gallagher sales culture is alive and well. Content developed domestically or internationally is quickly made available to our clients and prospects around the globe. Think thought leadership, webinars and other virtual sales events. These are capabilities and insights that smaller brokers, the ones that we are competing with most of the time, just cannot match. Moving to our mergers and acquisitions. Our international M&A activity during 2019 was excellent. We completed 12 mergers with an estimated annualized revenue of $235 million. We are continuing to see a large number of opportunities outside the U.S., which tells me our story is resonating more and more in international markets. We are looking for partners that want to fully leverage our tools, our data and our niches, partners who are not satisfied remaining the same. They want to change, they want to be able to support their clients and grow their books of business. And many times, they are looking for a long-term career path for their people. Partnering with Gallagher can offer them all of these opportunities. In terms of our organic growth, margins and the pricing environment, let me walk you around the world. In 2019, U.K. retail organic was running close to 5% and adjusted EBITDAC margins were pushing 25%. Exposure growth was modest while the P/C pricing environment improved through most of 2019. Overall, pricing increases were 1% to 2% in the first half of 2019 and were up to 4% by the fourth quarter and into the first quarter of 2020. The first quarter of 2020 organic and margins were about the same. On the specialty side, 2019 organic growth was high single digits and margins were approaching 30%. Pricing across most specialty classes was up at least 5% to 10%, and rate increases accelerated over the course of the year and into 2020. First quarter 2020 organic was over 10% and margins were slightly over 30%. Canada had excellent organic growth, call it, mid- to single -- mid- to high single digits and margins around 30% in 2019. Another favorable pricing story in Canada, with rates up high single digits to low double digits across most classes but predominantly driven by property and commercial auto. First quarter 2020 Canada posted slightly stronger organic and better margin. Moving to Australia and New Zealand. 2019 organic pushed 7% and margins nicely at 30%, with Australia in the mid-20s and New Zealand posting margins consistently above 30%. Australia and New Zealand were seeing rates much higher in 2019 than in 2018, which helped growth. First quarter 2020, we are not seeing the same level of rate increases. This caused organic to be a bit softer, call it, low single digits, but margins held up nicely as our international operational improvement efforts paid off. So let me finish up with some observations about the second quarter, including the impact from COVID. When I combine our international P&C businesses together, I'm seeing new business 1 point lower, retentions a bit better and about 2 points of unfavorable impact from midterm policy changes. Canada was a bit better than that. U.K. and Australia, a bit lower, and New Zealand was at the average. When I look at our London specialty operations, I'm seeing new business down a bit and strong retention levels, similar to last year. This makes sense. In New Zealand, the economy has reopened, and the team is mostly back in the office. After a slowdown in new business towards the end of April and into May, the team is refinding its stride in June. And so far, activity this month was very similar to last year. Australia appears to be a couple of weeks behind them, already moving toward a more normal level of new business. Canada is posting excellent new business this year and its economy is coming back. And the U.K. is still slower to reopen, so it is lagging the average. So while I would like to have -- so while I would have liked the international business to hold up a bit better like the U.S. I'm encouraged that these economies reopen -- as these economies reopen, we will see business rebound as well. In addition, across all geographies, price increases are offsetting exposure declines in industries that have a low or moderate impact from COVID. For high-impact industries, pricing increases are not keeping up with the exposure changes in New Zealand, are about equal in the U.K. and up a bit in Australia. In Canada where our business is skewed more towards property, price increases are offsetting exposure change even in the high-impact industries. And unlike our domestic P&C operations, most of our international operations do not have workers' compensation, so that naturally doesn't impact our non-U.S. operations. In terms of EBITDAC profits, we're following the same playbook as Mike, clamping down on operating expenses, letting attrition and some furloughs tighten our workforce ranks and continuing to shift our work into our centers of excellence. So we feel pretty good about the international P/C market environment. Rate in many instances is mostly mitigating exposure changes. Economic reopening is starting to roll through in the countries in which we operate. And operations continue to serve our clients virtually with very little, if any, disruptions. So I'm encouraged and optimistic about where we are today, and I'm excited about the future. Okay. I'll stop now and turn it over to Joel Cavaness, who's going to discuss our domestic wholesale brokerage operations, known as RPS. Joel?

Thanks, Tom. Good morning, everyone. I'm Joel Cavaness, the leader of our Domestic Property/Casualty Wholesale intermediary, which trades under the name of Risk Placement Services. My comments today will follow the same format as previous speakers. First, I'll start with an overview of RPS, then I'm going to provide some comments on P&C pricing. And then third, I'll wrap up with some observations related to COVID 19. RPS started from scratch 1997 with just 4 employees and has since grown to the fourth largest wholesale broker in the U.S. We have more than 2,300 colleagues. We finished 2019 with approximately $425 million in annual revenues, and we placed about $4 billion of premium on behalf of our clients. Remember, as a wholesaler, our customer base are not businesses themselves, but rather the independent agents and brokers that need our capabilities, products and carrier relationships. About 25 of our -- 25% of our business comes from Gallagher retailers, while the other remaining 75% comes from other non-Gallagher agents and brokers. Let me walk you through our key businesses, starting with open brokerage. Open brokerage is basically helping a retail broker who is having a difficult time placing a line of coverage or needs access to a specialty coverage or market they don't have. In this case, we go out to the market and negotiate on behalf of the retailer and their clients. It is very specialized and can range from hard-to-place property like earthquake or flood, or to casualty like long-haul trucking or liquor liability. Many times, these placements are further complicated with multiple layers and multiple carriers involved. Next, we have our MGA and program businesses. Here, we underwrite, reprice, rebind and we collect premium and we issue the policy, but we don't take any of the underwriting risk. We have about 40 programs focused on specific types of entities or coverage. For example, our commercial lines program range from public entities to country clubs to amateur sports. And personal lines programs include like nonstandard auto, manufactured homes and low-value dwellings. And finally, we have a standard lines aggregation where we provide retail agents access to admitted products from a particular carrier. For example, a local agency in, say, Maine, might be too small to get a direct Chubb appointment. However, the agency can still access Chubb products through us. In essence, it gives that Maine agency more products for its customers. Our goal is to be a recognized leader in the intermediary market by providing a wide range of services across a large distribution platform. We compete with many different wholesalers and ultimately, we win because of the speed of our response, our ease of doing business, our product breadth and the strength of our carrier relationships. In this environment, as you heard Mike say, rates are increasing, capacity is shrinking and terms and conditions are becoming more difficult. RPS has become a lot more popular with retailers as they need our help with their placement. This is leading to more opportunities for us. Our execution over the past couple of months is unchanged. We're open for business. We're supporting our retailers and maintaining fast turnaround times. While we are seeing clients less face-to-face, the number of phone calls or video conferences has increased dramatically and has been pretty darn effective. In 2019, our open brokerage business posted nearly double-digit organic. Programs in our aggregation businesses were in the low single digits, mostly due to the repricing of one particular program, otherwise, in the mid-single digits, too. Profitability has been solid as well with adjusted EBITDAC margin in the 20s and 2 have been further leveraged our centers of excellence and deliver extremely high-quality service. RPS is also a seasoned acquirer with over 50 acquisitions since 2000, including 2 so far this year. I think we picked the best partners, ones that fit culturally, are additive to our business and provide us with additional M&A opportunities in new spaces that RPS wants to expand. Most of our activity has been focused in the MGA and program space, largely because there are simply thousands of MGAs in the U.S. They choose to join us because they see that together, we can make investments in data and open doors to our already established relationships with over 13,000 retailers. We believe RPS is a natural home for these businesses, especially as retail brokers consolidate their approved list of wholesalers. Moving to the pricing environment. Wholesalers tend to see rates move a little earlier than retailers, so add 1 point or 2 what Mike has seen. In the end, overall rate is up about 9% in April and May. This includes double-digit increases in property and marine and mid-single-digit increases in professional liability and casualty. So we're seeing rate as pretty broad-based outside of workers' compensation. Certainly, capacity has tightened, specifically from umbrella or excess layers. Fewer carriers have appetites for these risks, and the carriers that are still willing to quote are reducing the limits that they provide. We, too, have segmented our business into high, moderate and low COVID-impact industries. Let me give you a sense of what we're seeing here in this quarter. For high-impact industries, open brokerage premiums are up year-over-year, which would suggest pricing is exceeding exposure changes. But on the program and binding side, rate increases seem to be falling a bit short of exposure changes, not a lot, just not covering the decrease in exposure units. In the low-impact industries, we're seeing a significant increase in open brokerage premiums as rate is exceeding the exposure change by a wide margin, while program and binding businesses are flattish. In other words, rate is offsetting the exposure declines. This makes sense as much of our MGA and program business is casualty lines, whereas our open brokerage business tends to be skewed towards property lines, which are less impacted by COVID. Our retention rates in May are very similar to pre-COVID levels. New business is up in open brokerage, but programs are down. And for our clients not up for renewal, we aren't seeing a meaningful change in midterm policy adjustments nor cancellations either. This is encouraging as it seems that revenue headwinds are mostly related to a pause in activity rather than companies going out of business. Let me give you 3 examples. First, take our amateur sports program. We tend to see an influx of submissions related to summer and fall sports tournaments during the second quarter. All of those organizations were frozen, not knowing if they were going to be able to play. So we didn't see the usual flow of business in April and May. However, as I look at June, we're seeing submission activity here moving closer to normal. It's early, but we're seeing an uptick. Another encouraging sign we are seeing is within the trucking space, which we believe is a leading indicator for future economic activity. Many trucks had been sitting idle during April and most of May. Now here in early June, we're seeing a reversal of this trend as demand bounces back. Freight rates are up, they are moving higher and trucks are added back to policies. And my third and last example is New York construction. There was a 2- or 3-month moratorium on construction projects, which put a big pause on activity. As these moratoriums are lifted, we are already seeing more New York construction-related submissions come across our desks. So when it comes to our EBITDAC profits, we, too, are taking all the actions that you heard already today. I won't repeat them for the interest of time, but they're absolutely filling the hole created by our lost revenues and even more. In summary, our open brokerage business is performing really well, thanks both to rate and a difficult market. While our MGA and program business had a couple of rough spots, but we're seeing volumes ticking higher. Overall, I feel good about our business, our competitive position, and I remain optimistic about the E&S market. Okay. I'll stop now, and I'm going to turn it over to Bill Ziebell, who's going to discuss our employee benefit consulting operations. Bill?

Thanks, Joel, and good morning, everyone. I am Bill Ziebell, and I lead our employee benefits and HR consulting business. Mike, Tom and Joel have focused previously on property and casualty, so my comments will shift to the employee benefits side. I'll follow a similar structure for my comments today, provide an overview of the business and then give you some insights on into April and May. GBS began in the mid-'70s and has grown to the fourth largest benefits broker in the world, generating over $1.2 billion of revenue during 2019. Our 4,500 colleagues operate out of more than 100 different offices, spread across the U.S., the U.K., Canada and Australia. About 90% of our revenues are domestic with 10% outside of the U.S. borders. We sell traditional medical, disability, life, dental, vision and voluntary insurance products that employers provide to their employees. We also advise on plan designs, funding alternatives and financial projections of these plans. That's about 70% to 75% of our revenues. The other 25% comes from consulting on HR and compensation plans, pharmacy benefit management services, retirement plan consulting, executive benefits, employee communications and other services that help employers address their human capital needs. We also target the middle market, just like our property/casualty counterparts. We define the middle market as a client that has somewhere between 100 and 5,000 employees. Like our retail P&C operations, we provide resources and capabilities that most smaller competitors just don't have. We also serve employers less than 100 and larger corporate enterprises, by offering a fresh alternative to some of our bigger competitors. Earlier, you heard Mike and Tom talk about their clients' total cost of risk and their value proposition, CORE360. We have a similar value proposition which looks at all the levers that an employer has to attract, engage and retain talent. Ours is called Gallagher Better Works. Gallagher Better Works centers on the full spectrum of organizational well-being, how to maximize the workforce by investing in physical and emotional health, financial well-being and offering career growth opportunities. We provide and tailor solutions that hit on and maximize each of these. We know from our pre-COVID surveys that attracting and retaining talent was the top priority for most employers while lowering costs was secondary. In the current environment, cost control has jumped ahead as the top objective of most businesses. While our goal is to help employers maximize productivity of their workforce, we offer strategies to lower costs as well. We believe our client-centric approach is working, and we see it in our Net Promoter Scores. Our scores are hovering above the 80% level, far exceeding industry norms, and our clients recommend us for our thought leadership, strategic thinking and the overall value we bring to the table. Our benefits business has averaged mid-single-digit organic in recent years with mid-90% retention and high single-digit new business growth. And like our P&C counterparts, our growth has been accompanied by a high level of profitability with adjusted EBITDAC margin in mid- to high 20s. While we have clearly seen scale benefits as we grow, we are in the early stages of utilizing our offshore centers of excellence, which should drive productivity and quality improvements in the future as we've seen on the P&C side. We are also actively engaged in mergers and acquisitions, completing 15 acquisitions during 2019. We have closed 1 merger during 2020, and our pipeline remains quite strong. Benefit consulting firms want to join Gallagher because we have what everyone wants, resources. We have niche expertise. We have content. We have marketing resources, and we have superior technology and tools. Operationally, GBS is performing very well. Effectively all of our colleagues are working from home. And it's comforting to see our people take their new work environment in stride. They've been very busy working on compliance issues with their clients, the new laws being passed in every country, strategies to help lower costs as well as using some of our tools to help self-funded employers calculate the cost impact to their health plans. Importantly, our employees remain engaged and focused on servicing their clients. We surveyed them a few weeks ago, and job satisfaction was exceptional, in the 99th percentile, which can be described as world class, and it says a lot about our cohesive Gallagher culture and the efforts of our teams to stay together, even while being apart. We at GBS, along with our P&C colleagues, recently hosted a multi-disciplined return-to-the-workplace webinar. I think it's a major differentiator of what Gallagher can provide. How to return employees to their offices is an important decision for all companies and their leaders and will almost certainly be the biggest risk management challenge most companies face for the foreseeable future. Cross-divisional efforts like these further distinguish Gallagher from the smaller brokers and consultants we are competing with day-in and day-out, and we continue to like our new business chances in this environment. Let me finish up with some observations regarding April and May. I'll start domestically. Again, that's about 90% of our revenues and 80% of that is traditional insurance products like medical, dental, vision, et cetera. We are reading the headlines of -- we're all reading the headlines of significant unemployment, but behind that news here's what we are seeing, which is mitigating the unemployment levels. First, like Mike and Joel said, we are not seeing many companies actually go out of business. Second, our client retention has been rather resilient in the current environment, in the mid-90s and very similar to pre pandemic levels. Lastly, we are not seeing the full impact of unemployment in our numbers because of 3 factors. First, the unemployment figures include workers that have been furloughed, but the vast majority of furloughed employees are still receiving their benefits through employer-sponsored plans, so they are still covered lives. Second, if an employee is let go, through their purchase of COBRA, they remain on their old employers' health plan, just bearing more of the cost, and again, still a covered life. And third, we have a more favorable business mix that is skewed toward the higher end of the middle market, and we're not seeing -- I'm sorry, we are not big in those hardest-hit industries like hospitality but rather more heavily weighted toward more resilient employers like public entities, for example. On the other hand, it is harder to sell new business as employers are not as willing to consider new ideas while they are treading water and thinking more about workforce reductions than attracting and retaining talent. Shifting to the other 20% of our domestic business. Again, that's our fee-for-service, which seems to be holding up better, specifically, that's our retirement and pharmacy benefit management businesses. Internationally, while only 10% of our total revenues, we are seeing supportive economic policy actions by foreign governments. In the U.K., we are only forecasting a revenue decline of about 5%. In Canada, some recent new business should lead to positive organic this year. And in Australia, the business is mostly asset-based versus headcount and unemployment levels play less of a role. All in, outside the U.S., call it, down single -- low single digits for 2020. So coming off of 2019 and first quarter 2020, where we were posting close to 5% organic, I think lesser new business, combined with fewer covered lives as a result of unemployment, in the high single to low double digits, will cause us to be flat to down a couple of points organically here in the second quarter. That said, we too have been adjusting our cost structure, both in terms of our workforce costs as well as our operating expenses, running the same playbook as you've heard from the other guys today. Despite these obvious growth headwinds, we feel good about our ability to quickly adjust our expenses, thus delivering EBITDAC better than what we did in 2019. And with a little luck that we are now past the peak unemployment levels, getting people back to work might actually give us a little bit of a tailwind in the second half. Like I said earlier, our folks are energized and committed to the cause, and that gives me a lot of excitement about our future. All right. I'll stop now and turn it over to Scott Hudson, who's going to discuss our Risk Management segment, also known as Gallagher Bassett. Scott?

Thanks, Bill, and good morning, everyone. As Bill said, my name is Scott Hudson, and I lead Gallagher Bassett, which is our third-party claims administration business, and as shown in our financial statements, as our Risk Management segment. This morning, I'll provide you with some information about Gallagher Bassett's business, and then I'll wrap up with some comments on how we're seeing our year play out. Gallagher Bassett, or GB for short, was formed in 1962 by Jim Gallagher and Sterling Bassett. And today, we're one of the world's largest P&C third-party claims administrators. In 2019, GB generated over $800 million of revenue, of which 83% was domestic and 17% international, mostly in Australia, the U.K. and Canada. We have 5,800 employees. And prior to COVID, we had already close to 50% of our U.S. employees working from home. So it was seamless to move the remainder of our colleagues into a work-from-home environment over the last couple of months. Annually, we handle about 1 million claims and pay out well in excess of $10 billion of claim payments on behalf of our clients. We don't take underwriting risk. But this would make us the eighth largest P&C insurance company in the U.S. if we were measured by total claims paid, which gives you a sense of our scale. About 70% of our volume is from workers' compensation, 20% liability and 10% property claims, very little of which is storm chasing. We also have a nice specialty offering for lines -- specialty operating lines for products like product liability, medical malpractice, professional liability and cyber. So today, we can talk to any of our clients about a well-rounded set of services for a large portion of their exposures that they have throughout their businesses. We serve 4 distinct client segments. Our largest segment is large commercial clients who self-insure or have large deductible programs and then outsource to us the claims resolution process. Second, we've got public sector clients, which include local municipalities, school districts, state entities and some federal governments. This is the largest portion of our client base in Australia, where we work with their state-sponsored work comp schemes. Third, we have our alternative market or group captive clients. These are generally pooled entities that utilize us for their claims infrastructure. And then fourth, we serve insurance carriers directly. We're helping more and more carriers without sourcing a portion of their claims handling, and this continues to be a large -- a fast-growing segment for us. While we segment our clients into 4 different groups, it's not always the lowest-cost way of handling that they come to us for. Rather clients choose us because of our expertise and that we deliver the best claim outcomes. Now the best claim outcome differs depending upon the client. When you're dealing with a specific insurance carrier or specific commercial entity, they're going to want their claims handled in a certain way. So we customize our services to align with our clients' expectations, specifically, back to work sooner, brand protection or customer loyalty and in some cases, lower cost. That's how we go about adding value for our clients. Our revenue retention runs generally in the mid- to upper 90s, so the business is very sticky. New business generation tends to be a bit lumpier, moving around from quarter-to-quarter because many of our prospects have very large volumes. We are more in the upper, middle and large market space. And as a result, over the last 3 years, our quarterly organic growth can bounce between 2% and 10%, but annually, we end up running around 5%. We were running about that in 2019 and the first quarter of 2020 before the pandemic. We also grow through M&A, but not to the levels you'll see in the brokerage businesses. Our industry is already highly consolidated and few larger customers are using local TPAs. So M&A just to add scale is not our approach. We have plenty of scale in our core products and services. Rather, we look for highly specialized and complementary claim adjusting and risk consulting entities that give us a new capability, a new product or deeper technical expertise. Occasionally, we will find a merger partner that rounds out a particular geography, but that has been rare in recent years. At the end of the day, we ask ourselves a very simple question, would this acquisition help us deliver better claim results for our clients? We did complete 3 acquisitions last year, all of which were -- all of which either added or expanded our capabilities. Looking forward, we have a nice pipeline of opportunities, however, we have yet to complete any acquisitions thus far in 2020. Over the last several years, Gallagher Bassett's margins have been in the 17% to 17.5% range, and we believe this is industry leading. It's important to note that even with that level of margin, it still allows us to make substantial investments into improving our product and service offerings. Coming to 2020, we had set our sights on growing over 5% and moving our margin up 0.5 point or so. Well, with the pandemic and the resulting economic environment, our organic growth goal is out the window, so we've recalibrated. We now have 3 main operating priorities for 2020. First, our top priority is making sure we continue to deliver the best claim outcomes for our clients. Ultimately, that is the product we've sold to our clients and what we are expected to deliver. Second, we are targeting full year 2020 adjusted EBITDAC similar to last year's EBITDAC of about $150 million, even with our 2020 revenues reforecasted to be down $30 million relative to 2019. Over the last 75 days, we have proactively managed the size of our workforce and implemented expense controls, so we can appropriately scale our business and mitigate the expected revenue softness. And third, we need to keep our team focused and energized. As the economy recovers, our customers' businesses will recover and so claims will follow. We must ensure our team is fully prepared for the eventual rebound in claims. Let me walk you through what we're seeing thus far in the second quarter. First, our value proposition of delivering demonstrably superior claim outcomes continues to resonate with new clients. And we had a number of nice new business wins during the second quarter, and our year-to-date new business sold is well ahead of what it was last year at the same time. Client retention remains at historic levels and even a bit better in some areas of our business. A number of our clients have experienced lulls in their businesses, but we've yet to see any permanent closings or bankruptcies or anything else along those lines. Our current clients are seeing lower business activity across a wide range of industries and geographies. The reduced level of businesses have led to increases in unemployment and have placed considerable pressure on claim activity, particularly in workers' compensation, general liability and auto. Let me translate what this means for revenue using the $210 million we posted in the first quarter as a starting point. So let me break that down. About $110 million of that revenue is proving to be resilient. That's our Australian-based public entity business, our U.S. specialty liability business and our U.S. cost-plus contracts, which are not expected to be meaningfully impacted, and there's 2 reasons for that. First, these revenues are generally not directly tied to claim volume but rather the resources deployed to a specific account. And secondly, clients in these areas are either not as impacted by the downturn or have chosen not to deconstruct established and experienced teams that have the ability to consistently drive exceptional outcomes for their clients. Then we have about $90 million of revenues that are earned on a fee-per-claim basis related to more complex, higher fee claims. While we have seen a decline in the number of new arisings in this area, much of that is being offset by COVID workers' comp claims. So net-net, we'll be down about 15% or $15 million with respect to this type of business. And finally, we have about $10 million of quarterly revenue from high-frequency low-severity claims. Those would be, as an example, our med-only type of claims. Those are off about 50% or $5 million. However, we are seeing that our May claim counts were higher than April, and in the early part of June, they're up again and continuing that trend. So we expect the worst of these declines are likely behind us. Looking forward to Q3 and Q4, we expect to see a further recovery in new arising claims as more and more businesses open back up and employees return to work. Clients such as a large movie theater, a national restaurant group, a global retailer and an airport ground and cargo handling service company, among many others, are already reopening their businesses or have communicated directly to us a near-term increase in business activity, albeit at less than full capacity. Based on our revenue outlook, we have taken appropriate steps to manage our expense base, very similar to what you've heard from the others this morning. For example, we have implemented a revised procurement strategy, postponed certain nonessential business modernization projects, shifted more work to our centers of excellence and reduced or furloughed underutilized employees in many geographies. However, to ensure that we don't negatively impact service to our clients, we've had to carefully rebalance claim loads across adjusters as we adjust the size of our workforce. So this will have an impact on our quarterly results as we march towards our goal of generating full year EBITDAC similar to 2019. First quarter this year, we beat first quarter of 2019 by about $1 million. Second quarter this year, we forecast to give all that beat and maybe a couple million more back. By the third quarter, we should be running equal to last year and maybe recover a couple of million dollars. And by the fourth quarter, we should be above 2019, thus closing out full year 2020 about equal to or up a little bit over what we posted in 2019. Okay. Let me wrap up. Despite the challenge of a lull in new claims arising, our team is focused on 3 things: one, continuing to deliver superior claim outcomes; the second, preserving or slightly bettering full year 2019 EBITDAC; and three, ensuring the team is well positioned for growth as the economies recover. I'll stop now and turn it over to our CFO, Doug Howell. Doug?

Thanks, Scott, and good morning, everyone. Thanks for joining the call today and spending a portion of your day letting us go over our business and give you some real time insights. We hope you find it's helpful and it will give you a better understanding of what's going on here at Gallagher. In a nutshell, I think that we're executing really, really well in the current environment. Today, I'm going to hit on 4 topics. First, I'll recap what you've heard from each of the division leaders on their views of the second quarter. Second, I'll highlight a few items on the CFO Commentary document that we posted on our website this morning, again, most of which relates to our views of the second quarter. Third, I'll then give you some thoughts on organic and EBITDAC for the second half of 2020. And finally, I'll wrap up with some comments on cash and liquidity. Okay. So let me first recap for Brokerage. You heard from our retail P&C leaders, both domestic and international, that's Mike and Tom, that their businesses are holding up pretty well, looking like around 3% organic growth here in the second quarter. Wholesale, you heard Joel say, is a tale of 2 cities. Open brokerage is doing great, but MGA and programs had a lull for a couple of months as employer -- as companies press pause on some of their activity. So let's call our wholesale business organically flat for the quarter. Then you heard Bill talk about our employee benefits business. Still a little bit of a wildcard as unemployment impacts will trickle through the economy, but call our employee benefit business down maybe 2% for the quarter. When you stack all that up, it looks somewhere around 2% organic for our Brokerage segment here in the second quarter. So overall, I would say that our organic is in line to perhaps a little better than our previous expectations that we spoke about during our April 30 earnings call. That said, of course, it's early here in June, and June is a very large month for us, but 2% feels about right at this time. In terms of EBITDAC, the team has done an awesome job. We set a goal of $50 million to $75 million of cost saves this quarter. And as Pat mentioned, we should push the upper end of that with about $60 million dropping into the Brokerage segment and about $12 million to $15 million hitting in the Risk Management segment. So when you step back, we will still grow organically our Brokerage segment top line and our bottom line will grow even more. Just shows you the resiliency of our Brokerage business and the payoff from over a decade or more of the team investing in our operations. You heard Scott Hudson talk about the Risk Management segment. They're focused on employees and clients first, but preserving profits is a close second. We estimate the top line in the second quarter will show the most pressure this quarter, but maybe improve over the second half of the year. Second quarter top line should be down about 10% or $20 million, but EBITDAC should only drop about $3 million, and then we should recover that or more in the second half. That, too, is really impressive work by the team to quickly contract their business and not much have -- not have much EBITDAC slippage at all. Finally, on the second quarter. When you look at the CFO Commentary, you'll see that most everything is in line from what we provided to you on April 30 during our earnings call, except for a couple of items. First, on Page 2 of the CFO Commentary, foreign exchange. The dollar has weakened against major currencies since April. Thus, we believe the full year revenue impact on our Brokerage segment results will be about half of what we previously estimated, with minimal impact on full year EPS and not much change in Risk Management segment either. Next, turning to Page 3. There's not much change here, but we would note that April and May clean energy results were on the lower end of our expectations due to lower economic activity and continued lower natural gas prices. June is looking a little bit better here in the first couple of weeks, but we are tightening our range for the second quarter and just bringing down our full year estimate just a bit. And third, when you go to Page 5 to the rollover revenues. Please take a look at your models for your M&A rollover assumptions. A few million dollar difference from our projections here could be worth $0.01 or so. So it looks like many of the models are projecting $100 million more of rollover revenues versus our current expectation of about $60 million. Remember, we're late in this quarter, so this number is unlikely to change more than a couple of million dollars at most. All right. So most of my comments have, thus far, really related to the second quarter. So here's what we are seeing in the second half. We believe there will be more of a U-shaped recovery, not a V and not an L. Some might even say that within the U-shaped recovery, there might be a series of shallow Ws. For us, if that comes true, that would mean some continued softness in the third quarter but a rebound in the fourth quarter. So if we're at 2% organic in the second, then third quarter might be flat to 2%, but fourth quarter should rebound a bit and maybe be 2%, 3% or even 4% organically. Cost controls in a U-shaped recovery or a series of shallow Ws can still be very effective. So like the second quarter, we should be able to cost save our way through a lull in organic. Finally, some comments on cash and liquidity. Recall that cash receipts had slowed somewhat in April as carriers and regulators extended terms to insurers. We saw stronger cash conversion in May than we did in April. And so far, cash receipts in June are running favorably at -- even at pre-COVID levels. So we don't see any issues here. We also have approximately $1.2 billion of liquidity, consisting of available cash on hand of over $250 million and access to another $950 million on our revolving credit facility. And over the next 2 years, we only have $175 million of upcoming debt maturities. So we're in very good shape here. In addition, you may have noticed that S&P released its issuer credit rating for Gallagher early this week at BBB with a stable outlook. We have historically found ample interest from the private placement market, but now having a solid investment grade public debt rating opens up an even larger base of debt investors should we decide to go that route. So those are my comments. Really great work by the team thus far. Now let's just hope for a safe reopening process that lets us have even better third and fourth quarter and pull off a year that's up over 2019 on all measures. Okay. Those are our comments. I think we're going to go to the operator now and open it up for questions.

[Operator Instructions] Our first question is from Elyse Greenspan with Wells Fargo.

My first question is on the expense program, so the $50 million to $75 million. I guess I'm thinking a little bit beyond the second quarter. So it sounds like organic could be a little weaker in the third quarter and then rebound in the fourth quarter. You guys said $50 million to $75 million, that's around 4% to 6% of your expenses. And so is the goal to keep pushing on that level through the balance of the year, even though organic won't decline by that much? And I have a second part of that question, which is, as we think about 2021, is there a certain level of the expense base that you think could continue to benefit your results on an ongoing basis even when growth rebounds?

Yes. I think I'll answer the 2 pieces on this. And then if some -- if you -- the follow-on. Okay. First and foremost, do we think that we can hold the expense base that we're seeing here in the second quarter, in the third and the fourth if there's a lull in organic like we think? Yes, the answer to that is, yes. We're focusing on that $50 million to $75 million each quarter for the next 3 quarters and even into the first quarter next year, if there's -- if this goes a little bit longer. So yes, I believe we can hold on to those. Longer term, I think we're going to have to take a look at how much of this cost comes back into the organization. I believe there are opportunities to hold on to some of that. Is that half? That would probably be a pretty good result of this. We're seeing some good opportunities in real estate. We're also seeing that we can do some pretty good virtual selling, virtual interaction, virtual meetings, so that should help us on the travel and expense. But some of that will come back into our costs. Our folks do want to be out there talking to their clients, and that requires some travel, some interaction with our customers. So if we could get to 2021 and hold on to half of those savings, I think that would be really, really great work by the team.

Okay. Great. And then my second question, you guys -- your outlook seems pretty good, right, maybe even a little bit better than what you guys said on the earnings call. We're seeing pretty sharp drop in GDP, yet it seems like the exposure impact is probably better than we would expect. Can you just -- I guess, I'm just trying to get color more -- maybe this is for the third quarter given the lag. What are you seeing on the exposure decline? And maybe what the disconnect relative to your business in terms of, right, the decline that we're seeing in GDP and how that's translating into an exposure impact and the overall organic impact that you guys are probably holding up better, I think, relative to expectations?

Yes. I think it might be a mix of our clients. I mean we are heavy in public sector. I also believe that we're not necessarily a Main Street broker, where we're talking to -- where we're selling to very, very small businesses, which seem to have the greater impact during this pandemic crisis. So I think it's probably the mix of our business is probably the #1 reason why we're not seeing it. I also think that there's just a lot of businesses that are -- have the belief that we're coming back. And so they're -- they've just paused their business. You heard a lot of the guys talk today about there seems to be people pressing -- businesses pressing pause on their activity, but they're not going out of business yet. So we'll see what happens in terms of that here in the summer. And then the final thing is that on the P&C side, we are getting tailwind from rate. So that's helping us with our organic. So you've got -- you might have a decline in exposure units, but we're offsetting that significantly by rate increases that are hitting our customers, unfortunately, at exactly at the wrong time, but that does happen. So it's between rate and just the sector that we play in is probably the sum of it.

Okay. And then one last one on M&A. We've seen a little bit of a slowdown just given, right, the lack of ability, right, to meet in person with prospects. Do you think -- as you guys think out about the economy recovering, and Pat, I know you mentioned that you've seen this in the past and that deals kind of can just be pushed out. What's the time frame here? Is it more that you're thinking, right, 2020 and 2021 kind of combined equal what you would have expected in the 2 years pre-COVID? I'm just trying to think about kind of the lag and when you think deal flow might come back and expectations for, I guess, the balance of this year and 2021.

Yes, Elyse, I think that 2021, pretty much for sure. I think this pandemic has really put an awful lot of these private brokers in a different spot. First of all, we've talked about this many, many times, most of these brokers or a good number of them are owned by baby boomers, and unfortunately, we're not getting any younger. And I think they were going along in a pretty darned good environment, bit of a rate increase, economy strong, full employment, and it was a pretty nice business. Frankly, a part of the language that kind of came into the industry was a lifestyle agency, where the owners were living a great lifestyle and the business kind of cooked along. Well, guess what? Things can change and they can change quickly. And I think you're going to see an awful lot of them looking both for greater capabilities for their clients as well as time to exit. And the old exit strategy used to be sell to the younger members of my team. It's getting harder and harder at these competitive levels. The younger members are not going to go borrow and pay the kind of prices that these guys can get on the open market. So I do think 2021 will be -- should be a return to what we saw in the past.

Our next question is from Mike Zaremski with Crédit Suisse.

A first question, just maybe trying to reconcile some comments and think through things. So I think Pat, you said that this event -- pandemic could be one of the largest catastrophes in history, and it's likely causing, if you agree, pricing to accelerate. I guess, on the other hand, though, when we listen to the insurance carrier management teams, they are largely saying that the losses will be contained. Business interruption isn't included within their expectations of losses, at least in a large part. And in the near term, there just haven't been a ton of workers' comp-related COVID claims entering the system. So I guess it's a long-winded question. I mean are you guys seeing a lot of loss activity related to COVID? Because I'm mostly trying to get at whether pricing really does have legs, if ultimately, the management teams are correct in that losses will be potentially much lower than the worst case that investors were thinking early -- in the early days of COVID.

Well, Mike, let me do 2 things. This is Pat. Let me start with a bit of an answer and then throw it to my teammates. But first of all, remember, this market was tightening and firming before COVID even came out on the radar screen. I mean when you take a look at our results for 2019 and going into 2020, you go back to our fourth quarter comments, third quarter comments, we were really in a very, very unique goldilocks environment. Prices were going up, but not at such a rate to call it a hard market, but clients really needed our help. But clearly, firming was there. Terms and conditions were changing. Just the opposite of what we saw in 2008, 2009, where we had a recession and as we came out, we were in the depths of a soft market. So things were already changing and then came the pandemic. Now let me turn it over to the operating guys in the room because I think if we start with Scott, Gallagher Bassett is seeing some activity. And then, Mike, I think, and Bill can kind of fill in with what they're seeing.

Yes, Pat, the -- in terms of claim activity, so the COVID-type claims, I mentioned in my comments that the -- it -- COVID work comp claims have actually softened kind of the overall reduction that we've seen in higher complex work comp claims, probably to the tune of 10% of the overall volume. Now those are not going to persist well into the future. Hopefully, as the other claims start coming back, we won't need those as much. But there's been a significant increase in the number of COVID work comp claims. Very few GL-type COVID claims, there has been a few. We've also seen -- now we don't do a lot of property, but we have seen a pretty significant uptick in business interruption claims as well. And so those 2 things, I think, have directly -- are a result of what's been happening with the pandemic.

Yes. This is Mike Pesch. I would just chime in to say, on the retail property/casualty business, we track our claim reported. And right now, as we track it through early May, mid-May, we had about 3,100 COVID-related claims, and that's a mix of both business interruption and workers' compensation and it's been steadily increasing. And just remember, I mean, while the standard true BI exposure for most insureds, as you've heard from many of the carrier and the carrier leadership, is not typically covered. There was coverage for specific industries that had certain business-related interruption-type coverage, looking to the entertainment industry, where that is largely something that they just buy as a general part of the kind of coverages that they purchase. Many of those coverage forms are manuscript. And those are some significant losses, and we trade in that space fairly significantly. So a good chunk of those 3,100 claims are related to the entertainment and sports-related industries. And those are not small claims. And so I think some of the comments related to the impact of COVID on further right -- rate increases is justified by some of those carriers that do have true exposure to COVID-related claims. And then the jury is still out on workers' compensation and how that will play out in the various states that have suggested that any person who acquires COVID and has worked in the workplace for a certain period of time will automatically have a compensable claim. So lots of still noise up in the air, a lot of stuff up in the air, but I do think we're seeing a small but growing increase in claim activity.

This is Tom Gallagher, and I'll just add a little bit of color as it relates to the U.K. The regulator and the High Court will be making a decision in the coming month as to what is covered under the contracts. There are some carriers that believe that they're in real trouble and -- in terms of what the policies may, in fact, cover. But we'll know very quickly in the U.K. what the direction of travel will be.

Okay. Very, very helpful commentary. My final question is for Joel in terms of wholesale RPS. And I think, yes, you characterized kind of the tale of kind of 2 cities in terms of programs being -- and MGA as being a bit of a lull. We've been hearing a lot about the open brokerage kind of E&S getting a lot more shots on goal. Could you give us a little bit more color on do you see that the broader wholesale market ex MGA and programs growing at a fast pace? Is pricing accelerating? Terms and conditions, are those continuing to tighten?

Sure. Happy to take that. Yes, and the short answer is yes. We're seeing, obviously, a significantly more interest in our capabilities. Submission flow is up substantially. Pricing is up fairly significantly, particular -- especially in particular classes of the business. The limits are being shortened is probably the biggest key to this. Where before, we could place a particular tower with only a few carriers, today, it takes many, many carriers to fill that same tower. I'll give you a quick example, a large -- a very large transportation account that carried $200 million of limits last year with -- to the entire international worldwide insurance market, we were able to only put together $125 million, and they ended up buying $90 million just because the price was somewhat, in their minds, prohibitive. So you are seeing a lot of that. And I can't -- you can't imagine the difficulty putting that together, how much -- how many man hours it took to actually get that completed, especially working way in advance when we started the process. So that's kind of the story of the day. People are putting out much, much shorter limits. They're not willing to expose the balance sheets to large -- very large numbers of millions of -- like they were before. So it's kind of natural. A little bit goes back to the very beginning of the E&S business of taking small bets. We just have to now stack them all together.

Our next question is from Greg Peters with Raymond James.

Pat, if you go back to the performance of the company following the great financial crisis in '08, it seemed like, if recollection is correct, your company performed okay in '08, but then in 2009 and 2010, it -- there was negative organic headwinds. And you've laid out a vision that this year looks like it's going to be okay. What's different this time that might prevent a repeat of what happened around the great financial crisis occurring again as we think about '21 and '22?

Well, Greg, I'm not an economist, but we're coming off an unbelievably strong economy, going into a pandemic which looks like a -- which looks like it's going to be -- if we get green shoots and things start to come back and the economy gets strong again as it was at the end of the year would be good, but the other -- the big difference is rate.

Yes. Okay. In your comments, Doug, you ran through the rollover revenue. And I think you implied that based on the models you've looked at, the numbers for the second quarter are running $40 million heavier than what you're seeing. Can you walk us through what's going on with your comments in the rollover revenue, please?

Yes. I guess I would have to ask maybe Ray to answer that. When we looked at just the kind of consensus estimate, it seemed to me that we weren't picking up some of the rollover revenues, right? I know this has been a historical problem out there. But maybe, Ray, you can add some comment on that.

Sure. Happy to. If you look across the analyst models, it seems that there's maybe 1/3 to 1/2 of their estimated rollover revenues, close to $100 million. I think a lot of folks maybe are thinking activity in the second quarter was as strong as the first quarter. You've seen us close a couple of deals here in the second quarter. So we're just suggesting to go back and take a look at it going forward.

Okay. Also, in the past, I think you've provided us an idea of the amount of cash and capital available on any given year for acquisitions. So given everything that's transpired here through the first 6 months, can you update us on how you view free cash flow for this year? Any pressures around accounts receivable? And then I know you mentioned the debt thing, but can you talk about what type of cash and capital you have available for acquisitions in 2020?

All right. A couple of answers there. We're not seeing liquidity issues for our clients at this point. We have seen no slowdown of any magnitude here in May and June with respect to our cash collections from clients. We had a little bit of a lull in April, made us a little cautious saying, "Okay. Could there be some collection issues there?" We're not seeing that in any magnitude at all here in May and the first 2 weeks of June. So we're not having client slow pay us or no pay us. Second of all, we do have a couple hundred -- $250 million on our balance sheet right now at the end of May. Recall also, though, that we are -- seasonally, the smallest in cash flows in the first -- the first 4 months of the year are our smallest cash flow quarter. So if you were to normalize that, we'd probably have about $400 million, maybe $450 million in our balance sheet if we were sitting, let's say, at the end of August, something like that. So capacity to do M&A, we still believe that this year, if we can outpace our [ EBITDA ] from 2019, should be very similar like we had in 2019, and that was about $1.5 billion of total capacity to do M&A between free cash flows and our ability to borrow. So I think there's not a lot of difference this year. It's more the fact that the supply of deals has slowed down just a little bit for us. So I would say that, again, we said it in our comments that you could see us catching that up pretty quickly in the second half of the year or into next year and have significantly more acquisition activity in 2021.

Great. The final question, and we've talked about this before. But I know Mike and others mentioned the common agency system that you guys are using. Can you give us an idea of what parts of your Brokerage business aren't on this common agency platform? Or maybe the simple answer is everything is on it.

Yes. This is Mike Pesch. As far as the retail -- U.S. retail property casualty business, everything is on our common agency platform. When we do an acquisition, there is a bit of a lag because they may be on a different system, and we have to integrate, of course, and that sometimes gets in the queue depending upon our service providers there to get them on our platform. But it is a big part of what we do. I would say probably the only exception to the common agency system is our Affinity practice, which -- our Affinity practice, as you might recall, was really started from scratch about 4.5, 5 years ago, largely through acquisition. Many of these businesses that we've purchased were really unique businesses that do one specific thing or provide one specific product. And so we have been in the midst over the last 4 years of really tailor-making a separate system that will be commonplace to all of our Affinity practice. And then also, as we add new acquisitions, bolt them on to that system, which we think, a, will pick up efficiencies there; but b, we think we could really use the technology to further grow the business. So that would probably be the only exception in the retail property/casualty.

Now the wholesale side, talk a little bit about that, obviously, we're on a very different system, of course, but I can [ credit ] teams and the other teams. We have -- about 95% of our operations are on common system. Again, the only exception comes down to some of our programs, like Mike explained in the Affinity business. We buy them because of their efficiencies and ability to operate. So some of those systems typically are very specialized. They don't fit the AIM product. So really what we've found is, obviously, the efficiencies gained through everybody being on a common system, through our technology spend, of course. But really the leverage gain that we get out of being on one system is our ability to collect our data and then use our data to assist us in both placements, education to our retailers, and then, of course, our ability to put together programs in the future.

So this is Bill, with GBS. We have predominantly a homegrown record-keeping system for cash receipts. We do use off-the-shelf or market products for invoicing for our fee-for-service business. But generally speaking, probably 90% plus of our business is on the same system there, most of that domestic.

The other thing, too, is that we also have -- each of these systems is feeding in to our One Source database. So when we look at activity on any given day, we have 98% or more of daily transactions that are being scraped into a common system globally that we can analyze. That's why we know exactly how many endorsements we had yesterday, we know how many cancellations, we know how many midterm policy cancellations every day. And the other thing, too, is because of our offshore centers of excellence. So much of this transaction work is being done offshore that we can also look at -- before it hits the system, we can see what's coming in the door today that will hit into the system in a day or so. So we have the ability to look at our system globally through our data system also. Kind of lost you there, Greg. What was that?

Our next question is from Mark Hughes with SunTrust.

Doug, you had suggested 3Q likely to be flat to up 2%, I think, on organic compared to what looks like 2% or so in the second quarter. Hopefully, I'm not mixing apples and oranges there, but could you say why you think 3Q will be softer than 2Q if we're starting to see more momentum?

I think the momentum is going to -- I think new business will lag a little bit. I think that we're running -- and when you look across the whole franchise, if we started off at 5% to 6% kind of coming into COVID, we said workers' comp here in the U.S. would cost us 1 point. Retentions are holding in there, maybe even a little better. And then we have midterm changes that are just -- as people are adjusting their programs, they're not canceling them, they're adjusting their programs, that might cost us 1 point. So you get down to maybe 1.5 points of less new business. So I think that -- I think it's reasonable to say that we had sales in March and April and May here that were started 3 months ago, 4 months ago, 5 months ago. If it's harder to get out and talk to clients today, you could have a little bit of a lag coming into the third quarter. But we're having some really good success. We're signing up some new business without traveling, without doing the traditional appointment setting. So that's why I'm hedging flat, down 1%, up 1%, down 2%, up 2%. I don't know whether it really matters to us, Mark. We think that we've got cost savings in place for us, and we think it will come back. This isn't like we're having just a -- also a huge sector of businesses will not be there in 3 months, 6 months. So that's probably why I'm maybe just a little more cautious on third quarter than second quarter.

And then on the workers' comp, it's been a headwind for quite some time. With COVID claims, any inkling that, that might flatten out or turn positive?

Yes. This is Mike Pesch. Yes, we already are starting to hear that there might be some firming. I don't know that we'll get into positive terrain in 2020. But I can certainly see that we are starting to see the fact that the loss costs that some of the carriers have and their projections for what their loss ratios are going to be in profitability is starting to show. And that's including both COVID and normal operating claims. Now when businesses have -- businesses were shut down, clearly, they weren't having workers' compensation claims. So I think there will be a little bit of a lag. But we are starting to see some momentum in workers' compensation that I think will probably more likely trickle into 2021 from a rating -- a rate standpoint.

Yes. I think -- this is Joel Cavaness. We still do a decent amount of comp business. And it did -- in certain classes of business, we did see just a small amount of lag in some of our programs. But we are starting to see and hear, like Mike, people talking about some additional traction that's going to be needed. Some of the, again, social inflation and different factors in the comp space is having an impact, and people are kind of looking for rate all over the place. So we believe we'll start seeing some additional -- we are seeing additional submissions. And when you get them in the wholesale space, that means they're not getting place in the standard market.

On the property, just -- I think that your description of overall market trends has been accelerating in recent months. On the property side, has property continued to accelerate? Or is it kind of staying at an elevated level?

Yes. I mean I would say I think it's been staying at an elevated level. Again, who knows what this hurricane season will behold. I mean there was a lot of predictions that it might be a bit more challenging than others, but we haven't quite seen that yet, but it's way too early. But we're seeing other spikes in hail and flood that is really affecting, I think, the model that the carriers have put together, and as a consequence, is causing there to be uncertainty from a rate perspective. And when there's uncertainty, they're going to maintain the levels that they're currently at. So I would say, I don't see any massive swings one way or the other. I see just steady increase in property rates, especially for risks that are a bit more challenging.

Yes. So this is Joel. Of course, we tend to work on the very, very large complicated placements or the very difficult-to-insure placements. And to kind of echo what Mike said, the complaint, I guess, is the right proper word, from our risk-taking partners is attritional losses are just eating them alive. They did deals or price deals with specific catastrophic loads and for earthquake or wind or whatever it might be. But really what was eating them up was what Mike was talking about, the attritional losses that they were experiencing. So again, they were -- the pullback in availability, of course, as any economic situation is supply and demand, right? And they're seeing way, way more demand than we're able to provide in the supply chain based on the appetites of these carriers, which have changed dramatically. We're out there trying to put together a $5 billion schedule in a difficult property business, it's not a lot of people running to the door to grab that like they were maybe 1 year, 1.5 years ago.

Our next question is from Meyer Shields with KBW.

Over the long run, I guess, we've developed this rule of thumb that when there are normal GDP inflections that they show up on brokerage revenues on a 1 quarter to 2 quarter lag. Is there anything different about this time, whether it's from the industry perspective or the macro economy, that would make that rule of thumb less relevant or less accurate, I should say?

Meyer, are you asking if -- what kind of lag we're seeing maybe -- and how that -- the impact of the economy rolls through our book, is that -- you kind of broke up a little bit there.

Yes, that's basically where I'm going. In other words, if we see a remarkably strong or a remarkably weak recovery in the back half of this year, should we expect a normal lag to play out in terms of 2021 brokerage growth?

No, I don't think so. I think that insurance is faster to recover. I think it's slower to decline and faster to recover because you have to open up -- you have to get your insurance in place in order to get your business back in business. So the lag that you might be looking at, probably, if you're looking at historical, might have had more to do with rate than it did with actual exposure units or a slower recovery in economy maybe.

Okay. No, that's perfect. That makes a lot sense. Second, completely different direction. All of the brokers out there that are larger than you are, in some sort of consolidation mode, which usually means that there's some talent available. And I was hoping we could get an update on recruitment.

Yes, Meyer, this is Pat. I think that whenever there's disruption and change, we thrive. And certainly, there are opportunities for us to talk to people that possibly weren't even interested in looking at other jobs in the past. We're always looking for good production talent and for people who can help us get stronger, and there's a lot of those discussions going on.

Our next question is from Yaron Kinar with Goldman Sachs.

My first question goes to the reinsurance and ILS market. I think those are areas that you've expanded your capabilities in over the last year or so. Just curious as to what you're seeing there. Appreciate your color on the retail and wholesale markets, but I was curious about reinsurance and ILS specifically.

This is Tom. We've had a very strong season as we go through the ILS process in 2020. It started out a little bit slow in January, but the carriers have been moving further and further into it as the year goes on. When it comes to reinsurance, I see -- I think you're seeing the reinsurance carriers really begin to drive rate, and as a result of -- and retentions. And as a result of it, that's coming through with the primary carriers. So it portends to be a very firm market for the reinsurance industry as well as opportunities in the ILS space.

Can you offer some quantification of rates in the reinsurance space similar to what you did with the primary lines?

I think you're up at least 10 and moves from there. And you've got to remember as well, retentions change at the same time.

Right. Okay. And then another question on international, it actually came from a client. Are you seeing any consolidation or potential for consolidation in the Australian market?

I think the Australian marketplace is particularly interesting right now because Aon and Willis both have significant presence in Australia. So as that begins to consolidate, there's opportunity in that disruption for people standing on the outside of it. The large domestics internally are also, you could call it, in a state of flux. So we see tremendous opportunity for us in Australia throughout 2020 and beyond.

Okay. Got it. And then one more. On M&A, I just want to make sure I understand the comments correctly when you're talking about potentially a catch-up later in the year and into 2021. So are you still thinking 2021 as a $1.5 billion, $1.7 billion M&A opportunity? Or do you think that's kind of the base and then you have a catch-up on top of that?

I think that's the base and the catch-up on top of it.

Okay. So you're not -- it's not like you have cash burning in your pocket now and looking to maybe deploy it through buybacks because you don't see necessarily the M&A opportunity fully caught up by the end of next year. You think that you'll deploy that temporary cash build through M&A later on.

Yes, I think so. I think that that's probably a better question for July. Let's see how things are looking in July. Remember, I said the first quarter -- or the first 4 months are traditionally our lowest cash quarters because that's when we pay out all the incentive compensation around the world. So we'll have the abundance of cash more towards July, August, September, and then we'll take a look at it at that time. I'd like to deploy that in M&A and maybe the M&A pipeline will be back, raring to go at that time.

Got it. One last one for me. E&O, are you seeing any increase in claims? Just because we're seeing all this uncertainty and then questions around business interruption coverage and things of that nature, has that resulted in increased claims against brokers or against Gallagher?

Yes, it has. There are more claims. I think that each one of these will have to be navigated carefully. But whether there's coverage or not, it's not that there's not a lot of black -- there's black and white on that in the policy, it tells you. So once the carrier happens, the carrier has to resolve that first, and then we'd be secondary to that if a client felt that somehow they were misinformed or not well provided. But it's -- that's -- we are -- of course, we're going to get some of those claims. But I wouldn't say right now, it's a huge number by any means at all.

Our next question is from Josh Shanker with Bank of America.

I just want to follow up something that you've answered in Mike Zaremski's question about claims and workers' comp and waiting to see what the legal decisions are. Are individuals who have workers' comp claims waiting to see whether or not their claim is covered? Or are they filing a claim first and whether or not it's covered is going to be decided later?

Yes, I think you're mixing 2 different things. I think on the business interruption cover, that's what Tom Gallagher was talking about. In the U.K., there's a court ruling to come down whether or not it's covered or not. So I think that's what Tom was referencing there. In terms of workers' comp claims, yes, I think that people filed a claim and they -- and then they decided whether or not the employer is going to cover it, if it's self-insured in Gallagher Bassett's place or whether or not it's covered by the primary market. We're waiting for a court ruling on those.

We now have a follow-up question from Elyse Greenspan with Wells Fargo.

I have a few follow-up questions. My first question, some other questioners have mentioned this. We obviously have the big Aon, Willis deal coming, and Marsh was obviously involved in another large transaction. As you guys think about potential opportunities from these deals, are there international markets that you guys are not big in that are kind of on your radar screen? Just trying to think if there is any plan to take advantage of some opportunities to expand the footprint.

Well, first of all, Elyse, we are clearly expanding globally, and we're doing it with caution, but I think, we're doing it very successfully. Since 2014 when we ventured with some pretty sizable deals into Australia, New Zealand, Canada and the U.K., we've added a number of other countries, both in partnerships where you own a majority of the enterprise. So the answer to that is, yes, there will be opportunities that come out of this because these consolidating parties did have partnerships around the world with other trading partners and there are some of those. Now let's put this all in perspective. They're not -- these are not big deals. We're not -- you're not going to see big, mega transactions that -- these folks control their own destiny. In most cases where they have big presence, they will put those operations together. They'll be successful and the fallout will benefit us. But this is not something that you're going to see be a big, big deal.

Okay. That's helpful. Then in terms of the Q2 organic, you guys -- Doug, I think you said U.S. and international would be around 3%. And in the -- going back to kind of the comment from -- throughout the call, it sounded like the U.S. retail, right, was going to be about half of what it was in the Q1. I thought you guys sounded maybe international might not be as strong. But I guess if the combination of the 2 is 3%, is international also going to be about that number in the second quarter? I'm just trying to make sure I...

Yes. Michael Pesch's business, it was running -- and our U.S. retail business was running about 6% coming into COVID. And so we said it's half, that's kind of 3%. And when you mix all the international all together, it's running about the same thing. So when you cut it in half, 2 -- you end up at 2% to 3% there, too.

Okay. That's helpful. Then in terms of -- another question I had in terms of deals, I noticed in the CFO commentary, right, multiples keep coming down, but obviously, fewer deals are closing. As the pipeline picks back up kind of coming out of COVID, do you think that there is going to be a change in deal structure between upfront and earn-outs just given some market uncertainty? Or do you think we'll just go back to deals being structured similarly to how they were before the slowdown?

I think you will have some more in this near term here, a little less down upfront, a little bit more on an earn-out. We're seeing that on deals that we're getting done right now. How do I feel about the multiples is the second piece of your question. Right now, in kind of a smaller space as the -- there -- we're still seeing numbers around in that 7 to 9x range so -- on the smaller. Some of the last couple of ones we've done a little less on the front end, maybe a little bit more on the back end. Traditionally, when we get done and we look at our acquisitions, the multiple pre earn-out and after earn-out is about the same. You could have a situation where with less down on the front maybe, you're paying 7.5 upfront. And when it settles out after the earn-out, you end up paying more like 8, 8.5. So you could have a little -- just a creep up in the short term. Going back, once you get into 2021, if the Brokerage business is still generate -- if we're still having rate increases, the economy is coming back, exposure units are regrowing again -- remember, we're right here at a very difficult time in the market. We're not saying it's hard yet, but if you see that, you could see multiples running a little bit next year too because growth would be there then. So -- but right now, we think that rational sellers are willing to take a little bit more on an earn-out and a little less upfront.

Okay. That's helpful. And then my last question, you guys seeing the pricing momentum based on your disclosures, right, seems to keep picking up. Yet, we're obviously in a situation, right, where companies are feeling a pull and obviously seeing losses from COVID and just the impact of the economy. How have discussions been with clients as you kind of talk about these price increases? Is there a pushback by some, right, that obviously aren't seeing as many claims, right, in the non-COVID-impacted industries? Just trying to think about discussions with clients and their willingness to continue to take price increases?

Yes, Elyse, this is Mike Pesch. I would say as a broker you learn early on that conversations in a hard or hardening market need to happen early and often. And so that's really where you set yourself apart in terms of being able to guide a client through the ins and outs of either not being able to purchase or not wanting to purchase the kind of limits that they historically had or by taking on retentions or looking at creative structures like group captives or single-parent captives depending upon the size of the risk. So I think, I guess, to answer your question, how are clients really taking it? Well, no one appreciates a big increase in their premiums. But I think that the messaging has been pretty consistent in the industry, both from us and from our peers and from the carriers in terms of the social inflation aspects of casualty and some of the challenges with property. That the message is out, so now it's about just navigating through it. And to be very candid, it's been -- our new business, even through COVID, has been very strong. And I think it's because -- we feel it's because a lot of clients, especially in that upper middle market and larger mid-market and risk management are sensing a flight to quality. They need the kind of advisement. They need the kind of coaching that comes with having all the bells and whistles and tools and resources to be able to provide that client with the right advice. And so I think it's really just going to be a race to quality, and our folks are actively out there pursuing new opportunities to be able to coach their clients and prospective clients through this.

Operator, do we have any more calls?

We do have one question left from Phil Stefano with Deutsche Bank.

As we think about the long-term opportunities for some of the expense actions to hold, I was hoping you could talk maybe just qualitatively about it. Were these expense savings that maybe we could have expected more slowly over time and COVID provided us with an exogenous shock to pull them forward? Or were you able to test some systems and capabilities that there are additional expense savings to come through that maybe you hadn't contemplated before and you got tested in a realized scenario to realize that some of these could be sustainable?

I think it's both, Phil. I think that the answer is that there were work streams in place. You heard several of the leaders talk about that, that we pulled forward a little bit faster that these [ were right ]. We talked last fall that we had looked at how do we do a better job of consolidating a lot of our support functions across the globe. Oddly enough, Gallagher, 15 years ago, started working mostly on the middle office layer in our offshore centers of excellence. And really, we were doing bank account reconciliations, et cetera, in offshore, but -- with our colleagues in India. But right now, we're having the ability to consolidate a lot of those support layer functions. So we've pulled that forward a little bit. I think just there's -- real estate is a big opportunity for us. We had already been on a march of reshaping our real estate footprint. But I think now with the ability to platoon or hotel, I think we've tested that. Systems are up and running. So everybody had to make sure they could work remotely, and that's been done. So postage, mailing, express, printing, there's opportunities there. Telecommunications, there's opportunities to consolidate that. So a lot of this is an acceleration of our natural march, but there's -- we've learned some things too along the way that we can do it a little bit faster, better and cheaper. And what I'm really pleased about is that our quality is not slipping. We are not seeing turnaround times decrease. A lot of that work is done offshore anyway for us. So that's not decreasing. So pretty amazing that we can evolve our business a little faster than maybe the pre-COVID march would have been.

Got it. And as we think about the original guidance for the $50 million to $75 million in actions, and then it felt like there was a low single-digit potential for furlough of employees. Was the furlough included in that $50 million to $75 million? Or maybe you can give us an update. And just kind of -- I felt like in at least one of the prepared remarks, furlough was mentioned, an update on kind of where we might be in that percentage.

Yes. I think in terms of our -- let me start backwards on our total workforce of about 34,000 people globally. We think that between furloughs and attrition and maybe some targeted outplacements, we think we can contract the workforce by about 3%. That's kind of the number. So if you think about it, we're talking about 1,000, 1,500 people in that -- 1,000 people in that. Before COVID, we had attrition of about 300 people a month anyway. So when you think about 1,000 being pulled out of the organization, it's pretty natural through attrition and then just some workload levelizing across divisions, branches and geographies. So if you think about the contraction of the workforce, not really where we're going right now, mostly with operating expense.

Thank you, everybody. This does conclude today's presentation. You may disconnect your lines at this time, and have a wonderful day.

Thanks, everybody.