Arthur J. Gallagher & Company (AJG) — Q1 2020 Earnings Call Transcript

Thank you very much. Good afternoon, everyone, and thank you for joining us for our first quarter 2020 earnings call. Also on the call today is Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. Before we get into our first quarter results, let me acknowledge those directly affected by COVID-19, including those on the front lines of the global pandemic. We owe them all our dedication and courage. At Gallagher, our priority is the health and safety of our colleagues. We're very fortunate that less than 50 of our 34,000 associates have contracted the virus, nearly all of whom have fully recovered. For a few that are still self-quarantined, we wish you a speedy recovery. I am incredibly proud of how all our associates have performed over the past six weeks. In March, we mobilized our business continuity plans around the globe, and we're up and running, working from home in a few days. We are working remotely without missing a step. This is the payoff of our relentless efforts over the past decade to standardize work, streamline processes and operate using common systems. All of our colleagues are productive, too. At home, they have the right tools and systems to deliver the highest quality service to our clients. And that includes more than 5,000 associates that are based in our service centers. Every day, we see countless examples of our employees selflessly giving back, from providing first responders with protective equipment to sending meals to senior citizens to distributing masks to the less fortunate. I’m proud but not surprised at the level of dedication, support and professionalism from all of our colleagues around the world. I thank every single one of you from the bottom of my heart. Now, moving to our first quarter financial performance for our combined Brokerage and Risk Management segments, here are some highlights. We had a terrific revenue growth quarter. Total reported revenue growth of 4% and adjusted revenue growth of 9%, which includes a 3% reduction due to COVID. Included in that is organic growth of 3.3%, but again, we had nearly 3% of an unfavorable impact due to COVID-19. This would have been another quarter like our fourth quarter last year. Even with around a 2% adverse impact from COVID-19, we posted a net earnings margin of 20.1% and a more impressive adjusted EBITDAC margin of 32.2%. We completed 8 acquisitions this quarter, with estimated annualized revenues of $124 million.

Thanks, Pat, and good afternoon, everyone. I also extend my sincere appreciation to first responders and those on the front line. And also my thanks to our 34,000 colleagues. You had to navigate your personal challenges presented by the pandemic, yet we’re up and running in a few days, delivering timely advice and service to our clients. That's just simply amazing. So thank you. Today, I'll walk you through the COVID-19 impact table on Page 2 of the earnings release and how that impacts our organic growth and margins on Pages 4 to 7. I'll address our expense savings initiatives, provide some thoughts on our capital and liquidity, and finish with a few short comments in the CFO Commentary Document. So, turning to the table on Page 2 of the earnings release. This table captures all of the COVID matters in our numbers. They all fully hit our reported GAAP numbers, and we did not adjust any of them out where we show our non-GAAP adjusted numbers. You'll see in the end, COVID didn't have much impact on net earnings nor on EPS, but there are four moving estimates that have a noticeable impact on revenues and EBITDAC. First, let's address how it impacts revenues. And just as a reminder, about accounting standard 606 that drives our revenue accounting. We adopted that in 2008. Recall it requires us to estimate annualized ultimate revenues for contracts and policies with effective dates prior to closing the books, even if those annualized revenues are dependent on future events. We must make our best estimate. As most of you know, there are a lot of insurance policies that have volume-like adjustments that can occur in the year after the policy effective date. Lines like workers' compensation, employee group medical plans, casualty lines that have adjustable premiums based on, say, future miles driven or flown. Those are just examples. And then you have experience-rated contracts. So there's a lot, and so on and so forth. In the past, historical patterns drove those estimates, and changes in volumes would emerge slowly as our clients' businesses naturally evolve. That's not today's environment. Our customers' businesses have been dramatically altered in a few short weeks. That's the reality. So we need to make our best estimates of what will happen in the future for those pre-April 1 contracts. It's not easy, but we still must do it.

Thanks, Doug. I think with that, we'll go to some questions.

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

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

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

Okay. So I’ll use that as my follow-up, Doug. There are $30 million of charges spread over the next three quarters. I usually consider a payback ratio, and it appears to be quite high, between $50 million and $75 million per quarter. So it seems that we should be cautious not to project a lot of these expense savings into future years, as many of these items may only be temporary.

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

Pat, could you explain your comments about segmenting the impact into 20% high, 60% medium, and 20% low? I’m interested in how you arrived at those figures. When I think about your business, particularly the aerospace sector, I notice there's not much rate activity in aerospace. However, I view it as a higher-impact business. It seems you suggest that you are generating enough rate to balance out the exposure. Could you provide more details on this?

Yes. First, we segmented our business into detailed categories. We identified industries likely to be significantly affected and grouped them into a high-impact category. For example, our hotel business represents less than $100 million of our overall $5.6 billion to $6 billion revenue. We categorized various industries, with hotels and restaurants falling under very high impact, while some construction and transportation were placed under moderate impact, and public entities and hospitals under low impact. We then analyzed what was happening to rates by account, geography, and type. We assessed the accounts in each category, acknowledging that it’s early information. However, we anticipate that hotels will experience more challenges in the second and third quarters. Despite this, hotel rates are not decreasing; those renewing their accounts are actually paying higher property rates, even though exposure units are down. Currently, we see a positive offset as those rates are holding steady.

And Greg, just to amplify that, we've got 156 sick codes on a sheet that counts for our revenue all of last year. There's kind of that 20-60-20 distribution on it, both in terms of our last year's revenues and, like Pat said, eating and drinking places. That's in the high-impact one. You've got stone, clay, glass, and concrete product manufacturers that might be in the medium, and then you've got legal services that might be in the low. So you just pick out a sick code. We can slice and dice our revenues exactly by that. Not only do we weight it by the industry, but we also looked at the coverage lines, too, as it informed our positions.

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

Yes, in some cases, the supplemental does not vary much. It automatically adjusts with the volumes in the quarter, so that's not a concern. For pure contingents, you may actually see an increase if loss ratios decline due to reduced activity. We have contracts that include a double trigger based on volume expectations and loss expectations. As we look ahead, we could experience some softness in that area. I estimate that could represent about $8 million in potential reserve.

I’m going to shift the focus to the balance sheet. I have two questions regarding that. First, considering the actions of the carriers relating to rebates, givebacks, and delayed payments, I noticed that your premiums and fees receivable have significantly increased since year-end. I’m curious if there are any concerns regarding that. Secondly, I wanted to revisit your intangible amortization charge. With over 30 million people filing for unemployment in the last six weeks, I believe there might be additional risks and potential write-offs of customer lists. Could you provide more insight on that?

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

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

Yes, I can address that. First of all, we are not close to experiencing any kind of goodwill impairment on this. Regarding the customer lists, it may seem that way at first glance, but we have businesses that are retaining 92%, 93%, and 94% of their customers annually. Just because many people are out of work doesn't mean that the business is failing. If they don't return in the next two, three, or four months, there could be some impact, but it's a noncash charge. We thoroughly evaluated hundreds of acquisitions during this quarter, as we do every quarter, and we did not find significant declines. So when we consider the $40 million in total across all these acquisitions, it's a minor adjustment, approximately 2%. If the situation worsens and we face extended business disruptions, there will be some noncash write-offs, but overall, it’s unlikely.

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

Let me break this down. Is there a significant difference in cost-cutting opportunities between Gallagher Bassett and the Risk Management segment compared to the Brokerage segment? Yes, in the Risk Management segment, you’re likely looking at 25% to 30% of those savings, while that business represents about 20% of our total operations. So, there's a slight skew towards that business, which makes sense as they have a more volume-sensitive nature than the Brokerage business. Regarding your margin question, if we successfully achieve the planned expense savings, we would expect to see increasing margins in both segments on a quarterly basis.

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

Yes. We might not achieve it all this quarter, given that it's May 1 tomorrow. However, if we can reach 90% of our goals this quarter, we will be able to catch up in the third quarter.

Okay. And then one more question on the COVID-related revenue adjustments. Just so I understand, that’s based on everything as it stands today. Even if we continue to experience this economic slowdown, you wouldn’t anticipate any further 606-related adjustments unless the assumptions change significantly from what you're considering today?

There should be no COVID-related adjustments moving forward if customers reduce their exposure units for renewals starting April 1, May 1, and June 1. If they purchase less insurance, that’s simply a matter of buying less. For contracts that were finalized in January, we completed all necessary work and recorded the expected revenue for the next 12 months based on those contracts. Recently, we had to re-evaluate our revenue projections for those contracts. Further deterioration is possible, especially if the number of covered lives drops below our estimates, if we receive additional audits, or if there are more midterm cancellations, which could lead to further COVID adjustments. However, I hope we have accounted for everything at this point. We will monitor the situation and provide updates on the adjustments as needed.

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

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

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

Let's revisit the margin point. The best approach is to estimate that we'll achieve $50 million to $75 million in revenue. If we maintain our revenue at last year's levels for the second and third quarters, we should see margin expansion. Even in a flat or slightly declining organic environment, margin expansion is still expected. Looking to last year, if we see a recovery in the fourth quarter or into next year, and if we return to the organic growth we experienced in 2019, we'll likely reintegrate some of these costs. So take the 2019 margin and project it to grow as we did between 2018 and 2019 through 2021, and that should give you a good estimate. In the short term, you can expect an increase in margin, but it may adjust back slightly in the longer term. I want to clarify this point. Does everyone understand? I may have been unclear. We anticipate achieving $50 million to $75 million in expense savings each quarter going forward, not revenue savings. Whatever the revenue ends up being is set, but we're reducing our expense base by $50 million to $75 million. I may have been mistaken in my earlier remarks.

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

Say again. Yaron, sorry, we’ve got some static on the line.

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

Could be.

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

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

The market conditions are challenging, Yaron. It's a question of whether you want to go it alone or partner with us. If I owned my own agency, I'd be considering how to align with a strategic partner that can provide the capabilities and resources needed to increase my business. That's where I'd prefer to be right now. We are managing our expenses, but we are not compromising our core capabilities. We can be cost-effective and navigate through this revenue downturn. If I were in sales, I would seriously consider joining Gallagher at this moment.

In one of the recent Investor Days, you mentioned aiming for approximately $1.5 billion in acquisitions in 2020. Is that still attainable or something you can pursue?

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

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

I’m not certain about the exact figure for potential generation. However, if we experience a pause in mergers and acquisitions, and implement expense reductions of about $75 million per quarter over three quarters, that amounts to an additional $225 million. Typically, we begin with around $500 million to $700 million, even after accounting for dividends. By the end of the year, we could potentially have $1 billion in excess cash if organic growth remains flat or declines slightly for a few quarters. Regardless, it’s likely we will have a significant amount of cash on the balance sheet at the year’s end.

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

We had a very successful quarter in our U.K. operations, with strong organic growth. The business there is performing well, and our early April returns show no signs of stress. Overall, we're seeing excellent results in the U.K. Canada also had a strong quarter; our operations there have really improved over the past few years, and we're achieving solid margins in the upper 30s. Australia and New Zealand have faced challenging market conditions recently, but despite that, there appears to be good organic growth. In the U.S., we've also had impressive results. I'm pleasantly surprised by the strong sales performance in April, as our team is securing significant new business.

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

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

I think Mark... you go Doug, and then I'll go ahead. Go ahead, Doug.

I think we’re surprised in the Gallagher Bassett unit by the strength of certain industries, particularly in the hospital sector right now. Claims continue to come in, and we are seeing an increase in workers' comp claims related to COVID. Our customers will also have workers' comp claims related to COVID. However, concerning the usual manufacturing medical-only type claims, such as those that allow workers to go back to work in a day or so, if there aren’t many people working, those claims are not arising as frequently. To be honest, while severity claims are still present, the frequency has declined. However, this only constitutes 10% of our business and does not significantly impact our margins. We have the capacity to adjust our headcount accordingly, and we have employed a significant amount of temporary labor for that purpose. We use a lot of contract or contingent labor, allowing us to easily adapt our labor pool.

I would add to that, though, Mark. One thing I was surprised at is how quickly on that side of claims it began to move. I mean as we saw unemployment requests go up very quickly at the end of March, those claims came down very quickly as well. People getting out of work were not filing claims, which is interesting.

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

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

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

I believe the concept of growth in acquisitions has always involved sellers expecting substantial growth while we anticipate a smaller percentage of that growth. As a result, we incorporate a portion of the purchase price into an earnout. During this uncertain period, I expect more sellers to be open to earnouts as they likely want to emerge successfully from this environment. Our goal is to support their growth, and it would truly please me to see everyone achieve their earnout, indicating that they are thriving and we are all succeeding together.

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

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

Yes, we are actively seeking to recruit producers. Regardless of economic conditions, we are always in search of talented production professionals, and that remains unchanged. In light of our acquisition process, I anticipate reduced competition. We stand out as one of the few firms of our size and capability that compensates producers based on their actual production, purchases, and billing. If I consider my options, I would choose Gallagher, where the production expertise is genuinely understood, compared to other agencies. Everyone on our team, except for a few specialists, has experience in the field. This connection is appealing right now, as we see increased interest from potential recruits who are eager to learn more about how we operate. We have the ability to engage smaller firms and show them how we can assist. This approach is resonating in the current market, so I believe we are in a prime position for recruitment and will achieve significant success in this area.

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

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

No. The other way. In other words, it’s clear that you were spending this for a reason, which doesn’t exclude responding to the unusual situation, but I am considering these losses in terms of investments. Will those appear in 2021?

I believe you are asking if we expect to experience a setback in our progress towards building a better franchise due to these expense cuts. We think that most of these expenses are immediately consumable. If we aren’t traveling today, I'm not sure how it will affect us next year. When travel resumes, I don’t think it will harm us. We believe that some of the cost-saving initiatives we are currently implementing have revealed that we can handle some of this work internally, which we may have previously relied on external consultants for. We can actually implement cost-saving measures that we didn’t realize were possible by collaborating across divisions and breaking down silos to improve our internal cohesion. How much will this impact us going forward? It might affect our technology investments slightly, but we are cutting back on technology investments in non-client-facing areas. So, will we refresh our website this year? Maybe not, but doing it next year is likely fine. We still want to make those investments, but that’s an example of how it might not significantly hinder our ability to sell more insurance.

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

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

Go ahead, Ryan.

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

There are two different numbers involved. One concerns new business related to one-time opportunities like a bond, and the other pertains to annual policies expected to retain clients and facilitate renewals. The key is to consider the difference between new and lost business. We have been seeing about 2 or 3 points of growth from rate recently. Our new business has been surpassing lost business by about 3%. Specifically, it's more like 4% net new and 2% due to rate and exposure. Towards the end of last year, almost all of the 2 to 3 points for June's rate and exposure was coming from rate, not from exposure. We experienced growth in exposure from 2012 to 2017, which has since leveled off a bit as we are focusing on rate. As we move forward, we could see a resurgence in exposure units recovering from the contraction. I still believe there is potential for further rate increases. When rates rise, it typically leads to more opportunities for new business. Additionally, it's crucial to secure and retain our renewal business. Looking ahead to next year, I would anticipate that new business could exceed lost business, and we may see that spread widen by at least 1 point.

Yes, Ryan. Doug can provide you with the numbers regarding the spread and related details. Over the past couple of years, it has been encouraging to see that we have divided our business into segments targeting small, medium, and large risk management areas. We have seen greater success recently with accounts that are slightly larger than the typical ones we dealt with in the past. This success hasn’t come at the expense of our larger competitors; rather, we often find ourselves competing against smaller firms. As Doug mentioned, in 90% of cases, we are up against someone smaller, and in the last two years, we have been able to win larger accounts from them. This shift has contributed positively to our trailing book of business, which has seen considerable growth over the last couple of years.

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

Right now, we're experiencing a challenging situation with our team working from home, many of them feeling restless and managing family responsibilities. Despite these difficulties, they continue to make calls and even secure orders from clients we haven't met in person. We're utilizing our communication tools and resources to support them, especially regarding the CARES Act and current market conditions, which local brokers aren’t providing. I'm pleased with the new business we've generated over the past month, which has held up compared to earlier this year, much to my surprise. As Doug noted, our retention rate is stable, and while local brokers may perform well in usual circumstances, they lack the capabilities we offer. We've noticed a slight decrease in lost business and an increase in new business. Although market challenges like exposure units, bankruptcies, and rising unemployment can be tough, I'm excited about our new business developments. We're operating like a new business machine.

So my other question is about your revenues. What percentage of your revenues is linked to a headcount metric, such as those related to workers' compensation and employee benefits? Additionally, what portion of your revenues might be considered nonrecurring, like those from a construction project? For example, to replace the construction project from last year, you would need to initiate a new construction project this year.

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

How big is the bond book? I'm sorry.

The bond book?

Yes.

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

Don’t have that.

My last 1 was just, obviously, on the carrier calls, there’s been a lot of discussion around business interruption. I’m just curious in how hectic is it in terms of talking to your clients? Are there a lot of claims coming in? Is there a lot of handholding? Or do you feel like a lot of the coverages are pretty easy to explain? Do they kind of get it, that type of thing?

There are a significant number of clients who, for various reasons, have provided us with feedback. Some clients have opted not to purchase business interruption coverage, and we set those cases aside. Additionally, there are different types of business interruption products available in the market, which will influence whether the insurance carriers will provide coverage. We represent our clients and meet with them to review what they purchased and the limits associated with their coverage. It’s important to clarify whether their policies offer coverage for pandemics, as some policies clearly do, while many others require physical damage to the premises for claims to be valid. The insurance companies have shown strong leadership by stating that they will pay legitimate claims promptly. They are committed to not amending their contracts and will assist clients in navigating through this situation. If clients have valid claims, we will do our utmost to ensure those claims are processed and paid.

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

I have one last question. Over the years, you have discussed the outsourcing operations in India. It appears that the impact of COVID there has been lagging behind the U.S. by about 4 to 5 weeks. I was wondering if we should be considering any impact on your business in India. Additionally, I might have one other follow-up.

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

Yes, it’s truly impressive. Since the beginning, they have been trained to perform all their tasks remotely. We maintain a paperless environment, and they take their laptops home every day. Occasionally, there are minor power outages due to issues with the electrical grid, but we have experience managing these situations. Having internet connectivity is essential for them to work from home, and I am very impressed with the resilience of the operation, which has continued without any disruption.

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

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

Well, that was maybe the last.

I think that's probably it for questions. Why don't I just make a quick comment here, we'll wrap it up. Again, thanks for joining us this afternoon. We really appreciate you being here. As you can see from our comments, our focus is clearly now on the difficult, evolving operating environment. I'm confident that we have the right platform, people and strategy to manage through the current environment for the benefit of all of our stakeholders: our employees, our clients, our carrier partners and our shareholders. Thanks for being with us, and thanks to all of our teammates for delivering a great quarter again. Stay healthy, everybody.