Crawford & Co (CRD.A) 2009 Q4 法說會逐字稿

Good afternoon. My name is Ashley and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company fourth quarter 2009 earnings release conference call. In conjunction with this call, a supplementary financial presentation is available on our website at www.crawfordandcompany.com under the Investor Relations section. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Instructions will follow at that time. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Monday, February 8, 2010. Some of the matters to be discussed in this conference call and any supplementary financial presentation may include forward-looking statements that involve risks and uncertainties, including statements regarding liabilities associated with our defined benefit pension plans and our ability to pay dividends in the future.

The Company's actual results achieved in the future quarters could differ materially from the results that may be implied by such forward-looking statements. The Company undertakes no obligation to publicly release revisions to any forward-looking statements made in this conference call to reflect events or circumstances occurring after the date of the call or to reflect the occurrence of the unanticipated events. For a complete regarding factors which could affect the Company's financial performance, please refer to the Company's Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission, particularly the information under the headings Business, Risk Factors, Legal Proceedings, and Management's discussion and analysis of financial condition and results of operation. This presentation also includes certain non-GAAP financial measures as defined under SEC rules. As required, a reconciliation is provided for those measures to the most directly comparable GAAP measures. I would now like to introduce Mr. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Mr. Bowman, you may begin your conference.

Thank you. Good afternoon, a warm welcome to our investors, clients and employees this afternoon for a discussion of our 2009 fourth quarter and year-end results, together with our outlook for 2010. I am Jeffrey Bowman, President and CEO of Crawford & Company. Joining me from the global executive management team this afternoon are Bruce Swain, our CFO; and Allen Nelson, our General Counsel and Chief Administrative Officer. I will begin with a couple of comments on the economy, a review of our business progress and strategic initiatives, and after Bruce has commented on the fourth quarter financials, conclude with a review of the business unit's focus for 2010. The global economic environment was challenging throughout 2009. Financial pressures on businesses large and small stifled growth, eroded employment, and tightened budgets, particularly a market critical to Crawford & Company, the workers' compensation market in the United States. In our Broadspire business, the most important economic indicator over the past year and into 2010, remains unemployment levels. By the close of 2009, the US was experiencing unemployment levels above 10%, the highest since November 1982. This unemployment rate means the US payrolls have declined steadily since December 2007. I would point out that in the United Kingdom and Europe, employment conditions were only slightly better.

In addition, deterioration in the financial markets led to a broad focus by our clients on containing their near-term costs. For third party service providers, this combination of lower global employment and tightened belts at the insurance carriers and other corporations, meant fewer claims overall and increased pressure to maintain market share, let alone provide growth. Our property and casualty clients in the United States as well as the rest of the world did see a softening of insurance premiums. The outsourcing, or right sourcing of claims by carriers, is made in the interest of reducing cost of delivery by turning fixed costs, in-house claims department, into a variable cost. This continues to be a positive business proposition for Crawford in discussion with our clients. What is essential in these types of arrangements, are delivering world class services by aligning the vision of the client to the quality of the service, and then being able to validate the process.

The first factor affecting results for the year was the lower level of US catastrophe-driven revenue. While US catastrophe claims are always variable, these events during 2009 were well below 2008, which was reflected in our year-over-year claims activity in both our international operations, and especially our US property and casualty segment for the fourth quarter. However, as I have stated previously, we are not building a corporation based solely on catastrophes. Our strategy is that we are ready globally to respond to catastrophes if they happen. Against this background, Crawford & Company performed well, delivering a solid performance in a difficult business environment. We as an organization are confronting reality in all of our business units, which means disciplined expense management while maintaining our financial flexibility.

While revenue declined 7.5% for the year, reflecting the factors I outlined a moment ago, our expense management efforts gained ground throughout the year, producing consolidated operating earnings gains in the fourth quarter, despite a sales decline. We are pleased that in difficult economic conditions, we produced a solid operating performance, even though that performance was obscured by the goodwill impairment charge, increased pension cost, low investment income rates, and foreign exchange movements. If you reflect on these issues and the economic conditions, we produced a year of continuous sequential earnings per share improvement in each quarter. We have improved the financial flexibility of the Company through improved working capital management, one of our strategic initiatives. In 2009, we produced a further three-day improvement in day sales outstanding and our cash at year-end was more than $70 million, positioning us well for the upcoming year.

In addition, in late 2009, Crawford amended our credit agreement to provide additional capacity and flexibility in the future. As a consequence of our strong year-end cash position, we made a voluntary $10 million payment into the US Pension Fund in January 2010. Our results for the year also reflect several items which affected our reported GAAP results. In order to fully appreciate the effort and progress that Crawford employees delivered in a very tough environment, it is necessary to isolate the impact of each of those factors. First, currency. For global businesses, currency shifts are a fact of life and we report their effects on our business as a routine matter in our quarterly results. Currency changes over the past year were a reversal of a weak dollar trend. The US dollar gained ground against most foreign currencies consistently through the first three quarters of 2009. This affected our 2009 results by $62.5 million in revenue due to foreign exchange, or $0.08 per share after considering the foreign currency impact to operating expenses.

Secondly, our defined benefit pension plans. In addition, the financial market shift beginning in 2008 affected companies who had defined benefit pension plans, [creating] a drop in plan assets and an increase in plan liabilities. In turn, US regulatory requirements mandated a cash infusion to restore these balances regardless of external business conditions. These underfunded status of our pension fund obligations affected our reported financial results by $10.6 million, or $0.20 per share for the 2009 year, consistent with what we had indicated at the beginning of 2009. Thirdly, goodwill asset impairment. In the second and third quarters, we completed our goodwill impairment analysis of the Broadspire segment, which reflects both current performance and anticipated outlook for the business. As a result of this analysis, we recorded a cumulative non-cash, non-operating impairment charge of $141 million, or $2.71 per share in the second and third quarters. This impairment charge did not affect the Company's liquidity or cash flows, and had no effect on the Company's compliance with the financial covenants under its credit agreement. As a result, all the goodwill associated with the acquisition of Broadspire was written off in 2009. Fourthly, the Company recognized certain foreign tax benefits in 2009 totaling $5.7 million, or $0.11 per share. And Bruce will review those later on.

Through this past year, Crawford has demonstrated the value of a diversified business makeup. Across all these businesses, during our conversations globally with our clients over the past year, our priorities have been to improve our service levels and product offerings to maintain and improve our existing client relationships and to take advantage of new business opportunities as they emerge. On a currency adjusted basis, our revenue for the year declined $16.2 million from the prior year, while net income increased $3.3 million, or $0.07 per share. The revenue decrease was largely a result of lower Broadspire revenues in the US and reduced weather events in the United Kingdom. The increase in net income is largely due to the cost management initiatives instituted globally. That concludes my initial remarks. Bruce, would you please review the Company's financial performance for the fourth quarter?

Sure. Company-wide revenues before reimbursements decreased by 9% in the 2009 fourth quarter to $238.4 million from $262.9 million in the prior year's fourth quarter. This decrease is primarily attributable to constant dollar declines in our international operations segment and weakness in revenues produced in our Broadspire and US property and casualty segments. These factors offset continued growth we experienced in the fourth quarter from our Legal Settlement Administration segment. Our net income attributable to Crawford & Company totaled $8.9 million as compared to $8.3 million we reported in last year's fourth quarter. The fourth quarter 2009 diluted earnings per share were $0.17, increasing over the earnings per share of $0.16 in last year's fourth quarter.

The Company's selling, general and administrative expenses, or SG&A, totaled $49.7 million, or 20.9% of revenues before reimbursements in the 2009 fourth quarter, decreasing approximately $5.6 million from $55.3 million, or 21% of revenues in the prior year quarter. This decrease in cost is primarily due to lower professional fees, reduced administrative staff levels, and reduced incentive compensation expenses. SG&A cost reduction will be a key area we continue to focus on in 2010. During the 2009 fourth quarter, the Company recognized a one-time $3.3 million income tax benefit for foreign tax credits as a result of a recently completed internal restructuring of certain of the Company's international operations. In addition, during the second quarter of 2009, the Company completed an internal restructuring of certain of its international operations that resulted in an ongoing reduction in its effective tax rate.

For the 2009 fourth quarter, the Company benefited from $1 million in reduced foreign taxes as compared to the 2008 quarter as a result of the second quarter restructuring. These tax benefits increased earnings per share by $0.08 for the fourth quarter ended December 31, 2009. In addition, during the 2009 fourth quarter, the Company incurred restructuring costs and a loss on a sublease of $1.5 million after related income taxes. These costs reduced diluted earnings per share by $0.03 for the 2009 fourth quarter. As compared to the 2008 period, during the 2009 fourth quarter, the US dollar was slightly stronger against most of the major foreign currencies in which we operate globally. Although the impact in the 2009 fourth quarter was not significant. International revenues declined by 4.1% in the 2009 fourth quarter on a local currency basis and after reflecting the negative impact of exchange rate fluctuations, international revenues declined by 5.2% in US dollars to $103.9 million.

Excluding the negative effect of exchange rate fluctuations, our revenue decline in local currencies primarily reflects decreases in our United Kingdom and European operating regions. International operating earnings declined to $10.4 million during the current quarter, down 4.6% from last year's fourth quarter operating earnings of $10.9 million. However, our operating margin increased slightly from 9.9% in the 2008 fourth quarter to 10% in the 2009 quarter. When measured on a constant dollar basis, international operating earnings were $10.2 million in the 2009 period. Revenues from the US Property and Casualty segment totaled $44.7 million in the 2009 fourth quarter, decreasing 25.2% from the $59.8 million reported in last year's fourth quarter. Revenues generated by our catastrophe adjustors totaled approximately $3.7 million in the 2009 fourth quarter, declining from $11.3 million in the 2008 quarter when the Company was completing claims arising from hurricanes Gustav, Dolly, and Ike.

Apart from the decline in catastrophe-related revenues, the revenue decrease in the 2009 fourth quarter was driven by a reduction in strategic warranty-related revenues, as we have been winding up several inspection projects during the course of 2009, and a reduction in overall industry-wide claim frequency, which has impacted our field operations. Operating earnings in our US Property and Casualty segment totaled $1.6 million, or an operating margin of 3.7% of revenues in the 2009 fourth quarter. This is compared to operating earnings of $4.8 million, or 8% of revenues in the prior year quarter. This operating earnings decline primarily reflects the lower revenues generated during the current quarter. For the full year 2009, US catastrophe-related revenues were comparable with 2008's level. However, the timing of those revenues varied significantly between the two years. In 2009, our cat revenues were relatively consistent in the first and second half of the year, as compared to 2008, which had a second-half surge as a result of hurricane-related volumes.

Revenues from our Broadspire segment decreased to $70.6 million in the 2009 fourth quarter, down 6.6% from $75.6 million in the prior year quarter. Overall claim volumes in this segment were down during the 2009 fourth quarter, reflecting sharply lower industry-wide workers' compensation claim referrals as a result of weak US employment levels. Broadspire's operating earnings in the 2009 quarter totaled a positive $2.1 million, or 3% of revenues, reversing the operating loss of $1.8 million, or negative 2.4% of revenues in the 2008 fourth quarter. This improvement was primarily driven by cost reduction measures implemented during 2009. Legal Settlement Administration revenues, comprised of class action and bankruptcy claims administration services, rose 6.8% in the 2009 fourth quarter to $19.2 million, up from the $18 million in the prior year quarter. This growth reflects the positive impact of several major bankruptcy and securities class action administration projects during 2009.

Operating earnings totaled $3.2 million in the 2009 fourth quarter, or 16.8% of revenues as compared to $2.3 million, or 12.9% of revenues in the prior year period. Legal Settlement Administration continues to have a strong backlog of projects awarded, totaling approximately $55 million at December 31, 2009 as compared to $42 million at December 31, 2008. Our cash and cash equivalent position at December 31, 2009 totaled $70.4 million as compared to $73.1 million at December 31, 2008. Our investment in unbilled and billed receivables has decreased by $23.5 million in US dollars during 2009, reflecting a three-day decrease in day sales outstanding, or DSO, to 68.1 days at year-end.

At December 31, 2009, the Company re-measured its defined benefit pension obligations, and in accordance with the applicable accounting rules, we recorded a net $26.5 million non-cash charge to equity to recognize the increase in the Company's underfunded position. This charge was recorded in accumulated other comprehensive loss, which is a component of shareholders investment in the accompanying condensed consolidated balance sheets. This charge had no impact on our 2009 results of operations or cash flows. Our total debt has declined in 2009 by $15.6 million, reflecting the deleveraging we were able to accomplish during 2009, with our net debt, defined at total debt less cash on hand, being at the lowest levels since we completed the Broadspire acquisition in the 2006 fourth quarter. Stockholders equity declined by $119.1 million for the year, reflecting the $140.9 million in impairment charges recorded during the 2009 second and third quarters and the remeasurement of the Company's defined benefit pension obligations at year-end.

Cash provided by operations totaled $51.7 million for 2009 compared to $71.6 million provided in the prior year. This $19.9 million decrease was primarily due to lower net income during the 2009 period before reflecting the impact of the impairment charges and higher working capital requirements in 2009. The Company's cash requirements typically peak during the first quarter and decline over the balance of the year, with substantial cash inflows usually occurring in the fourth quarter from some of our major markets. Our free cash flows stood at $25 million for 2009, decreasing $13.1 million from the $38.1 million in 2008. We have carefully monitored our level of capital spending in 2009 to ensure that approved projects support our strategic plans and have a clearly demonstrated payback. During the 2010 first quarter, the Company utilized some of the strong operating cash flow generated during the 2009 fourth quarter to make a discretionary $10 million contribution to our frozen US defined benefit pension plan. That concludes my comments, Jeff.

Thanks, Bruce. I will start by stating Crawford's outlook for the insurance industry in the coming year is cautious. While some measures of our economic activity are reported to be improving, one of the factors that drives our US Broadspire business, unemployment levels, has not shown meaningful improvement. Consequently, we have planned for a challenging claims environment into the second half of the year in the Broadspire segment. At the same time, the economic factors that create a challenging claims environment should prove to be beneficial in our bankruptcy claims business. The cost management strategies of our property and casualty clients should be a positive for Crawford as well in the business processing outsourcing arena. While the economy may prove to be a headwind, Crawford will not simply wait for conditions to improve. Over the past two years, we have developed and implemented various strategic planning initiatives to improve our work product, protect our client relationships, and generate new business opportunities, even in a shrinking market. At the same time, we have reduced our fixed costs.

So let me review some of these initiatives with you now, as a way of gaining insight into our planned activities during the coming year. For 2010, our focus on attracting new business and retaining our current customers is linked to the launch last year of Crawford System of Claims Solutions, which is prominently displayed on our website. This process defined our competitive advantage to reinforce industry leadership and clarify our portfolio of businesses to our clients. Significant attention has been put into care count management and cross-selling initiatives throughout our businesses globally. One area of engagement with clients that we are concentrating on is VPO, where we have already won several claims programs from clients to handle the full claims administration process. While we are winning new business and clients, we remain ever vigilant on service and quality initiatives, as well as being able to validate these results.

Also as a result of client focus group discussions, we are seeing our clients challenge us to be more responsive in our claims handling, as they demand sustainable performance improvement through better control of indemnity spend, improved business processes, better automation, and increased data analytics. We are again well positioned to handle these challenges going forward. As previously advised, we have introduced a new command center into Atlanta that provides effective central oversight for our claims organization. And we are seeing improvement in the quality of our products as a result. I have commented before on the consolidation of the number of the vendors among our clients. We know that our largest competitor is the in-house claims operation of our property and casualty clients. In this environment, pressure to reduce expenses can enhance the outsourcing of claims to providers such as Crawford. We allow a better cost of delivery by turning fixed cost, in-house claim departments into variable costs, and at the same time, reduce the clients' need to invest in claims technology. This continues to be a value proposition for Crawford in its many discussions with clients.

Let me now turn to the outlook for each of our business units, starting with international operations. Results from the International segment reflected lower claims volume of 5.5% in the year, primarily due to reduced frequency in personal lines activities in the United Kingdom and Canada. In our international operations, we continue to be focused on new client acquisition, which results from refinements of our business process outsourcing model and the acquisition of new claims programs. We continue expansion of our European products to support new and existing clients and provide market share expansion. In support of that, we are looking at innovative solutions to improve our claims handling systems. Another bright spot internationally is the growth of our Latin American division, where we have taken on significant numbers of affinity claims programs.

Now turning to the USA, our US Property and Casualty division reported a challenging fourth quarter due to lower claims and the absence of CAT-related activity. While we enjoyed a solid performance through August, a decline in claims intake began in September and continued through the balance of the year. As a result, revenue and earnings declined against prior year. The fourth quarter was difficult, but the pretax margin for the US for the year held at 9%. Our overall new business won for the year was approximately $13.7 million on an annualized basis. This gives us confidence in our 2010 outlook. Two adverse claim trends relate to economic conditions. In vehicle inspections and the warranty division, we have seen frequency reduced. Warranty inspections significantly reduced from 2008 levels, as long-running class action contracts expired. As a result, we have significantly reduced staffing in this area in response to the claims reduction.

The US group has invested in resources for our casualty services business, and this we see as a growth area in 2010. Also in line with our goal of growing Global Technical Services, our large complex claims unit in the United States, we continue to aggressively add executive general adjustors, or EGAs, to our operations. During quarter four, we made a small purchase of a Chicago claims adjustment company called TLAA. In other expansion areas in the US, Crawford Central and Claims Alert, we intend to leverage off of investments made in 2009. And our contractor connection business in the USA continues to build, as we add more contractors to the program. Moving to technology and innovation, we have expanded our command center to introduce multiple key performance indicators that enable us to manage data and report improved analytics to both our own operations and our clients'. Further, we are continuing to enhance our own claims management systems.

Now moving on to our Broadspire business unit, we have seen significant progress from Broadspire by balancing its cost base in the fourth quarter against declining claims. The US unemployment rate and the lack of job creation continues to place pressure on the revenue stream from existing customers and reduce the lift from new business wins. With the loss of our largest customer effective January 1 in this segment, coupled with the economic picture unfolding, we expect challenging conditions in 2010. We continue to emphasize the development of new business opportunities with an enhanced value proposition and target market approach, executed by cross-selling, additional services, and balancing our cost base over this period. We believe that this will position us well to weather the economic conditions and put us into a position to take advantage of opportunities that may emerge later in the year. Our retention rate in 2009 was 96.4%. However, it is important to note that even though the renewal rate was higher, there has been a contraction in existing business, which will have an impact in 2010.

In the Legal Settlement Administration segment, which is our Garden City Group operation, we continued to see a significant increase in bankruptcy cases received. We continue to project a steady increase in revenue in our bankruptcy cases over the next few quarters, which is evident in our 2009 results from this segment. We have been fortunate in securing further high profile cases in the fourth quarter. In respect to the bankruptcy marketplace, we are now solidly among the three main competitors in this arena as a result of the large case assignments made throughout 2009. The competition in this business line is fierce, and we continue to invest in talent, and other resources to grow our operation further. In the past years, our securities class action practice has been, and still is, a critical part of our success, particularly because we have been successful in obtaining the largest cases in this sector.

In 2009, there were not many settlements in these cases, but we did a great job of getting a significant share of the existing pie. We are continuing to see the economic conditions that have set the stage for robust growth in our bankruptcy business have a different impact on securities class action settlements. In short, companies and their insurers are not settling securities class actions at the pace we saw in previous years. We remain confident that the class action market will turn around, but we have not planned on a substantial recovery in 2010. Overall, the Garden City Group has been retained in 281 assignments, both class action and bankruptcy, versus 191 in 2008, a 47.1% increase in assignments. We are very pleased with that performance. Finally, Garden City group's backlog at the end of 2009 was $55 million, up from $42 million at year-end 2008.

Now looking at the guidance for fiscal 2010, consolidated revenue before reimbursements -- between $970 million and $990 million, compared to $970 million for 2009. Consolidated operating earnings -- between $54.3 million and $60.3 million compared with $53 million for 2009. Consolidated cash provided by operating activities -- between $30 million and $35 million. After reflecting stock-based compensation expense, net corporate interest expense, customer relationship, intangible asset amortization expense, special charges and credits and income tax, net income attributable to Crawford & Company on a GAAP basis -- between $23.5 million and $26.5 million, or $0.44 to $0.50 per share compared with earnings per share before goodwill impairment charge of $0.48 for 2009. Over the past two years, we have created in Crawford a worldwide management team that will not deviate from our strategies as laid out. We have employees worldwide that understand the values that create an environment to produce and execute improved performance. Despite some of the negatives around the economy, and given the market's strength of our business segments and the diversity of earnings for our Corporation, we continue to remain optimistic about the potential growth opportunities as we execute our corporate strategies. Thank you for your time, and we look forward to your questions. Operator?

(Operator Instructions). And our first question comes from the line of Jack Shirk with SunTrust.

Hi, thank you very much.

Hi, Jack.

You mentioned that claim counts for UK were down 5.5% last year. What were they -- or do you have them for the fourth quarter for both the international market and US? Just on an underlying basis.

Yes, for -- hi, Jack, this is Bruce. The case statistic that Jeff was referring to was overall in our international business, the volumes were down for the full year 5.5%. So in 2008, there were 603,000 cases and in 2009 there was approximately 570,000 cases.

Okay, and then do you know how much it was down for just the fourth quarter?

Just, just the fourth quarter it was down 4.1%.

4.1% for the international. How about for the US?

For US Property and Casualty for the quarter, it was pretty flat, just a slight decrease of 0.2%, and on a year-to-date basis, it was down 2.4%.

Okay.

That's just the US Property and Casualty business.

Right. And then for Broadspire, as we start to see the unemployment rate peak, what is the typical lag for when we would start to see claims pick up in terms of unemployment versus the lag in [comp] claims?

The driving factor on that, Jack, will be when jobs creation starts.

Okay.

I mean that is the prime economic factor that we look at. You'll see a flattening as corporations have taken out jobs in their individual companies. But you won't see an increase in the workers' comp claims really until we start to see job creation.

Okay, and do those pretty much correspond with it? Or is there any lag at all or should we look for [kind of one for one]? So to speak.

I think it's going to be on -- a as it happens basis, so it will really be on a one-for-one basis.

Okay, and then on -- Jeff, you mentioned in the us property market, with the vehicles inspection warranties [and] inspections being down, just a little more color there. What was that related to?

That's our Transportation Industry sector. I mean we're seeing about a 30% decrease in claims in Transportation mainly because of the economic factors around less goods moving around, less trucks on the road, et cetera. Really having a more -- fewer vehicles [doing] fewer miles. And again, until the economy recovers on that and the movement of goods around the country increases, you'll see that figure remain fairly flat, I would think.

Okay. So more related to on-road accidents versus warranty recalls and other things from dealers?

Correct. Absolutely, yes.

Okay. Just wanted to be clear on that. And then just a couple more things. In terms of the outsourcing trend, are you seeing any change in the rate there on behalf of your clients? Third quarter to fourth quarter, or has it kind of stayed about the same?

I think the big issue here is obviously, we have very much put invested into really the Crawford system of claims solution. And our sales force has been retrained in this. We've really got a whole strategic initiatives going on at present in talking to clients about the whole process from [FNOL, ENOL], all the way through to treasury management. And that's what's catching on in different parts of the marketplace. Those initiatives are strengthening rather than decreasing.

Right. Any change in the sales -- length of the sales cycle? Any narrowing there, or is it about the same?

It's very difficult to say. Some parts of the sales cycle can be year-plus, and some, it depends on the individual circumstances of who we're dealing with. It's a very varied approach to that.

Okay, and then my final question is just in terms of the backlog for the Legal Settlement business, you mentioned it was $55 million at the end of the year. What was it for the third quarter? Do you have that, Bruce?

I think it was in the mid-[$40 millions.]

Okay, all right. Great.

I don't have that figure in front of me, but I believe that's right.

Okay. Thank you very much.

Thanks, Jack.

Our next question comes from the line of Adam Klauber with Macquarie.

Thanks, good afternoon, guys.

Hi, Adam.

Hi, Adam.

Looking at the US P&C, how much were property claims down about on a dollar basis excluding cats?

In terms of the volumes that we saw in Property, they were actually up in the quarter and up year-to-date as well, excluding cat and --

Okay.

And a lot of the growth that we've seen this year has been in our contractor connection unit, which is our direct repair network where we've seen pretty substantial growth this year over last year, and quite a bit of market share expansion.

Okay, so of the roughly [$8.9 million] in non-cat revenue decline in US P&C, how much of that would you say it due to the warranty and how much to transportation -- lower transportation claims?

Yes, of the warranty, would probably make up another $2 million of it quarter-over-quarter, if you're looking at the fourth quarter of 2008 to fourth quarter of 2009. The vehicle services claims, not that much. Those tend to be high frequency, low severity claims. They have a very small average fee associated with them, so the impact to the top line is not as great as the impact to the cases overall. We've -- when you back out the contractor connection improvement that we've seen in 2009, there is some pullback in the underlying property cases where we're sending [[adjustors]] out to the field to adjust cases. And that's just really attributable to the industry-wide decline in claims that we've seen in 2009.

Okay, I mean because that still seems like a decent gap. So is -- again, say $4 million or $5 million lower claims, is that just less usage of third party at this point?

Yes, I mean -- Adam, it's Jeff. There is really a frequency issue. The frequency in the fourth quarter in the US P&C was very significant this year. And the consequences of that are -- is a mild, very mild period in the United States. And not as many accidents. If you take that in with the decrease in transportation, the strategic warranty decrease as well, and the lack of catastrophe activity, which we have a lot of in the first half of the year, that really sort of explains the variances on it.

Okay, so is that frequency across a number of lines, then? Lower frequency?

Yes, I mean across all lines.

Okay, including casualty then?

Casualty was down a bit, but not to the degree property claims were [up].

Okay, a lot of properties. Thanks. As far as next year, do you have a range on what you think pension and interest expenses will be?

Yes, our pension expense will be less in 2010 than it was in 2009. We're anticipating that to be about $11.6 million. And that's down from $14.2 million that we saw this year. Our interest expense, we're looking at about $15.5 million for next year in our guidance.

Okay. And then looking at SG&A, a nice sequential improvement, but actually it also came down last year, and the fourth quarter was lower than the first three quarters. Do you think this sequential improvement will be carried to next year? And is there -- and I know you've taken some restructuring. Can it actually go down from here? Right now I have it at around 21%?

Certainly, SG&A cost reduction is a tier 1 item for the Management team, and it's something that we're focused very intently on. There can be quarterly fluctuations in those -- in those numbers and that primarily comes from the -- our self-insured liabilities that the Company has for auto, errors and omissions and workers' compensation exposures that we have actuarially determined each quarter. And those numbers can be volatile based upon the underlying claims history. We've had very good history in 2009 in our errors and omission line related to our focus on quality and training and those sort of things occurring in the field. The sustainability in SG&A cost reductions is going to come in part from the completion of our technology projects within the Broadspire organization, which is going to allow us to further reduce our IT and back office expenses and in certain other areas of the Company as a result of getting our systems environment consolidated onto one platform.

And when will that hit the bottom line?

We should start to see some in 2010 --

Likely 2010.

And then going into 2011. As we discussed in the past call, we, we did hit a significant milestone with the [risk take] integration that allowed us to eliminate over $6 million in year-over-year cost in our IT area related to an outsourced data hosting arrangement that we had. So that cost won't be present in 2010. That's included in the guidance figures that we've given, by the way. But that is a significant milestone for us. We have other milestones as we go through 2010 and 2011 that should allow us to further eliminate administrative expenses.

Okay, and, Jeff, how's the pipeline of larger outsourcing deals?

In the USA, we have a number of deals that we are actually working on at this very moment. We signed up two corporations in the latter part of 2009, and they are smaller size deals, but in terms of the process, the process is in place. We have significant investment in ensuring that we have a value proposition that is attractive to our clients. And, we are -- our sales team are working around the country very hard on concluding those deals. And we have a number -- the cycle can be anything, as Jack said earlier. It can be anything from a year-plus or to a shorter period of four or five months. But it is something that we've seen picking up traction at the moment, as you get the value proposition lined up very correctly with the client's expectations.

Okay, thank you. Thank you very much.

Okay. Thanks, Adam.

Thanks, Adam.

And our next question comes from the line of Sam Hoffman with Lincoln Square Capital. Please go ahead with your question.

Hi, Sam.

Hi. I had two questions. The first is on revenue. You've guided for about flat revenue in 2010 [excluding] currency. So how much cat revenue is included in that guidance? And then second, it sounds like you're going to be losing revenue from Broadspire. Which business units can make up for that?

The -- the first question is the cat revenue we've budgeted for for 2010 is $18 million.

Okay.

And that would be on the [cats] -- events happening throughout the USA. In terms of Broadspire, Broadspire revenue, yes, I mean obviously we have the loss of our large client coming into play in that division, which is then being made up by new revenue gains that we're getting in during 2010. But gets slightly muted by the frequency change of claims due to the economy.

Okay. And my other question is on free cash flow. So your operating cash flow is projected to decline to $30 million to $35 million, and I assume CapEx still is going to be about 3% of revenue. So the two questions on that are, can you explain the decline in operating cash flow from 2009 to 2010 when earnings are going to be about the same? And then -- okay. Go ahead. Sorry.

Okay, yes. And I guess to pick up on a point earlier on our CapEx, we're projecting our CapEx to probably be about $27 million for 2010. Our operating cash flow for the Company includes contributions that we make to our defined benefit pension plans. And those contributions are going to increase in 2010 over the level they were at in 2009. They are going to increase about $20 million. So that $20 million increase is within that $30 million to $35 million operating cash flow projection. So if -- another way to look at it, is if our pension contributions were on a comparable level with 2009, then our operating cash flow would -- should be on a comparable basis.

Okay, and then finally, on that issue. With respect to the pension, the fact that your underfunded pension amount grew by, I guess it was $27 million, did that make the pension contribution requirement go up? Or was that -- the $20 million increase that you just mentioned, was that because you made a voluntary $10 million contribution? And related to that, is the $20 million differential permanent or is it one-time?

Yes, the $20 million differential is -- we don't look at it as one-time. If you go back and look at the third quarter disclosures that we made in the [quarter], we think that we're going to have a mid-$[20 million] to up to $30 million requirement into our US DB plan over the next two or three years. So that's going to put pressure on the operations to generate the cash, obviously. For 2010 our requirement was in the low- to mid-[$20 millions]. Given where we ended up, our 2009 cash position we had some excess cash that we've decided to put into the US defined benefit plan. So that's going to take the total cash requirements in 2010 in the low $30 million range. So $10 million discretionary, plus another $23 million or so required. And those required contributions are going to be fairly significant over the next couple of years. We will be updating that disclosure in the 10-K that we'll file, probably in the first week of March.

The year-end re-valuation of the pension plan, that hit that we took to equity was primarily related to a drop in the discount rates and that has the impact of increasing our plan liabilities. And while our assets performed well during 2009, as you might expect, the liabilities grew at a greater rate. And so our underfunded position increased as a Company. That's an accounting phenomenon, but it doesn't necessarily tie to the funding that is calculated on a different basis. And that's calculated under the requirements of the Pension Protection Act. And the drop in discount rates didn't significantly change the cash funding requirements that we had when we were looking at it at the end of the third quarter. They have moved around a little bit, gone up in some years, maybe come down in others, but stayed substantially the same. A lot of the increase in our underfunded pension position was actually related to our international plans. And those plans and the cash funding requirements are not in any way related to the Pension Protection Act that just impacted the US plants.

Okay, thank you.

And our next question comes from the line of Jim Curran with New Salem Investment.

Follow-up on what you've just been talking about. You mentioned the discount rate. I mean is that bottoming out here, and will it reverse going forward as the economy improves and interest rates go back up? Or is that not related?

No, it is related. The rate that we use is a rate that's based on the Moody's AA rate. So as corporate borrowing rates increase, then that will be beneficial to the Company when it discounts its liabilities related to the pension plan. Depending on how fast and where rates ultimately go to, the corollary to that is it could have a negative impact on the asset side if interest rates are too onerous or too volatile. But just looking at the liability side of the equation, as interest rates increase, our liabilities come down. And the conventional wisdom is certainly that in the future, interest rates have a bias towards an increase rather than a decrease at this point.

And [then a] moderate increase would be beneficial to your net pension liabilities?

Yes.

Absolutely.

Okay. Can you talk about just the absolute performance of the assets in the plan and how they are invested and what your philosophy is there? It's a pretty big, important factor in your balance sheet.

It certainly is, and I don't have the specific performance factors or measures in front of me. But I can talk to you about the Company's philosophy in managing the assets and the related liability. We ended the year with an investment mix of 65% equity and 35% fixed income. And of that 35% fixed income, it's duration-matched to the underlying liabilities. So our liabilities have an average duration of approximately 12 years, and when we invest in fixed income investments, we seek out fixed income investments that have a comparable duration of 12 years. And that gives us a hedge on that component of our liability. We have developed a glide path over the course of the required PPA funding, or Pension Protection Act funding, whereas at the end of 2015, we will have put in substantial amounts of cash into that plan. And as we put cash into the plan, we are not putting it in a risk-bearing asset, but we're trying to invest that into a hedging asset such that when we put new cash into the plan, it's being earmarked in general to fixed income investments with that duration matched to the underlying liabilities. Such that the more cash we put in, the more risk we take off of the table. And as we started at 65% equities today, when we get to the end of 2015, we'll be substantially completely funded in that plan. And our equity percentage over the course of that five or six-year period, it's going to go down to 10% systematically, as we either, a, put cash in the plan or, b, market returns or interest rate movements change the funding percentage such that we might move more investments out of an equity investment into a fixed income investment and at opportunistic times when the funding percentage improves.

Is there a lower or higher discount rate, or more beneficial discount rate applied to debt instruments to determine the balance, the liabilities?

No, there -- the assets are going to be valued at comparable rate to the liabilities. I mean the liabilities use an index that's based upon the Moody's AA rate. The assets will be invested in corporate bonds primarily, but it will also have some government instruments in there as well. So they ought to match up pretty well. The key is to have the durations matched up such that when we get to a position where we're fully funded, interest rates can go up or down and it -- the liabilities will go, or assets will go up and down in concert with each other.

I see.

And you shouldn't see the volatility in either the Company's balance sheet or cash flow statement at that point in time.

Okay. What kind of a manager have you got -- have you got a separate manager for the debt and equity?

Yes. We've -- In 2008 actually we underwent an investment review and replaced the manager that we had at that time with a new manager who is responsible for selecting the individual managers that manage the fixed income component and the equity components of the plan.

Okay. Somewhere, you seem to give conflicting numbers. Earlier in the call, you said something about that your pension expense went from $14.2 million in 2008 to $11.6 million in 2009. And then later in the cal,l you talked about lot bigger numbers. Would you mind retouching on that again?

Yes, there's two components to our pension story. One is a non-cash P&L charge that hits our operating results, and it's determined under the accounting rules. And that non-cash expense is going to go from $14.2 million in 2009 to $11.6 million in 2010. The other component to pensions is the actual cash funding that we're required to put in. And in that funding is going up significantly in 2010 compared to 2009. So in 2010, in the US we put in about $10.5 million and that's going to go up by $20 million to $23 million in 2010.

$20 million to $30 million?

Yes.

Okay. And that's all in your guidance?

Yes.

Okay. All right, thanks a lot.

Okay. Thanks, Jim.

(Operator Instructions). Our next question comes from the line of Carter Newboldt with [Rutabega] Capital. Please go ahead with your question.

Thanks, good afternoon.

Hi, Carter.

I wonder if you could review what your options are with regard to free cash under the amended credit agreements. I'm particularly interested in the decision you made to make excess cash funding to the pension this year at a time when your equity stock price is at least at a 20-year low. Do you have the option to repurchase stock or pay cash dividends?

We -- we do have the option to -- and the opportunity to pay a dividend or repurchase shares under our credit agreement. There's a couple of tests that we have to go through. For a leverage ratio between 2.75 and 2.25, okay, on a --

Is that on a gross basis?

LTM basis. Yes. Then we can make up to $4.5 million of restricted payments. And those restricted payments could be a dividend or a share repurchase or earn out payments that occur for acquisitions subsequent to the date of our original credit agreement. There's really none in the third bucket that are out there right now. So it's really dividend and share repurchase. Once our leverage ratio gets below 2.25, then that basket increases to $12 million.

But for whatever reason, pension contributions are not part of your restricted payment calculation?

That's correct.

So I don't know how to be subtle about this question, so here goes. I mean, you guys sit at the controls of a Company that's got a 20-year legacy of concerns among public shareholders about who it was run for. Whether it was run for the family for most of the 1990s, and now I guess the question that pops in the [forefront] is whether it's run for pensioners. I mean did you all take a really hard look at a first dollar spend on that $10 million that's already out the door on a voluntary pension basis against your other options? Or did you prefer it, for some reason, that you can articulate? Because from where I sit, I haven't heard you yet make the case that it increased shareholder value. I just heard you make the case that you made the payment.

Yes. I think that what we look at and what the Board looks at in terms of whether and when to put the dividend back on, and that's certainly something that Management supports. It's something that the Board is also keenly interested in. But before we do that, I think we have to make sure that we've got sustainability in our earnings and some element of certainty that we will meet those financial covenants in the future. I don't think anybody wants to reinstate a dividend and then by virtue of the fact of a formulaic threshold in the credit agreement, have to pull it back off. So there's that. The pension plan has been obviously a pretty big drag on our earnings over the past two years, and it's got substantial cash funding requirements. I mean those cash funding requirements aren't going to go away. So as we look at the balance sheet risk that we've got, we see the defined benefit pension plan as being one of the biggest risks that we face. and it's also an element of debt in our capital structure that's very volatile. So to the extent that we can generate earnings our of our operation to make discretionary payments into that plan to de-risk it, then we think that's a very good use of the free cash flow of the Company.

I mean the only way that pension plan is going to get funded is through the operating cash flows of the Company. And as we generate operating cash flow, as we drive DSO improvement within the Company and cost efficiency, we have really two twin priorities for that free cash flow. And it's paying off our pension obligation and taking risk off the table there, and also deleveraging our third party borrowings that we have as a Company. And, we are pleased that we were able to make progress on both of those fronts during 2009. We took our borrowings down to a level that's $15.6 million less than where we started the year and were able to make $10 million in cash contributions to the US plan during the course of 2009. And then in January, we put in another $10 million.

That's helpful. That's a more -- at least a clearer defense of the strategy. Let me ask one other -- let me ask you to go a little deeper on something else you said. You said nothing is going to take care of the pension issues other than cash contributions. That assumes that you retain ownership of all the businesses that have the pension liabilities. And you've articulated a five- to six-year strategy for [mending] that. I think if I staple those two together, you're saying you've got a long-lived commitment to Crawford as presently structured with four separate operating units. The other way to reduce the pension liabilities is to sever yourself from the businesses that own them, if you could.

In theory, that's correct, Carter. But I mean we have four individual segments at this moment which are -- three are performing adequately. One, we are turning around at this moment. We had a fourth quarter profit in the Broadspire operation, which is a fairly significant turnaround. We are reinstating and implementing new technology into that unit to attract more business. There's some economic factors that have affected that at the moment. But that unit is a very significant part of the recovery that we're putting in place. And that business is a very positive cash generation business. I mean at this moment -- I mean we are not looking to -- at this current moment to divest of any particular unit.

Okay, thank you.

And there are no further questions at this time. I will now turn the call back over to Mr. Bowman for closing remarks.

Thank you. Thank you very much, all of you, for your questions. Just a few closing thoughts. Really, it's about our strategies, which remain three-fold within the organization. The first and the most important is securing new business wins for all of our business units. That is something we are intently focused on. The second is focusing on improved operational efficiency and delivering those results to our clients. And thirdly, is an absolute disciplined approach to our expense management and our working capital. For 2010, we will continue to manage the Corporation with integrity and innovation every day to ensure that we are building sustainability as a Corporation. And we intend to fully capitalize on the opportunities that are presented that will drive current and future growth for our shareholders. I would like to thank everyone for joining us this afternoon and wish you a great week. Thank you.

Thank you for participating in today's Crawford & Company conference call. This call will be available for replay beginning at 6 PM today through 11:59 PM on February 15, 2010. The conference ID number for the replay is 53036043. The number to dial for the replay is 1-800-642-1687, or 1-706-645-9291. Thank you. You may now disconnect.