Crawford & Co (CRD.A) 2010 Q2 法說會逐字稿

Good afternoon. My name is Sarah, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Crawford & Company second quarter 2010 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, August 9, 2010.

Some of the matters to be discussed in this Conference Call and in the supplementary financial presentation may include forward-looking statements that involve risks and uncertainties including statements regarding liabilities, associated with our Defined Benefit Pension Plan and our ability to pay dividends in the future. The Company's actual results achieved in future quarters could differ materially from 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 unanticipated events.

For a complete discussion 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, 2009, 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 these 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.

A warm welcome to our investors, clients and employees this afternoon for a discussion of our 2010 second quarter together with our current outlook for 2010 and comments on key events. I am Jeffrey Bowman, President and CEO of Crawford & Company. Joining me today from the global executive Management team are Bruce Swain, our CFO, and Allen Nelson, our General Counsel and Chief Administrative Officer.

We will begin with some comments on the claims environment and general economy. Bruce will then review the second quarter financials in more detail followed by our review of progress on our strategic initiatives and concluding with comments on our corporate focus for 2010.

Our worldwide team continues to work hard to produce acceptable results building on the operational strategies we are implementing. Irrespective of economic conditions or challenges outside our control, we continue to execute on our plans to strengthen our Corporation for medium- and long-term growth and increase shareholder value. The global economy outlook appears to be improving in many respects, but as it affects the US insurance industry, conditions remain stubbornly difficult.

Financial pressures persist in businesses large and small as our clients focused on containing their near-term cost. For third-party service providers, this combination of lower global employment and tightened belts at the insurance carriers and in other major corporations continues to mean fewer claims overall and increased pressure to maintain market share, let alone provide growth. In particular, our US market is under pressure as the industry has seen a reduction in claims reported from 2007 to 2009 of 13.4% according to industry sources. Over the same period, Crawford has only experienced a reduction in claims reported of 8.5%. Therefore, improving on the industry average, testament to our Management that we are winning accounts.

Although we do not have the second quarter 2010 industry numbers as yet, first quarter and current loss and loss adjustment expenses for the industry showed a drop of 5.4% or $4.3 billion. This reference is a contraction in underlying exposures and gross written premium. The decline in gross written premium is 6.5% over the past three years, indicating the contraction in the US Property & Casualty market across all the major lines of business.

In our Broadspire business, the most important economic indicator remains the US unemployment figures. In the second quarter, Broadspire has seen a slight increase in claims in the temporary staffing and healthcare accounts, which we expect to ultimately offset the losses of claims in the manufacturing sector. However, we cannot expect to see workers compensation frequency grow until the US is increasing jobs. Growth in the near-term, therefore, then comes from winning new accounts, which I will touch on in the business unit report.

Our Property & Casualty clients in the United States and the rest of the world are still seeing a softening of property and casualty premium rates. We continue to be very optimistic on the outsourcing or rightsourcing of claims by carriers made in the interest of reducing the cost of delivery by turning fixed-cost in-house claims departments into a variable [cross]. This continues to be a key positive business value proposition for Crawford in discussions with our clients. What is essential in these types of arrangement is delivering world-class service by aligning the vision of the client to the quality of the service, and then being able to validate the process through technology.

Similar to quarter one was the lack of adverse weather in quarter two, affecting both catastrophe and non-catastrophe revenue in the US and Canada. During the second quarter of 2010, weather was unusually benign and claims counts were well below 2009. The US catastrophe events remained below average in the first half of 2010.

Canada is in the International Operations segment and thus negatively affected our international operation results. Canada has seen a year-to-date reduction of 30% in total claims assignments 2010 over 2009. Finally, excluding the potential impact of adverse weather conditions, we believe North American claim activity is beginning to stabilize at the reduced level we see today, and we expect to begin a slow increase tracking an increase the economic recovery going forward even as sustained high unemployment will slow down the recovery of the workers compensation and commercial reliance exposure.

Turning to our corporate performance. Against this industry and economic background, Crawford & Company delivered an operating result that reflected the difficult business environment. Second quarter revenue improved on the first quarter, but declined compared to the previous year, reflecting the factors I outlined a moment ago.

Our expense management efforts gained ground throughout the year, producing increased cost efficiency in the second quarter, particularly in selling, general, and administrative costs. We implemented further administrative cost controls in the second quarter and have seen improvement in our self-insured professional indemnity expense as we have improved quality. During the 2010 second quarter, we incurred a $2 million pre-tax charge for severance costs related to the reduction of 146 administrative staff. This reduction in force is expected to produce $9.6 million in annualized compensation and benefits savings over a 12-month period. Unfortunately, we were also required to record a charge relating to a purchase price arbitration decision on the Broadspire purchase related back to 2006.

Moving from the GAAP earnings per share to an adjusted non-GAAP earnings per share, the comparison for the quarter was $0.10 per share for the current year compared to $0.11 for the prior year. So, let me walk you through those adjustments. For the second quarter 2010, reported GAAP earnings per share of a loss of $0.05 per share was affected by $0.13 due to the goodwill impairment charge and $0.02 related to restructuring activities. For the prior year, the reported loss of $1.70 reflects a goodwill impairment charge of $1.81. For the six months, comparable adjustments to reported earnings per share gives a flat adjusted non-GAAP earnings per share result of $0.19 in both years. That concludes my initial remarks.

Bruce, would you review the Company's overall performance for the second quarter?

Company-wide revenues before reimbursements in the 2010 second quarter were $238.2 million compared to $249.7 million in the prior year second quarter. Growth in our International Operations segment, due to a weaker US dollar, offset weakness in revenues produced in our Broadspire and US Property & Casualty segments. Our net loss attributable to Crawford & Company totaled $2.5 million in the 2010 second quarter compared to a loss of $88.1 million in the 2009 period. Second quarter loss per share on a GAAP basis was $0.05 in the 2010 period compared to a loss per share of $1.70 in the 2009 period.

The Company's selling, general, and administrative expenses, or SG&A, totaled $50.4 million, or 21.2% of revenues, in the 2010 second quarter, decreasing approximately $4 million from $54.4 million, or 21.8% of revenues, in the prior year quarter. This decrease in cost is primarily due to lower self-insurance costs, reduced expenses associated with the termination of a computer system hosting contract, and administrative cost control. As Jeff mentioned, during the 2010 second quarter, the Company incurred severance cost of $2 million before related income taxes resulting from the elimination of 146 positions representing $9.6 million in annual administrative expense savings, consisting of compensation, taxes, and benefits. These severance costs reduced earnings per share by $0.02 for the 2010 second quarter.

Also, during the 2010 second quarter, the Company recorded a goodwill impairment charge of $7.3 million, or $0.13 per share. All but the interest portion of the charge is non-deductible and was due to the contingent determination in an arbitration proceeding related to the October 2006 acquisition of Broadspire Management Services, Inc. In the 2009 second quarter, the Company recorded a preliminary non-cash goodwill impairment charge of $94 million, or $1.81 per share, related to our Broadspire segment.

Revenues, net loss attributable to Crawford & Company, and loss per share in the 2010 second quarter were impacted by a number of items, including the positive effects of decreased defined benefit pension expense and the positive impact of foreign currency exchange rate changes. And the negative effects of increased restructuring and other costs as well as charges associated with goodwill impairments related to our Broadspire segment in both 2010 and 2009 periods.

As compared to the 2009 period, during the 2010 second quarter, the US dollar was weaker against most of the major foreign currencies in which we operate globally. This benefited the Company's consolidated and International Operations segment revenues in 2010 compared to 2009. International revenues decreased less than 1% in the 2010 second quarter on a local currency basis, and after reflecting the positive impact of exchange rate fluctuations, international revenues increased by 10.3% in US dollars to $105.8 million. Excluding the positive effect of exchange rate fluctuations, our revenue performance and local currencies primarily reflects organic increases in our European and Americas operating regions, offsetting weather-related declines we experienced in our Canadian market.

International operating earnings declined to $7.3 million in US dollars during the current quarter, down 13.6% from last year's second quarter operating earnings of $8.5 million. The operating margin in this segment decreased from 8.8% in the 2009 second quarter to 6.9% in the 2010 quarter. When measured on a constant dollar basis, international operating earnings were $6.6 million in the 2010 period.

Revenues from the US Property & Casualty segment totaled $47 million in the 2010 second quarter, decreasing 14.3% from the $54.8 million reported in last year's second quarter. Revenues generated by our catastrophe adjusters totaled approximately $2.8 million in the 2010 second quarter, declining from $7.2 million in the 2009 quarter. Apart from the decline in catastrophe-related revenues, the revenue decrease in the 2010 second quarter was driven by a reduction in field operations revenues as a result of a decline in overall industry-wide claim frequency.

Operating earnings in our US Property & Casualty segment totaled $3.3 million, or an operating margin of 7% of revenues in the 2010 second quarter. This is compared to operating earnings of $6.2 million, or 11.3% of revenues, in the prior-year quarter. This operating earnings decline primarily reflects the lower revenues generated during the current quarter, partially offset by ongoing cost-control measures. During the 2010 second quarter, US CAT activity remained below prior-year levels due to relatively benign weather in the first six months of the year.

Revenues from our Broadspire segment decreased to $61.2 million in the 2010 second quarter, down 16.3% from $73.1 million in the prior-year quarter, reflecting the impact of a previously announced non-renewal of a major contract within this segment. Overall claim volumes in this segment were also down during the 2010 second quarter, reflecting lower industry-wide workers' compensation claim referrals as a result of weak US employment levels. Broadspire's operating loss in the 2010 quarter totaled a loss of $1.8 million, or negative 2.9% of revenues, compared to the operating loss of $606,000 or negative 0.8% percent of revenues in the 2009 second quarter. We continue to focus on cost efficiency within this segment in light of unfavorable claim trends.

Legal settlement administrative revenues comprised of class action and bankruptcy claims administration services declined 6.4% in the 2010 second quarter to $24.3 million from the $25.9 million in the prior-year quarter. While declining against the 2009 second quarter, the segment generated double-digit sequential revenue growth over the 2010 first quarter. Operating earnings totaled $5.6 million in the 2010 second quarter, or 22.9% of revenues, as compared to $4.3 million, or 16.5% of revenues in the prior-year period. Legal Settlement Administration continues to have a strong backlog of projects awarded totaling approximately $56.5 million at June 30, 2010, as compared to $62.8 million at June 30, 2009.

Our cash and cash equivalent position at June 30, 2010, totaled $38.2 million as compared to $70.4 million at December 31, 2009. Our investment in unbilled and billed receivables has increased by $21.5 million in US dollars during 2010, reflecting a 6.9-day increase in day sales outstanding, or DSO, to 75 days at the end of the 2010 second quarter. Our pension liabilities declined in 2010 by $16.5 million, reflecting the higher contributions to our frozen US defined benefit pension plan required during 2010. Our total debt has increased in 2010 by $10.8 million, reflecting the increased required contributions to our US pension plan and the negative impact of higher receivable levels.

Cash used in operations totaled a negative $29.6 million for 2010, compared to $3.7 million provided by operations in the prior-year period. This $33.3 million decrease was primarily due to increased defined benefit pension funding during the 2010 period and growth in unbilled revenues and billed accounts receivable in 2010. The Company's cash requirements typically peak during the first half of the year 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 a negative $48.8 million for the 2010 period, decreasing $40 million from the negative $8.8 million in the 2009 six-month period.

In addition to the increase in receivables and defined benefit pension funding, this decline reflects the $5.8 million principal payment we made against our outstanding debt in the 2010 first quarter. We are carefully monitoring our level of capital spending in 2010 to ensure that approved projects support our strategic plans and have a clearly demonstrated payback.

Back to you, Jeff.

Thanks, Bruce.

Let me first continue by offering a cautious outlook for the insurance industry for the coming quarters. While some measures of economic activity are improving, as I said earlier, unemployment levels, a key factor driving our US Broadspire business, have shown only slight improvement. Consequently, we are still expecting a challenging workers' compensation claims environment into the second half of the year in the Broadspire segment. We also expect absent weather-related events which are forecast by the experts to be active in quarter three, a slow general improvement in property claims activity. The cost management strategies of our property and casualty clients should be a positive for Crawford in the business process outsourcing arena.

While the economy may remain a headwind, Crawford is not simply waiting for conditions to improve. Over the past two years, we have developed and implemented various strategic planning initiatives to improve our work product, improve our technology, protect our client relationships, and generate new business opportunities even in a shrinking market. At the same time, we have continued to reduce our fixed-cost and improved our technology, enabling us to gain operational efficiencies.

Let me review some of these initiatives with you now as a way of gaining insight into our planned activities during the remainder of 2010 and into 2011. Our focus on attracting new business and retaining our current customers is linked to the launch last year of the Crawford System of Claims Solutions, which is prominently displayed on our website. This process defined our competitive advantage to reinforce our industry leadership and clarify our portfolio of businesses to our clients. Significant attention has been put into key account management and cross-selling initiatives throughout our businesses globally.

One area of engagement with our clients that we are concentrating on is business process outsourcing, where we have already won several programs from clients to handle the full claims administration process. The expansion of our GTS products, our high-value, complex-claims business, and the international expansion of Broadspire have been very well received by our clients overseas. Also, as a result of client 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 well-positioned to handle these challenges going forward.

We are also relentlessly accelerating our overall technology strategy with better analytics for both local and global clients, and we have introduced new technology that provides effective central oversight for our claims organization, and we are seeing improvement in the quality of our products as a result. We will continue to be diligent on expense control, as demonstrated by the second quarter reduction in force, and will stay focused on maintaining our long-term goals of improving operating performance and cash generation.

Let me now turn to the outlook for each of our business units, starting with the International Operations, which represent 44.3% of our group revenue in 2010. The international segment reflected an increasing claims volume of 6% year-to-date. The single biggest variance in quarter two, as it was in quarter one, was the reduced frequency in personal lines activity in Canada. We also undertook a substantial developmental effort in Canada, which resulted in our Contractor Connection product going live May 3 with a major client. The results to date for Contractor Connection have been excellent, and we believe there is a strong market in Canada for this product, which is based on the operation we have in the United States, and the growing UK version of Contractor Connection, which is branded repairNet, which continues to go from strength to strength.

Our UK operation is benefiting from two surges in weather events that occurred in the first quarter. At the same time, our Australian operation also had weather events in Melbourne and Perth. The build-up of work in progress will be worked on in the second half of the year as we look to reduce DSO figures and generate improved cash balances. In our International Operations, we continue to be focused on the new client acquisition and the sustainable revenue from the acquisition of new claims programs. We were successful in the second quarter in winning new programs, which will result in $9.2 million based on current volumes in new revenue on a per annum basis. In pursuit of new business, we continue to make excellent progress with our London initiative to grow Crawford's market share of the Lloyd's Market. Our goal is to increase our visibility in Lloyd's to be viewed as the claim provider of choice on a global basis.

We also continue to see growth in our Latin American division, where we have taken on significant number of affinity claims programs, and we will see growth in these new affinity programs we have been building in Brazil, Peru, and Mexico. We are still globally supporting our Chilean corporation, where we have a minority interest, on the very significant earthquake claims that occurred in February 2010. As I mentioned earlier, significant weather claims in Australia, where we had catastrophic events in Melbourne and Perth, have required us to send US CAT adjusters to support the Australian operation. Overall, I am encouraged by the opportunities in front of our International Operations, where we have developed meaningful collaborative relationships with our clients.

Now, turning to the US. Our US Property & Casualty division reported a challenging first quarter due to lower claims and the absence of catastrophe-related activity, and this has not changed in quarter two. The declining claims intake that began in September 2009 has continued to date. As a result, revenue and earnings declined against the prior year. Expenses are being managed harder to ensure we maintain margin and enable revenue increases in future months to yield a more positive bottom line improvement.

It's also important to reiterate that there are some very good bright spots for the US Property & Casualty division that gives us confidence in our 2010 outlook and going into 2011. Firstly, in line with our goal of growing GTS, our large complex claim unit in the United States, we continue to aggressively add executive general adjusters, EGAs, and win high complex claim nominations from our clients. Secondly, our Contractor Connection business in the USA continues to build as we add more contractors to the program and, more importantly, new clients.

Year-to-date claims are up 35% over 2009. To demonstrate the success of the Contractor Connection business, our upcoming 12th Annual Contractor Connection Conference in 10 days' time has over 100 exhibitors and nearly 2,000 attendees participating, making it one of the largest restoration expos in the USA, especially as it is an invitation event. We are satisfied that our claims intake decrease is better than the overall industry decrease. We continue to secure new accounts, and this will benefit us in the future when the expected claims increase and frequency reemerges. Winning new accounts and being nominated in advance on claims programs is critical.

Moving to technology and innovation, we have improved our operating performance in our command center to introduce multiple client key performance indicators that enable us to manage data and report improved analytics to both our own operations and our clients.

Now, moving on to our Broadspire business unit. The high US unemployment rate continues to place pressure on the revenue stream from existing customers and reduce the lift from new business wins. Having said that, we increased our new business wins for our TPA business to $5.2 million year-to-date. We have also received a significant number of new RFPs, which confirm that both our reputation and quality are growing, and have currently 123 prospects in our pipeline, which is the highest for some time. As previously advised, with the economic picture unfolding, we planned for lower overall revenue in 2010, and therefore are continually monitoring our costs. Whilst our results are still not where we want them to be, we have made substantial progress in restoring our quality reputation, improving our technology, and developing new products.

The TPA market has become very aggressive in pricing for new business and renewals. 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. As a result of the current economic environment, service innovation is a critical success factor for Broadspire. We continue to enhance current services and develop new ways of managing loss cost to meet the complex challenges in today's marketplace.

We recently launched our BOLD Network. This is a good example of how we are changing the marketplace's thinking on workers' compensation networks. Leveraging our clinical expertise and priority metrics, we are able to identify the needs and cost drivers of our customers. The same clinical- and metrics-driven approach has allowed us to develop the Broadspire pharmacy benefit management program. Using evidence-based medicine, we designed our drug formulary and clinical review process explicitly to address the unique pharmaceutical cost drivers of workers compensation claims.

Broadspire's ability to fully integrate all of our services, claims management, medical management, and medical bill review, using our own staff gives us capabilities to provide innovative solutions to improve the bottom line of our customers. None of our competitors can match us. We believe that this will position us well to weather the economic conditions and put us into a position to take advantage of future opportunities as they emerge. There is no debate regarding the priority of getting Broadspire profitable. This is a major objective of the Corporation.

With regard to Legal Settlement Administration, we are pleased with this segment's operating earnings compared to last year's quarter two and year-to-date. Earnings have increased significantly due to the first-class cost control strategies implemented by our GCG Management team. The most recent moves for GCG in quarter two was their engagement in the BP Gulf oil spill. We have been retained by the administrator, Ken Feinberg of Feinberg Rozen, to assist in the creation and management of the Independent Gulf Coast Claims Facility.

Beyond that, the challenges that lie ahead for GCG remain growing our revenue in a very difficult [market] climate. We are seeing significant pressure on price from our clients and competitors. In the second quarter, we were retained in several new significant matters, including a large mutual fund settlement, a consumer case in which we e-mailed over 50 million notices and several legal notice programs. The bankruptcy market pace is definitely slower than last year. However, since we have established ourselves as a market leader, we are seeing an increased flow of opportunities. Currently, bankruptcy lawyers are still predicting a pick-up in filings at the end of this year and early next year, reflecting several factors including expected interest rate hikes and debt renegotiation. Given the overall economic climate, the GCG operating performance is a significant achievement and, based on the substantial backlog, we are excited about the potential performance in the balance of 2010 and into 2011.

We have revised our guidance for fiscal 2010 as follows. Consolidated revenue before reimbursements between $930 million and $940 million. Consolidated operating earnings between $50.5 million and $55 million. Consolidated cash provided by operating activities between $25 million and $30 million. After reflecting stock-based compensation expense, net corporate interest expense, customer relationship intangible asset amortization expense, special charges and credits, and income taxes, net income attributable to Crawford on a GAAP basis between $14.5 million and $17.7 million, or $0.27 to $0.33 per share. Before reflecting the special charge related to goodwill impairment of $0.13 per share, net income attributable to Crawford & Company on a non-GAAP basis between $21.6 million and $24.8 million, or $0.40 to $0.46 diluted earnings per share.

Before my closing comments, I would like to welcome our newly announced Director, Harsha Agadi, to the Board of Crawford & Company. Harsha has more than 24 years experience across several food services and franchise companies, including Domino's Pizza, Pepsi, Kraft General Foods, Little Caesar's, Enterprises, and Church's Chicken. He has been highly successful in introducing global brands to several overseas markets through direct investment and master franchising. Mr. Agadi was also responsible for opening over 2,000 stores [for four competing brands] in the last 20 years in over 50 countries. I and my team look forward to drawing on his management guidance and expertise as we continue to grow Crawford, both domestically and internationally. I'm excited about his appointment.

To our shareholders, clients, and employees, we are dealing with one of the most difficult economic periods since the Great Depression. Over the past few 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 value that creates an environment to produce and execute improved performance. Given the market strength of our business segments and the diversity of earnings for our Corporation, we continue to remain very optimistic about the potential growth opportunities as we execute on our corporate strategies for our shareholders.

Thank you for your time, and we look forward to your questions. Operator, will you please explain the process for asking questions to our audience?

(Operator Instructions). Your first question comes from the line of Mark Hughes with SunTrust.

Thank you, good afternoon.

Hi, Mark.

Hello. The legal settlement margin was very good in the quarter. How sustainable is that?

Hi, Mark. This is Bruce. It was a very good quarter for legal settlement and we were very pleased with that performance. As you know, that business can be lumpy and we can have swings in revenue and profitability depending upon the timing of court awards and the work done under those projects. So in the second quarter this year, we had a good quarter, but it's subject to some variability going forward.

Right. Was this an unusually profitable quarter?

I tell you, it's on the high-end of where we've seen.

Okay.

I mean, they've gotten up into the 20s before when you go back in the 2005-2006 period I think they were running operating margins in about that range. But I think that we've seen over the course of the past several years that that's a mid-teen business that we've seen kind of quarter-over-quarter but again, it's all subject to the timing and scale of the work that's awarded to it.

Right. What's your latest thinking in terms of the Broadspire return to profitability? Do we need the overall claims volume to stabilize? I guess there's stabilization improvements sequentially in 2Q, assuming that's sustained, when do we get back the positive margin?

Let me just take the industry side of it first, Mark. There's no doubt we're facing industry-wide declining workers compensation claims volume. And we've put a lot of work into client programs, [renewals], many of our accounts that offset some of the broader industry factors and we are winning business now. And, as I said earlier, we do have a number of RFPs that we're now working on.

I think that the issue around that is also we're expanding our medical management side. I think it's a transition. Our technology is coming into play and I think the real increase will start coming in the 2011 year as we come out of here. If we take the premise that we don't see a further decline in Workers Compensation claims. And we did see a little bit of an uptick Q2 over Q1, so we're watching that obviously very carefully going into Q3 and then into Q4.

Okay, and then you'd mentioned a couple times, I think, an outlook for claims to stabilize and perhaps start to pick back up as the economy firms. I took it that you were talking about the overall US market. Is that a fair reading and have you started to see anything that makes you think that the frequency is -- again, in the US claims adjusting, not Broadspire, the frequency there is on the mend?

I wouldn't say it's on the mend. I mean we're still, as an industry, we have in the US, which is -- and Canada, we've had very little weather activity in the first six months. We've seen a little bit of activity taking place in July both in Canada and the Midwest, but we are dealing with significant decreases in claims over a three-year period, as I mentioned. From industry statistics, we're looking at about a 13.4% decrease in claims over a three-year period, where Crawford's claims have really reduced by about 8%, 8.5% over the same period. I think we're maintaining our market position.

We are winning and obtaining new nominations, especially in the global technical service end, which is the higher-value complex claims, and also on program nominations as and when we see that claims volume start to increase. So I'm confident that we've got the right models in place. Our Contractor Connection model is working very well.

We've got some significant new prospects that we're looking at, at this moment, and as I said, it's a testament to the Property & Casualty business unit, we are getting nominated on programs. I think it's -- we're bottoming out a little bit on the claims. We've seen some form of stabilization on the last couple of months but it's too difficult to say when we see the claims start increasing because that's something outside our power at the moment. But we do have the right business model and technology in place to be a much smoother efficient operation in dealing with our clients.

And again in the US market, I think you'd suggested claims, at least the last of couple months, have stabilized? Is that --?

Absolutely.

And, again, that's distinct from Broadspire?

No, Broadspire we've seen a turn-up in claims Q2 over Q1. Significantly down from two years ago and a year ago, but it's reassuring that there's a stabilization there. I think we're seeing that also with the Property & Casualty, and this may be where our clients have taken actions on their own internal claims department with the decrease in the number of claims coming in and they've been able to do a bit of the reorganization around reducing fixed-costs and creating a fixed-cost model. We believe if claims start to increase we will get a significant portion of that coming through the overflow of that.

Thank you.

Okay.

(Operator Instructions). Your next question comes from the line of Adam Klauber with Macquarie.

Good afternoon. How are you guys?

Good.

Good afternoon.

A couple different questions. On your revenue forecast, it looks like that's suggesting growth of roughly negative 5% for the back half of the year, which is pretty close to what you had in the second quarter., So, are you being pretty conservative, because that suggests really no rebound whatsoever?

Well, when we look at it, we're certainly taking measure of the fact that there's been very little catastrophic claims activity in the US or in North America. So as we look to the back half of the year, we're basing our guidance on kind of a continuation of where our current business conditions are. Certainly to the extent that there's an uptick in industry-wide claims frequency or a catastrophic weather event, then that would certainly -- should certainly be a benefit to us.

Okay. As far as pre-tax margin, it's been sitting around 3% and obviously revenues have been pressured. With some of the moves you're making this quarter, even if revenues remain under pressure, is it potential to get the margin going north of 3%?

On a pre-tax basis?

Yes. Pre-tax.

Yes, I mean, the important thing for us is stabilizing the top line, and that's the challenge to delivering a bottom-line result for us and probably for any other company. It's difficult for us to cut our way to improve margins. In some of our businesses, you've got claims that go on for an extended period of time, mainly in the Broadspire business. And so getting some stability in the top line allows you to make planning decisions around your cost base in order to get your margins up. So I think that with stability in our top line, we can work more on the bottom line and deliver some improved results, but if it's going to take stability on the top line.

Okay.

Adam, just to that point, I mean, you know, the -- as I said the loss activity is -- we see sort of stabilizing at the moment from our information and if it really -- if the claims track with how economic activity goes forward, we should see through the cost management that we've put into the business that we should see significant gross when that revenue increase comes in through the increased claims activity.

Right. Because the other part of that is our SG&A costs, (multiple speakers) which we're pushing down, but we've got the ability to leverage that SG&A base in the US. Such that incremental revenues can deliver up to 25% to the bottom line and that we're not increasing that SG&A cost. So that's the real -- that's going to be the real driver and the real leverage for the bottom line.

In the Broadspire segment, are you seeing claims going longer? Is the duration stretching out as the economy's not recovering or not recovering as quickly?

In general we have, yes.

Okay, and also, on the -- and I'm sorry, you may have said this, if you exclude FX, what was the organic growth rate on international?

In the quarter it was a decline of less than 1%.

Okay, and actually one more quick question. You show unallocated expenses coming down from $5 million to $1 million. What's the -- I guess what's the source of the drop?

There's a few things. One, we've got lower defined benefit pension expense this year compared to last year. Are you looking quarter-over-quarter?

Yes.

Or year-over-year?

Well, they declined on both.

Right so we've got lower defined benefit pension expense in both -- in 2010 in the US. We've also seen improvement in our self-insured reserve experience in the United States, primarily around our self-insured professional indemnity program. Which is E&O claims that might be brought against us for the handling of a claim, as well as better experience in our self-insured medical program.

So would you expect the unallocated corporate to stay at more of the first-half run rate or the potential of that move up into the second half?

Well there's always the potential that can move on us, really related to the self-insured reserves. Which have some volatility associated with them mainly based upon the occurrence of a claim that we may not know about or increased utilization under our medical plan. So those can be volatile.

I will tell you this though. In terms of our self-insured programs, we have seen improvement there over the past few years and a lot of its been down to a pretty involved process that we have internally around managing these claims, getting the business involved in them, looking at root cause analysis so that we can fix problems at the root level and not have a repeat performance of bad claims that we may have experienced in the past. So I think that sort of enterprise-wide focus on this is helping us to have some sustainability there. But it's still an area that's difficult to predict and I wouldn't want to offer any prediction on the future.

It comes back to the quality of the products as well. We've spent a lot of time with linkage between our Management teams, technology, ensuring that we are doing things right with the claims the first time. And that quality starts coming out and you will see improvements in the self-insured reserves on that basis. We've put a lot of time and effort into making the quality of the product much better than it was a few years ago.

Great, and finally -- I'm sorry if you said this. Any guidance on pension expense going forward for this year and for next year?

We have not offered any guidance on pension expense going into next year. For 2010, we expect our pension expense to be about $11.6 million, and that's down from $14.5-plus million that we had in 2009, so that's where we're seeing some of our benefit. We have, and you may be aware that there's been a lot of conversation around pension funding reform in the US. And there was a recent act that was passed recently that gives, in the US, some potential for funding relief going forward. And it affords companies a couple of different methods of looking at the losses that were incurred in their plans over the past few years and stretching out the cash funding requirements associated with those losses. We are looking at that right now and we expect to adopt one of those relief provisions. We've gone into some detail in our 10-Q that we filed this afternoon about what that could look like in terms of cash funding for us going forward. And you could look at that in relation to what we had disclosed back in the 10-K for 2009 and see that the difference is there.

It's something that is still subject to interpretations and regulations coming out around some of the key provisions of the act. But in its current state, we're seeing a benefit to us going forward in terms of cash funding, probably in the $6 million range. But the act does have some provisions that could require higher contributions than what we've disclosed based upon dividends that the Company might pay in the future. As well as certain levels of compensation that may require additional contributions into the pension plan. So I think, look at the Q and that will give you some insight, and then as this becomes clearer, we'll be updating our disclosure around that and hopefully providing some more clarity in the third quarter call.

Okay, well thank you very much.

Thanks, Adam.

At this time there are no further questions. Presenters do you have any closing remarks?

Thank you. Thank you very much for your questions. Just a couple of last comments.

Our strategies remain intact within the organization. One, most importantly securing new business wins for all of our business units. Two, focusing on improving operational efficiency and driving results to our clients. Thirdly, a disciplined approach to expense management in working capital. Fourthly, to our employee commitment and engagement. We continue to emphasize having a positive attitude which manifests itself in exceeding the requirements that our clients have. And fifth our 100% commitment to our shareholders that we are improving the Corporation.

For the balance of 2010 we will continue to manage the Corporation with integrity and innovation every day to ensure we are building sustainability. We will continue to fully capitalize on the opportunities presented that will drive current and future growth for our shareholders. I'd like to thank everyone for joining us this afternoon and wish you all a great week. Thanks and goodbye.

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 August 16, 2010. The conference ID number for the replay is 909-540-84. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you. You may now disconnect.