Crawford & Company Q4 2008 Earnings Call Transcript

Feb. 9.09 | About: Crawford & (CRD.B)

Crawford & Co. (NYSE:CRD.B)

Q4 2008 Earnings Call

February 09, 2009; 03:00 pm ET

Executives

Jeffrey Bowman - President & Chief Executive Officer

Bruce Swain - Chief Financial Officer

Allen Nelson - General Counsel & Chief Administrative Officer

Analysts

Mark Hughes - SunTrust

Matt Reams - Buckhead Capital

Carter Newbold - Rutabaga Capital

Shamo Sadukan - Lotus Partners

Operator

Good afternoon, my name is Mollie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Crawford & Company Fourth Quarter 2008 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 speaker’s remarks, there will be a question-and-answer period. Instructions and will follow at that time. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today Monday, February 09, 2009.

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 frozen defined benefits pension plan and our ability to pay dividend in the future. The company’s actual results achieved in future quarters could differ materially from results that maybe 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, 2007, 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 the Results of Operations.

This presentation also includes certain non-GAAP financial measures as defined under the SEC rules. As required, a reconciliation is provided for those measures to the most directly comparable GAAP measures, which is available on our website at www.crawfordandcompany.com/quarterly releases.

I would now like to introduce Mr. Jeffrey Bowman, President and Chief Executive Officer of Crawford & Company. Mr. Bowman, you may begin your conference.

Jeffrey Bowman

Thank you and good afternoon. A very warm welcome to our investors, clients and employees this afternoon for a discussion of our 2008, fourth quarter and year-end results together with our earnings guidance for 2009.

I’m 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.

Today, we will be talking briefly about our markets followed by the highlights of fiscal 2008. Bruce will review the fourth quarter financial results and I’ll wrap up with the review of the segment operating performance and a discussion on the guidance and economic headwinds we face in 2009.

The greatest economic impact of the downturn is being felt in our U.S. and U.K. businesses with less initial impact in our Canadian and overseas markets. In the U.S, the economic downturn had placed many corporations in a challenging financial position. This results in a greater need for us to manage accounts receivable and customer credit worthiness very adversely.

In our Broadspire segment, a significant portion of the TPA business is tied to the workers’ claims administration, which is in turn tied to U.S. employment levels. We are monitoring this closely. In our U.S. Property & Casualty and international business, we have not seen an appreciable impact on claims volume or customer relationships today.

We have a very strong story to tell on how we provide quality, consistency and value-added outcomes for our clients in managing their indemnity dollars, which are the most significant portion of the claim. We will continue to refine our services to meet the changing needs of our claims.

So, let me review some of the progress made in the fourth quarter. Throughout, the fall and despite the turmoil in the financial markets, we continue to work hard to execute the plans we outlined at the beginning of the year and the management team and global employees have produced another quarter with significant positive operational results over the prior year.

We have exceeded full-year guidance and produced the fourth consecutive quarter of strong results, which include double-digit revenue growth in U.S. Property & Casualty and increased catastrophe related revenue. The 2% growth in our international operations was adversely effected by currency shifts and was 11.6% before those impacts.

Operating margins improved in the International Operations and U.S. Property & Casualty segment for the quarter and improved across all segments over the year. We are pleased with the Company’s progress this year and I’m happy to report that Crawford and Company posted strong fourth quarter sales with net income of 152% and significantly improved cash flow over the prior year.

Throughout 2008, we exceeded our 2007 results and our earnings per share of $0.16 is equal to the best fourth quarter performance since 1999. For the full-year Crawford surpassed the $1 billion revenue month for the first time in its history. Earnings per share of $0.62 for the year is also the highest since 1999.

As we have stated before, the 2008 was not just about improving earnings. It’s was about delivering on our strategy to improve our balance sheet and cash flow to working capital management and debt reduction.

The $48 million improvement of our operating cash flow over 2007 also shows that we are making progress. We are committed to winning new accounts and importantly retaining those accounts we have through closer customer relationships. After Bruce provides some detail review of the segment results, we will discuss our guidance for 2009 in detail.

At this point, I expect that we will see continued progress in all of our four segments in the upcoming year, driven by modest revenue growth an improved leverage of volume gain against expenses. Insurance remains the DNA of global business and we are very optimistic about the growth opportunities for our operations.

That concludes my initial remarks. Now, let me turn things over to Bruce for a detailed review of the segment operating results and after that I will outline some of the operational achievement and then review the guidance for 2009. Now over to you, Bruce.

Bruce Swain

Okay. Thanks Jeff. Companywide revenues before reimbursements increased by over 7% in the 2008 fourth quarter to $262.9 million and $245.2 million in the prior years’ fourth quarter. This increase is attributable to double-digit organic growth from our International Operations and U.S. Property & Casualty segments, which offset weakness in revenues generated in our Legal Settlement Administration and Broadspire settlements.

Our net income totaled $8.3 million, as compared to net income of $3.3 million we reported in last year’s fourth quarter. We recognized fully diluted earnings per share of $0.16 for the current quarter as compared to earnings per share of $0.07 in last year’s fourth quarter.

Fourth quarter 2008 earnings per share included $0.02 related to the recognition of our foreign tax credit related to calendar year 2007, as well as $0.02 related to the recognition of the current year R&D tax credit as a result of legislation passed by Congress during October, which reinstated the credit for 2008.

Net income in the 2008 fourth quarter, included a $2.5 million non-taxable gain on the sale of the business in our Holland subsidiary, or $0.05 per share. We also incurred restructuring costs in certain of our operations, which totaled $2.2 million after related income taxes or $0.04 per share.

The Company’s selling general and administrative expenses or SG&A totaled $53.5 million or 20.3% of revenues in the 2008 fourth quarter. Increasing about $2.7 million from $50.8 million in the prior year, declining as a percentage of revenues from 20.7% in the prior quarter, this increasing cost is primarily due to higher incentive compensation expense as a result of the Company’s improved financial performance during 2008.

Let’s look at the results in our International Operations. During the 2008 fourth quarter, the U.S. dollar strengthened dramatically against most of the major foreign currencies in which we operate locally. Reversing the weak dollar trend we have been experiencing and benefiting from over the past few years.

International revenues grew 11.6% in 2008 fourth quarter on a local currency basis, but after reflecting the negative impact of exchange rate fluctuations by only 2.1% in U.S. dollars to $109.6 million. This revenue growth reflects increased case referrals in our Canadian operating region, resulting from new business wins during 2007 and 2008 and the positive impact of claims generated in 2007 from the U.K. flooding events, which we substantially completed during the 2008 fourth quarter.

International Operating earnings improved to $10.9 million in the current quarter, up 10.3% over last year’s fourth quarter operating earnings of $9.9 million. This improvement reflects an increase in the operating margin, from 9.2% in 2007 fourth quarter to 9.9% in the 2008 quarter.

Revenues from our U.S. Property & Casualty segment totaled $59.8 million in the 2008 fourth quarter, growing 35.2% from the $44.2 million reported in last year’s fourth quarter.

Revenues generated by our catastrophe adjustors totaled approximately $11.3 million in the 2008 fourth quarter, increasing over the $1.8 million produced in the prior year period. Operating earnings in our U.S. Property & Casualty segment totaled $4.8 million, or an operating margin of 8.0% of revenues in the 2008 fourth quarter.

This is compared to an operating loss of $466,000 million or 1.1% of revenues in the prior year quarter. This turnaround was driven primarily through technology driven efficiencies, strong incremental margins from catastrophe-related business and higher case volumes.

Revenues from our Broadspire segment increased slightly to $75.6 million from $75.2 million reported in the 2007 fourth quarter. Broadspire’s operating earnings in the 2008 fourth quarter totaled a loss of $1.8 million or 2.4% of revenues, increasing from an operating loss of $388,000 or 0.5% of revenues in the 2007 fourth quarter.

Legal settlement administration revenues comprised of class action and bankruptcy claims administration services declined 2.5% in the 2008 fourth quarter to $18 million. Operating earnings totaled $2.3 million in the 2008 fourth quarter, or 12.9% of revenues, as compared to $2.9 million or 15.9% of revenues in the prior year period.

Legal settlement administration continues to have a strong backlog of projects awarded, totaling approximately $42 million at December 31, 2008, as compared to $45 million at December 31, 2007. Our cash position at December 31, 2008 totaled to $73.1 as compared to $50.9 million at December 31, 2007.

Our investment and unbilled and billed receivables has declined by $58.6 million in U.S. dollars during 2008 and our totaled debt has also declined in 2008 by $18.5 million as we used excess cash generated from operations to pay down borrowings.

At December 31, 2008 the company re-measured its defined benefit pension obligations and in accordance with the applicable accounting rules recorded to $116.9 million non- cash charge to recognize the increase in its under-funded position.

This charge was recorded into accumulated other comprehensive loss, which is a component of shareholders investment in the Company’s condensed, consolidated balance sheet. This charge had no impact on the Company’s 2008 results of operations or cash flows.

Cash provided by operations totaled $71 million for 2008, compared to $23.3 million provided in the prior year. This $47.7 million improvement was primarily due to higher net income in substantially improved working capital management.

In 2008, we reduced our day sales outstanding or DSO by 19 days, doubling the goal that we set at the beginning of the year. Our free cash flows stood at $36.9 million for 2008, improving substantially over 2007.

That concludes my initial remarks. Jeff, back over to you.

Jeff Bowman

Thanks Bruce. Let me add some comments and thoughts about our business progress and outlook for each of our business segments, starting with the International Operations. We continue to see strong revenue growth from contract wins that are predominately Property & Casualty programs in our Canadian and U.K. operations. Currently, many of our clients are in the process of renewing contracts with us and we are very optimistic on retention and renewal.

When we look at our claims referred and compare 2007 to 2008, we see a decrease in international claims of 13.6% in the fourth quarter. This was expected as it relates primarily to 2007 flooding in the United Kingdom. It is a positive sign for these operations that despite the claims trend, revenue and operating earnings continue to growth.

For the year, International Operations represented 42% of the Company’s total revenue, compared to 39% in the previous year. Through good expense management in quarter four, the international business unit had an operating margin of 9.9% and a margin of 8.7% for the year.

The strengthening of the dollar in October is worth commenting on. Typically, there is not much movement in exchange rates on a quarter-over-quarter basis. Historically, the dollar has been gradually weakening against the currencies in which we do business over the past several years.

That trend reserved abruptly in October and had a negative impact of 9.5% for the fourth quarter. The current strength of the dollar has affected our guidance and outlook for fiscal 2009, which I will discuss in a moment.

Now reviewing our U.S. Property & Casualty segment, as previously stated our goal in 2008 even in the challenging overall claims environment was to improve U.S. Property & Casualty’s revenue growth and to ensure that we managed costs to provide an acceptable operating margin.

Financially, our U.S. Property & Casualty operation has performed extremely well reporting a strong top line for the quarter, double-digit operating margins for the year and a 4% increase in total claims in quarter four. As a result of the investments we incurred in previous years in employees, training on quality, we are delivering a market leading product.

This is a significant strategy linked with our technology implementation of CMS2. We are benefiting financially and operationally from increased process efficiency. We have positioned the U.S. Property & Casualty segment to take a bigger share of the claims market as our clients consolidate independent adjusters and we are beginning to see significant outsourcing opportunities from clients in the volume case claims business.

To assist in this direction U.S. Property & Casualty focused on completing the design and beginning implementation of the major transformation of its business model. Its three main components were announced in early December and comprised one, a substantial restructuring of field operations from 55 branch offices to 36 service centers and more than 308 locations throughout the USA.

The introduction of a new performance center in Atlanta that provides effective central oversight of claims and thirdly, the development of a business processing outsourcing models, which will enable the delivery of more comprehensive end-to-end claims processing for our insurance carrier claims.

We believe these are exciting events for our clients Crawford & Company in the U.S. Property & Casualty segment. There were in 2008, an increased number of CAT events and consequently, we saw an increase in the U.S. Property & Casualty catastrophe claims revenue to $22.9 million. Results were buoyed by the onset of several major hurricanes together with both related and unrelated storm activity through large portions of Florida, Louisiana, Texas, Missouri, Ohio and Pennsylvania.

The key stones Dolly, Gustav and Ike have produced almost 25,000 claims. In the previous year, total catastrophe claims were 12,000. In 2008, improvements in technology and processing capabilities enabled the U.S. CAT services unit to complete the processing of the hurricane-related claims in a more efficient manner. Approximately, 95% of all catastrophe claims received were completed by year-end, which is a far superior result to previous storm seasons.

Now moving onto our Broadspire business unit, Broadspire’s revenue increased 0.4% from the comparable quarter last year. They produced an operating loss of $1.8 million in the quarter due to primarily higher IT expenses relating to RiskTech and an increase in the other administrative support expenses.

The year showed operating earnings at $3.5 million compared to $3.1 million in the prior year. One of the factors we are dealing with was a 15% decline in workers’ compensation claims in the fourth quarter, which is consistent with the frequency decline of the whole workers’ compensation market.

The decline has been a decade long trend and has caused a loss in revenue from our existing customer base without the loss of the customer from our book of business. We do remain confident in the long-term opportunities for Broadspire and we are continuing to manage our expenses closely to make staffing models responsive to the current intake of new claims. We have also improved our inventory management programs to address the existing inventory of claims to ensure that it gives us more staffing flexibility.

During 2008, Broadspire added additional focus and resources to their 1000 marketing team to better sell services in the claims and medical management marketplace and developing innovative customer solutions. We have started 2009 strong with third-party administration claim service and standalone managed care client wins.

In fact, the value of the accounts one in January 2009, exceeds the total for all of 2008. Another success with the implementation of RiskTech in November, while this is only the first phase of the systems implementation, we are now beginning to see process improvements. As the clients are transitioned onto the new system, we should start to see legacy costs removed from the organization.

The new message from Broadspire is resonating with prospects and we are starting the year in a good position. Broadspire is still in a transitional phase within its core claims business and our retention rate on existing business remains high at 93%.

Now; our fourth business unit Legal Settlement Administration, The Garden City Group’s fourth quarter revenue still continues to be effected by the timing of case flow. Overall economic issues have slowed the pace of settlements in all sectors, consumer, antitrust and securities.

Even before the financial crisis of the past four months, we did encounter some pricing pressures from our clients and competitors. We expect this to continue as 2009 unfolds. In this environment, some clients are price-driven rather than quality-driven. Recently, there has been a consolidation of providers in the marketplace, which should benefit us going forward.

While we succeeded in growing the bankruptcy business, we still chip away at our competitors. We have now moved into third place in this market and working hard to close that gap. We are benefiting from an increase in volume that isn’t being absorbed by our competitors. We are very pleased to report that The Garden City Group management during 2008 has been able to maintain very good margins.

We actually increased our 2008 year operating earnings margin to 14.4% from 12.7% in 2007. Now, looking at the guidance for fiscal 2009; consolidated revenue before reimbursements between $960 million and $980 million. Consolidated operating earnings between $50.5 million and $55.8 million. After reflecting stock-based compensation expense, net corporate interest expense, intangible asset amortization expense, special charges and credits and income taxes, consolidated net income on a GAAP basis between $22 million and $25 million or $0.41 to $0.47 per share.

Our outlook for 2009 does include $15 million of Catastrophic claims revenue in the USA. This is lower than actual 2008 by $8 million. Our 10-K that will be filed with the SEC next month will outline our frozen defined benefit pension plan expense and funding requirements in the U.S. and U.K. in 2009.

This pension expense increased as a result of the recent stock market declines and downturns in the global economy, which have negatively affected the asset values in our pension plans as they have affected many other corporations. To better explain our guidance, we have inserted bridges on revenue, operating earnings and earnings per share.

In respect to revenue, we show a net increase in organic revenue from 2008 to 2009 of $21.3 million. During 2008, we sold a small more operation in the Netherlands, which decreased revenue by $6.6 million. However, the most significant decrease is the foreign currency impact of $93.3 million due to the recent strengthening of the U.S. dollar. Then based on the midpoint, the revenue guidance is $970 million and excluding the foreign exchange impact on revenue growth for 2009 is 2.9%.

Moving onto the operating earnings bridge, we achieved $69.1 million in 2008. We have three items that materially affect our guidance. The first is positive in relation to its new business and at $8.6 million in net organic growth to operating earnings.

The second a negative is the foreign currency impact which is attributable to the appreciation of the U.S. dollar. The effect to operating earnings is a decrease of $7.6 million. The third issue and the largest is the expense increase in the Company’s defined benefit plans. The decrease to operating earnings in relation to the Company’s U.K. and USA pension plans totaled $16.9 million.

Just to remind you, the U.K. plan was close to new members in 1998 and the U.S. plan was frozen to members and future benefits accruals in 2002. Without the impact of the U.S-U.K. pension plan and the foreign exchange impact, the operating earnings growth is 16.04%.

Lastly, the earnings per share bridge starts at $0.62 per share. The increases relating to operating earnings and reduction in interest costs are $0.9 and $0.5 are positive respectfully. The negative totaled $0.32 related to foreign currency impact, increased pension expense and other expenses. This calculates to a midpoint guidance of $0.44 per share in the $0.41 to $0.47 guidance range. If, you excluded foreign exchange in U.K. pension hits the growth in the EPS figure would be $0.74, an increase of 19.4%.

Now, let me finish my comments by stating that our management team will continue to build on these operational improvements as we move forward through 2009. Our priority remains two-fold. One, a disciplined approach to expense management and working capital to help navigate these difficult economic times. And two, focusing on improving operational efficiency and delivering excellent results to our clients.

We trust our shareholders are pleased with our progress in 2008 and we look forward to 2009, as we continue to grow and build a strong foundation for the corporation.

Thank you for your time and we look forward to your questions. Operator, can I ask you to queue the questions please.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Mark Hughes - SunTrust.

Mark Hughes - SunTrust

The new business in the Broadspire area, can you give us some sense of what that ought to mean to the top line next year? Are we looking at positive growth, low single-digits what the impact should that have?

Jeffrey Bowman

We’re looking at, we don’t give segment information obviously, but the new wins are coming as a result of the restructuring of the sales organization that we did in the back-end of last year and the new clients we are bringing onboard are actually ones that we’ve been working on for a short while and the gestation period is now taking place and these clients are now locked in for 2008 and this is the first month of the year and we are seeing very positive responses to the model, to the messages that the Broadspire operation have been putting out in the second half of the year. So yes, we do see the revenue improving with these new wins.

Mark Hughes - SunTrust

Was there some up-front cost associated with bringing those customers online that showed up in the fourth quarter?

Allen Nelson

No.

Mark Hughes - SunTrust

Okay and then the catastrophe revenue, I think you have got $15 million you have assumed.

Allen Nelson

You’re right.

Mark Hughes - SunTrust

Some amount of that that’s carry over from the assignments you have already got related to the 2008 storms, that you got visibility into?

Jeffrey Bowman

We closed off in 2008 about 95% of the storm claims that we took in. So, we have a small residue, some of these will be the larger claims in terms of indemnity dollar value, which take a longer period to close down, but the revenue effect will not be significant on that in 2009.

Mark Hughes - SunTrust

Okay, then the final question, Bruce currency exposure, what the mix of exposure that you have got, if you can share that?

Bruce Swain

We operate in four primary foreign currencies and kind of an order of significance. We have got the Great Britain Pound, which is about 37% of our revenue, the Canadian dollar comprises about 27%, the Euro would be next at 13% and the other major concentration we have would be Australian dollar at about 7%. After that you have got all sorts of other currencies that make up the remaining 16%, but I think if you look at of those major four currencies, it gives you an idea of how we are impacted.

Operator

(Operator Instructions) Your next question comes from the line of Matt Reams - Buckhead Capital.

Matt Reams - Buckhead Capital

I was just wondering if you could provide some additional information on ‘09 guidance. What are you expecting for amortization?

Bruce Swain

Amortization of our customer relationship intangible or?

Matt Reams - Buckhead Capital

Yes.

Bruce Swain

That amortization runs approximately $6 million a year. We expect that to continue into 2009.

Matt Reams - Buckhead Capital

Okay and will depreciation levels be similar in ‘09 from ‘08?

Bruce Swain

Yes, the overall depreciation and amortization level should be comparable in 2009 as compared to ‘08.

Matt Reams - Buckhead Capital

Okay, you have mentioned in ‘09 guidance that interest expense is going to be down about $2.9 million.

Bruce Swain

Correct.

Matt Reams - Buckhead Capital

So, that’s just a reduction from which you had in ‘08 levels.

Bruce Swain

That’s right.

Matt Reams - Buckhead Capital

Okay, what about tax rate?

Bruce Swain

For 2009, we are estimating our effective tax rate at 28%.

Matt Reams - Buckhead Capital

In the new credit agreement that you released the details in 8-K, it mentions that you wanted to do some restructuring in International Operations. I was wondering if you could explain more in detail about that. And I think it also mentioned something about new U.K hold “notes” and then also some de-leveraging and I was hoping you could kind of clarify all that for us?

Bruce Swain

We recently amended our credit facility to enable us to do a legal entity restructuring, but also to allow us to repurchase up to $25 million of our outstanding term-loan B in the open market. And what the legal entity restructuring is, is we looked at all of our legal entities internationally as well as in the United States and wanted to structure them to be more closely aligned with how we manage our operation internally and also how we report our information externally, so this reorganization isn’t a management reorganization or a change in the segment results that we are going to be providing to get our underlying legal entities to be more inline with those two structures.

So, that’s going to provide us management efficiencies, administrative compliant savings and treasury flexibilities just to name a few of the benefits. The amendment didn’t change any of our underlying interest rates or spreads, debt covenants or maturities of the facilities.

Matt Reams - Buckhead Capital

Okay, have you already bought in the term-loan debt that you outlined?

Bruce Swain

We have not as of yet.

Matt Reams - Buckhead Capital

Okay, so your interest expense assumptions for 2009, does that include that you buy-in that sometime this year?

Bruce Swain

Our interest rate assumptions have the assumption that we will reduce our total funded debt by approximately $10 million during 2009, but it does not include any, obviously wouldn’t include any significant repurchases of the term-loan B.

Matt Reams - Buckhead Capital

Okay. So this global restructuring, are they going to be cost associated with it or is it just clearly a kind of an internal?

Bruce Swain

There were costs associated with it. We had fees that were paid to the lender group in order to get the amendment done and there is also professional fees with lawyers and accountants with the process. The bank fees totaled approximately $1 million and those are capitalized and amortized over the remaining life of the credit facility. The legal costs buy and large were incurred during 2008 in our component of the restructuring cost that we took in the fourth quarter, but there will be some expenses that flow through in the first quarter as everything is finalized and put in place, but we don’t expect those to be material.

Matt Reams - Buckhead Capital

Okay. Obviously you made significant improvements in working capital. Are any of those, is all of that to be sustained or are there additional improvements or are we likely to see some give-up in 2009?

Jeffrey Bowman

On that particular issue, we are driving our operations worldwide to decrease through our DSO up and working capital accounts receivable, both billed and unbilled by 10% in the next year; and that is as we’ve seen in ‘08 is significant in getting us to a working capital level that is basically what we wanted to be rather than what it currently is and we shouldn’t be at that level we are. We know we can get this down by better management of our work in progress, better management of our accounts receivables and basically ensuring that our staffs are motivated to do that as well. So, we do see improvements still to come on that, we haven’t hit the bottom yet on this one.

Matt Reams - Buckhead Capital

That’s great. I would imagine that’s why you have an interest in getting some flexibility to retire some term-B notes?

Jeffrey Bowman

That’s right.

Matt Reams - Buckhead Capital

Okay, great. What’s your CapEx budget for ‘09?

Bruce Swain

For ’09, we’re expecting about $31 million, which is comparable with where we were in 2008.

Matt Reams - Buckhead Capital

Okay. Related to the pension expense, what was the actual expense in 2008?

Bruce Swain

In 2008, we actually had a credit and pension cost of about $2.6 million and that’s going to turn in 2009 to an expense of about $14.3 million.

Matt Reams - Buckhead Capital

Okay and that were probably because of the significant under funding, are you going to be running at that rate for a few years?

Bruce Swain

Well, it’s difficult to tell. I mean there is a lot of moving parts in the determination of pension expense. Obviously, the sharp downturn in the financial markets was the primary driver, what happened in the fourth quarter. To the extent that we see, a sharp recovery our pension expense could be lower going forward.

If the recovery is slower and doesn’t have sharp movements up to offset some of the decline that we took in 2008 and you could see that level of expense continuing on, but that’s a number that gets measured at 12/31 each year and it’s based upon investment returns that have occurred in the market value of assets as of year-end as well as discounting of the liabilities based on the interest rates that exist at year-end so. We’ll know more about that expense as we get through the year end and we see how our investment returns have performed and where the interest rates look like they are heading.

Matt Reams - Buckhead Capital

Okay, great and one last question, I’ll get back in the queue. With Broadspire, what amount of expenses, do you expect to take out in 2009 versus ‘08 due to the technology efficiencies?

Jeffrey Bowman

Hi, Matt this is Jeff. In that the last five months of the year, we have a contract with a third-party vendor for basically hardware that basically will be removed from the organization, that is about $6 million per annum cost saving plus and there will be legacy costs that we’re able to takeout with that old program that’s been outlined in our filings before and we are onboard at this moment for that particular saving to start kicking in and that is initially the first part of getting the RiskTech system onto fewer systems within the organization. So, we see that starting to move out. The other positive issues around is we’re seeing process efficiencies coming out of the implementation of RiskTech. We’re able to go to our clients and start talking to them about it.

One of our clients’ is already on the live model and we have very positive feedback from them about what the system is doing. So, we’re excited about this system beginning to really drive the efficiencies that we anticipated when we did the Broadspire acquisition. It’s a long road and it’s a very complex system, but we’re well on the way to moving along it now.

Matt Reams - Buckhead Capital

Are the legacy and efficiency opportunities as big as the hardware?

Jeffrey Bowman

I mean the legacy issues are quite significant. We put out an 8-K at the beginning that said that our savings from technology would be in the $15 million to $20 million range and that we have no reason to shy away from at the moment.

Matt Reams - Buckhead Capital

Okay, but you haven’t specified a specific target for ‘09 of that $15 million to $20 million?

Jeffrey Bowman

No, correct.

Matt Reams - Buckhead Capital

Okay, it just over the life of the opportunity?

Jeffrey Bowman

That’s right. It is once we are fully implemented.

Operator

(Operator Instructions) Your next question comes from Mark Hughes - SunTrust.

Mark Hughes – SunTrust

In the U.S. Property & Casualty, the 4% increase in the claims assignments, is that sort of a good underlying run rate if we takeout the CAT activity?

Jeffrey Bowman

I can give you a quick analysis of that. We’ve seen a significant upturn in the property claims and a decreasing causality claims and this is inline with the market scenarios that are out there in generalities. Obviously, cash catastrophe claims are up, but we’ve got a few outlines in there that we had a vehicle leased outsourcing that ceased in the prior year, which really sort of screws with the figures a little bit, but property we’re seeing an increase in volume in our property through taking market share, new clients and then the small increase in the weather patterns that we saw in 2008. I would expect that the range is somewhere between normal 0.5% on claims, but it is a good indicator. The total year was about 1.6% increase in total claims.

Mark Hughes - SunTrust

Likewise in the International business down 13.5, you corrected for the U.K., flood activity, is there a kind of run rate we should think about that there?

Jeffrey Bowman

I think, we’re going to be looking at flat run rates for the next year or so. There will be some increases; we had two effects that came in ‘08. One was our Canadian operation got up to speed with a couple of large contracts that they had brought into the operation and then we had that really being diluted by the expected decrease over the prior year of the U.K. and there are too much significant operations.

We’ve seen an increase in our Asia-Pacific claims going up and with the tragic events happening in Australia at this moment around the bushfires, we see a small up tick in claims coming in through that over the next couple of months. There are always ups and downs on a global basis. I think we should be looking around the flats scenarios for 2009 year unless there is some significant weather events that occur, but our book-of-business is growing, which is very good and then obviously, we’re watching very carefully the economic situation with all of our clients.

Mark Hughes – SunTrust

In Broadspire, the 15% decline in claims, for you how did that compare to the first nine months?

Jeffrey Bowman

For the year, well I I’ve got this figures for year and for the quarter. For the year, we’re down to 11.1% and if I give you workers comp claims alone, that in totality for Casualty and workers comp clams, we were down 9.1% for the year, but we were down 14.5% in the fourth quarter. So the fourth quarter, the employment figures obviously do have an effect on our model and we are very focused on our model reflecting from the staffing perspective, the claims intake and that’s why I made reference to the inventory management, because we’re looking very carefully at those trends coming in and then adjusting our model appropriately.

Mark Hughes – SunTrust

I wonder where the claims, was the claims frequency off more than the decline in employees covered, do you have a sense on that?

Jeffrey Bowman

Not really. We’d have to get in, it depends on the individual clients that we have within the organization and we can get some work done on that Mark and come back to you on that.

Mark Hughes – SunTrust

Presumably, the employment hasn’t dropped-off that much, it seems like the claims frequency was down more than if we just think of general employment statistics booked out.

Jeffrey Bowman

Well, I mean we’ve got 1.5 million people and it was 2.5 million people that have come onto the unemployment. There is going to be a knock on effect on workers comp claims decreasing. I mean less that has been a decade long trend anyway and workers comp claims are reducing as you know, the U.S. has gone from manufacturing base to a services base.

Operator

Your next question comes from Carter Newbold - Rutabaga Capital.

Carter Newbold - Rutabaga Capital

I think you’ve given us most of the components of free cash flow next year, but I don’t if I’ve heard you yet say what you think your cash pension contribution will be for next year, have you given that figure yet?

Bruce Swain

We haven’t, but I can give it to you now. Our cash contributions will be approximately $10.5 million in 2009.

Carter Newbold - Rutabaga Capital

Okay and then Bruce, so I guess as I add that in and sort of roll that into all of figures. I think you all, that 70 something million of cash as of year-end are well north of the amount of cash that you’ve at least indicated in the past that it takes to kind of sustain the business. So, sort of a two-part question, I guess A, is that assumption is still good or has something changed in the core level of cash that you require and then does that roll up all the free cash flow opportunities, plus the amount by which I think your north of the core level of cash in the business. I get a number bigger than the amount of what I presume will be an attempt to buyback term-loan B at a discount. So beyond that, could you talk about, I guess first off, can you confirm that any of those assumptions hold and if so, what are your priorities for free cash flow beyond that?

Bruce Swain

Sure, yes I can help you with. Our underlying assumption of the cash required to run the business has not changed, $40 million to $45 million is the cash level that we seek to hold to run the business day-to-day. Given the dislocation in the credit market and all of the financial uncertainty, we took the decision that we wanted to hold as much cash as we could and be as liquid as we could and we’re still in that position.

In terms of where our priorities are from a free cash flow standpoint, I think that we have required contributions into our defined benefit pension plans this year, but we know we’ll have contributions in the future. So, to the extent that our operations generate the cash, I think we’d look at excess cash first to be used to fund our defined benefit pension plans, after that we’d be looking at de-leveraging our third-party borrowings.

Carter Newbold - Rutabaga Capital

This maybe a sensitive line of questioning, given the constituents for a call like this, but was there anything extraordinary going on in the way that you guys had invested your pension assets either in the U.S. or the U.K. or that has required revision, whether risk metrics that were not well tended to or did you have an experience, it was kind of outside the balance of your actuarial expectations or are you just reacting to what’s been a very negative year in the markets?

Bruce Swain

No, it’s just very negative year in the markets. I mean our returns for the year were negative obviously, but they were inline with other negative returns that other people with defined benefit pension plans have experienced.

Carter Newbold - Rutabaga Capital

Last question, I think you said there has been some consolidation and legal settlement industry and I guess I either have forgotten or I’m not aware of what’s happened there, can you just review how much consolidation and how many sort of global scale players there are at hand?

Bruce Swain

There are three major players, the one company that was consolidated was taking up by one of those three players about five or six months ago and effectively there were three major players you have EPIC, in the bankruptcy EPIC, KCC are two of them, in the security class actions you have [Rust], which is owned by [Inaudible] but we have the largest position on security class actions that we run about third in the bankruptcy, that is our two main areas that we are in.

Operator

Your next question comes from the line of Shamo Sadukan - Lotus Partners.

Shamo Sadukan - Lotus Partners

Can you talk about how much this year you feel like in 2008? The company benefited from the claims that were coming from some of these national disasters that happened and kind of what you expect that part of the business to do in 2009?

Jeffrey Bowman

Yes, sure. I mean, predominantly we are talking about in the U.S. CAT division, which is this year had revenue about $22 million, which was significantly up from the prior year. As I said in the earlier part of the presentation about 25,000 claims. When we look at what catastrophe it was and how it has changed over the years is that we really saw in ‘06 and ‘07 as very non-catastrophe events in the United States. Then ‘08 picked up again with a number of events in the Texas area, I mean with Iken with Gustav and Dolly.

We had prior to that here where for many years we had a minimum of $20 million in catastrophe revenue. So, we’re still being very conservative when we put into our projections of $15 million, but we are not here to run the organization on catastrophes, we are here to run the organization in a steady state and then effectively able to ramp-up our staffing when those catastrophes do take place.

Shamo Sadukan - Lotus Partners

Okay and then what’s the latest update on the difference between A&P shares, it’s about $3 now still and there doesn’t seem to be very much economic difference between the two shares given the effective control of the company by insiders. So, do you guys have any plans to take any actions that would equalize the value discrepancy?

Jeffrey Bowman

Well, management of the Board of Director’s are very aware of the price differences between the two classes of share and obviously we monitor that situation constantly. The markets as a whole set the price of the Company’s shares, which have expanded and contracted substantially over the past 10 years, we believe that a lot of the spread can be explained by the overall stock market volatility that we’re experiencing at the moment and the only difference between the A&P shares are the voting riots attached to the B shares. Any decision to change capital structure of the company is the Board of Directors decision and we’ve not taken a position on that issue at this moment. Should we do that well, obviously we will publicly announce and promptly advice.

Operator

Your next question comes from Matt Reams - Buckhead Capital.

Matt Reams - Buckhead Capital

Hi this is a broad general question. I was wondering, if you could comment on how the downturn in the economy and the financial and other problems in the credit markets have affected your competitive position in any of your business units, to the extent there are some competitors that are heavily leveraged or having other problems?

Jeffrey Bowman

I mean, we concentrate on profit Matt from the way we’re managing our organization and dealing with our customers who are our number one importance that we’re handling. I can’t really comment on the competitors because, we’re the only publicly quoted corporation in the industry. I think from our aspect, we are putting investment in technology, we’re continuing to train our staff, we’re continuing to provide segmentation analytics to our clients to be able to validate that what we are doing and that really is from our perspective is a leading indicator on growing our business.

I know that from our prospective that we are in a position where we have more clients coming onboard than we had in the prior year and from that perspective, we’ll staff accordingly as necessary. The only area where we see a downturn is obviously, we’ve seen a reduction in workers comp claims at the market scenario and we will adjust the model accordingly to deal with that, it is very difficult with not very much information to be able to comment on competitors and we say that we know from the U.S. self-insured market position we’re probably running number three, after (Inaudible).

Matt Reams - Buckhead Capital

Have you noticed any kind of pickup in RFPs, where you’re getting hints from those submitting the RFPs that, they are concerned about the services levels that they could get or that potentially there are some dislocations that are being caused by what’s going on the economy in the financial markets?

Jeffrey Bowman

Not really, but we know with the restructuring we did of our sales team last year and the number of our RFP’s are, I mean we have an increasing pipeline on this. We have business process, an outsourcing model appeals in this economic environment to be a business proportion our clients are listening to very carefully. There is a significant expense management in all organizations and that is the ability where you have to take a fixed cost for a client and turn it into a variable cost. That is a business model that we will continue to be predominant over the next 12 to 24 months.

Operator

There are no further questions at this time. I would like to turn call back over to Mr. Bowman for closing remarks.

Jeffrey Bowman

Thank you. I’d like to thank everyone this afternoon for joining us and I wish you all a great week. Thanks very much.

Operator

Thank you for participating in today’s Crawford & Company conference call. This call will be available for replay beginning at 06:00 pm today, through 11:59 pm on February 16, 2009. The conference ID number for the replay is 829-430-95. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you, you may now disconnect.

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