Arthur J. Gallagher & Co.

SWB:GAH

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon, and welcome to Arthur J. Gallagher & Co.'s First Quarter 2021 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions]

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the security laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the cautionary statement and risk factors contained in the company's 10-K, 10-Q and 8-K filings for more details on its forward-looking statements.

In addition, for reconciliations of the non-GAAP measures discussed on this call as well as other information regarding these measures, please refer to the earnings release and other materials in the Investor Relations section of the company's website. It is now my pleasure to introduce J. Patrick Gallagher, Chairman, President and CEO of Arthur J. Gallagher & Co. Mr. Gallagher, you may begin.

[J. Gallagher, executive]

Thank you, Laura. Good afternoon, and thank you for joining us for our first quarter 2021 earnings call. On the call with me today is Doug Howell, our CFO, as well as the heads of our operating divisions.

What a fantastic quarter. We executed against our 4 long-term operating priorities to drive shareholder value: first, we grew organically; second, we grew through acquisitions; third, we improved our productivity while raising our quality; and fourth, we continue to reap the benefits of our unique Gallagher culture. I'm extremely proud of how our team continues to execute and deliver world-class expertise and service day in and day out. We're off to a great start in 2021.

So let me give you some more detail on the quarter, starting with our Brokerage segment. Reported revenue growth of 12.2%. Of that, 6% was organic revenue growth, better than our recent IR Day expectations, thanks to an excellent March. Our cost containment efforts saved about $60 million in the quarter, helping drive our net earnings margin higher by 94 basis points and expand our adjusted EBITDAC margin by 480 basis points. And net earnings were up 17% and adjusted EBITDAC was up 24%, an excellent quarter from the Brokerage team.

Let me walk you around the world and give you some soundbites about each of our Brokerage units, starting with our P/C operations. In the U.S., retail organic growth was strong at about 5%. New business was excellent and retention remains strong. In our U.S. wholesale operations, Risk Placement Services organic was about 6%. Open brokerage organic was 15% due to rate increases, higher levels of new business and improved retention. Our MGA program's binding businesses were up about 4%. Retention in new business were similar to the first quarter of 2020. However, we did see a little bit more tailwind from rate and exposure during the quarter.

Moving to the U.K., over 7% organic for the quarter. In both our retail and specialty operations, new business was up over prior year while retention held pretty steady. Australia and New Zealand combined posted organic of 3%. New business and retention were both similar to prior year. And finally, our Canadian retail operations, excellent organic of 13%, fantastic new business and rate all added to our stellar performance again this quarter. So overall, our global P/C operations posted more than 7% organic, which is better than the 5% to 6% we discussed at our Investor Day, thanks to a really strong March.

Moving to our employee benefit brokerage and consulting business. First quarter organic was up slightly, which is better than our March IR Day expectations. Revenue from our traditional health and welfare business held up well, while fees from consulting arrangements, special project work and our life business were up slightly. So when I bring P/C and Benefits together, total Brokerage segment organic was 6%, a really strong start to the year.

Next, I'd like to make a few comments on the P/C market, starting with the rate environment. Global P/C rates remain firm overall and the increases we saw during the first quarter of 2021 are consistent with the past couple of quarters. Rates in Canada led the way, up double digits, driven by property and professional liability. In the U.S., rates were up about 7%, including double-digit rate increases within our wholesale open brokerage operations. Our U.K. retail and London specialty operations combined, rates are up about 5%. And finally, Australia and New Zealand combined, rate increases are in the low single digits.

At the same time, capacity is constrained in certain lines and carriers are pushing for tighter terms and conditions. There are also quite a few pockets in the U.S., Canada and London specialty market that I would describe as hard such as cat-exposed properties, cyber, umbrella and public company D&O, just to name a few. So the global P/C environment remains difficult but is giving us some tailwinds.

Looking forward, we don't see conditions that would indicate this rate environment will change anytime soon, and we are seeing more and more economic activity across our client base. For example, customers are adding coverages and exposures to their existing policies. And through yesterday, April endorsements, premium audits and other midterm policy adjustments are a net positive overall. That, too, is an encouraging sign.

On the benefits side, a recovering labor market in 2021 should favorably impact our core health and welfare business. And we remain optimistic that we will start to see some incremental HR consulting and special project work. This is a terrific time for our team to shine, firm global rates, increasing exposure units and recovering employment. Our clients need our expertise and we are there with the very best insurance, consulting and risk management advice. So while there's a lot of year left, I have greater conviction that our full year 2021 Brokerage segment organic will be equal to or perhaps even better than pre-pandemic 2019 organic.

Moving on to mergers and acquisitions. We finished the first quarter with 5 completed brokerage mergers, representing about $90 million of estimated annualized revenues. I'd like to thank all of our new partners for joining us, and I extend a very warm welcome to our growing Gallagher family of professionals.

As I look at our tuck-in M&A pipeline, we have more than 40 term sheets signed or being prepared, representing about $250 million of annualized revenues. Our global platform is a great fit for savvy and successful entrepreneurs. We have the tools, data, products, niche expertise and carrier relationships to help these owners support their current clients and take their business to the next level.

Next, I'd like to move to our Risk Management segment, Gallagher Bassett. First quarter organic growth was 0.6%, which is in line with our March IR Day expectations of about flat. It was still a tough compare to pre-pandemic first quarter 2020. However, there is no doubt we are starting to see more and more core workers' comp claim activity when compared to what we were seeing last year at this time. Traditional workers' comp claims are returning and we are seeing fewer and fewer COVID-related claims. Our cost containment efforts paid off again this quarter. We saved around $4 million and expanded our adjusted EBITDAC margin by 180 basis points to 18.4%, another great quarter of execution by the Gallagher Bassett team.

Looking forward to the next 3 quarters, we would expect new claims arising to be higher than what we saw last year, perhaps not back to pre-pandemic levels quite yet but certainly higher than last year. So when I combine that with some really nice new business wins, we should be back to seeing organic in the upper single digits for the next few quarters. That would also bode well for keeping margins above 18% for the remainder of the year.

Let me wrap up with some comments regarding our unique Gallagher culture. It's a culture that emphasizes doing things the right way for the right reasons with the right people. It's a culture of service, service to our clients, to one another and to the communities where we work and where we live. And our culture continues to be recognized externally. Just last week, Forbes named Gallagher one of the best U.S. employers for diversity. And that's on top of Gallagher being recognized by the Ethisphere Institute as one of the world's most ethical companies for the 10th year in a row, 10 straight years, and once again, the sole insurance broker recognized.

These recognitions are a direct reflection of our more than 30,000 global colleagues working together as a team guided by the 25 tenets of the Gallagher Way. Culture is a key differentiator for our franchise. Every day, all of our people get up and work diligently to maintain our culture, to promote our culture, to live our culture, and I believe our culture has never been stronger. Doug, over to you.

[Douglas Howell, executive]

Thanks, Pat, and good afternoon, everyone. I'll echo Pat's comments, an excellent quarter and a terrific start to the year. Today, I'll spend most of my time on both our cost savings initiatives and our clean energy cash flows, then highlight a few items in our CFO commentary document, and I'll close with some comments on M&A, cash and liquidity.

Before I plunge in on cost, 1 quick comment on Page 3 in the Brokerage segment organic table. You'll see that we had a great quarter for contingent commissions. There is a little bit of favorable timing in there, call it about 50 basis points on total organic. That will flip the other way next quarter but regardless, a really solid quarter.

Okay, let's go to Page 5, the Brokerage segment adjusted EBITDAC table. You'll see that we grew adjusted EBITDAC by $122 million over last year's first quarter, resulting in about 480 basis points of adjusted margin expansion. That would have been closer to 550 basis points, but as we discussed in our March IR Day, M&A roll-in isn't as seasonally large, and we did strengthen bonus a bit, given our outlook for 2021 as considerably more optimistic today than it was last year at this time, standing at the gates of a global pandemic.

Within that $122 million of EBITDAC growth is about $60 million that is directly related to our cost savings initiatives, call that about 370 basis points of margin expansion. So when controlling for these 3 items, we see underlying margin expansion of about 180 basis points on that 6% all-in organic, once again, absolutely terrific execution by the team.

Moving on to the Risk Management segment on Page 6. We grew adjusted EBITDAC by $4.3 million, resulting in about 180 basis points of adjusted margin expansion, leading us to post margins nicely over 18%. Most of that was due to our cost savings initiatives. So when I combine our Brokerage and Risk Management segments, savings were around $64 million, pretty similar to the last 3 quarters. And that consists of: reduced travel, entertainment and advertising, about $25 million; reduced consulting and professional fees, about $15 million; reduced outside labor and other workforce costs, about $15 million; and then reduced office supplies, consumables and occupancy costs of about another $9 million.

But remember, first quarter 2021 is the last quarter we have a favorable comparison to pre-pandemic spend levels. So now it's all about how much of the cost savings we can hold going forward. As I look at it today, I still believe we will hold a lot of it. As we have said before, we do see certain costs coming back but that won't happen overnight. Our best guess is maybe $15 million coming back in the second quarter '21, then step that up by about $5 million to $7 million in the third quarter and a similar step-up again in the fourth quarter. Those amounts that I've given are relative to 2020 same quarters adjusted for the roll-in impact of M&A.

As for how that translates into margins, that's really dependent on where we land on organic. But say you assume organic is around 5% or above for the remainder of the year, the math would say that would be enough to show some full year margin expansion. And regardless of where we land, let's keep this in perspective for the longer term. The pandemic has allowed and perhaps even forced us to accelerate a lot of the improvements we had on the drawing board and also served as an opportunity to design new and better ways to run our business. Both of these make us more productive today than we were 15 months ago and our service quality has even improved. This will provide a lasting benefit for years to come.

So let's move now to the CFO commentary document we posted on our investor website. On Page 3, most items are very similar to what we provided at our March IR Day. On Page 4, both clean energy and the corporate line came in better than we had provided in March. The corporate line is just timing between first and third quarters for certain tax items. But the clean energy investments had a much better quarter and we bumped up our full year estimate. It's now looking like $70 million to $80 million of full year after-tax earnings, which is really good news.

Next, flip to Page 5 of the CFO commentary. If you missed the clean energy vignette that I gave during our March IR Day, it might be worth to listen to the replay on our website, starts with the hour and 9-minute mark. Here are the punchlines: First, recall, 2021 is the last year of what we call the credit generation era; second, 2022 will be the first meaningful year in the cash harvesting era. This means 2021 is the last year we will report GAAP earnings, and 2022 will be the first year meaningful cash flows show up in our cash flow statement.

You'll see here on Page 5 that we think 2022 annual cash flows could increase by around $125 million to $150 million. And finally, this is not a 1-year benefit to cash flow. We have more than $1 billion of tax credit carryforwards on our balance sheet that should favorably impact cash flows for the next 6 to 7 years.

As for M&A capacity, at March 31, available cash on hand was more than $400 million, and we had no outstanding borrowings on our revolving credit facility. So with cash on hand, our untapped borrowing capacity and another year of strong cash flows, it means upwards of $2.5 billion of M&A capacity here in '21. With a nice M&A pipeline, we are in good shape to continue with our tuck-in strategy.

Before I pass it back to Pat, and that was a mouthful, as I sit here today, I see a lot of positives. Organic has nice tailwinds from rate and exposure growth. Add to that a lot of pent-up consumer demand and perhaps a wave of governmental spending. Both could be additional growth catalysts. We have a robust M&A pipeline that should continue to grow, especially if an increase in capital gains tax gets momentum.

And we've learned a lot from the pandemic on how to operate better, faster and cheaper, all the while improving service quality. And our productivity gains we achieved over the last year appear to be sticky. This all bodes well for another year of strong cash flow generation, with a kicker starting in 2022 from our clean energy investment. So we are very well positioned operationally and financially. I can feel the excitement out in the field about coming out of the pandemic stronger than ever before. It's setting up to be another great year. Back to you, Pat.

[J. Gallagher, executive]

Thanks, Doug. Laura, I think we can go to some questions and answers.

[Operator]

[Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, analyst]

My first question is on organic. You guys printed 6% in the quarter. As I look to your comments, you said perhaps you get back to where we were in 2019, which is also 6%. But if you think about what's going on today, you pointed to still strong P&C pricing and the economy is getting better. So what would cause the forward 3 quarters of this year to not be stronger? Like do you see anything decelerating or is it just there's some conservatism in that outlook for things to kind of stay stable over the rest of the year?

[Douglas Howell, executive]

I think it depends on the recovery pattern. I think there's still a lot of unemployment in there, and we're running somewhere in that 5.5% to 6% range right now. We're going to hold that for the rest of the year. It looks like it could be a pretty good year. So there's nothing inherently different today in that thinking other than it feels kind of like 2019.

[J. Gallagher, executive]

Our clients are doing much better, Elyse. I think they are coming back to 2019, not surging beyond it.

[Elyse Greenspan, analyst]

Okay. And then in terms of the margin, right, you guys had alluded to 400 basis points of margin expansion at your IR event, and that came 80 basis points above but we still had the headwind you were alluding to. So what was better, I guess, relative to the IR Day within the margin? Was it the contingence on supplemental? Or was it just kind of the core margin expansion away from the save which is better than you were thinking?

[Douglas Howell, executive]

It was a contingent commission that came in better, primarily fueled that.

[Elyse Greenspan, analyst]

Okay. And then on the M&A side of things, you pointed to an active pipeline in terms of tuck-ins. There's obviously a pretty big merger between Aon and Willis that -- where they're working towards their regulatory approvals. And I'm not sure if you can comment on it. Obviously a lot of speculation in the press in terms of what may or may not be divested.

But as you guys think about larger deals, could you just give us a sense of how you're thinking about, I guess, potentially on the M&A side, if there are properties that could become available there to the divestment process and things that could potentially be attractive to Gallagher.

[Douglas Howell, executive]

Right. So there's a lot to unpack in that. I'll hit the capacity. We have up to $2.5 billion worth of M&A capacity this year. And we've got a full pipeline of nice tuck-in acquisitions that are out there. In terms of what comes out of the Aon and Willis opportunity, we read the same things that you're reading. And we just typically don't comment on acquisitions that we hear about in the papers. But we've got $2.5 billion and we like our tuck-in merger strategy.

[Operator]

Our next question comes from the line of Greg Peters with Raymond James.

[Charles Peters, analyst]

So I just want to turn around the discussion on M&A. Can you go back and revisit sort of the process that evolved and emerged when you guys were doing the JLT global aerospace deal in 2019? Was it a 3-month process? Was it a 1-month process?

And I guess, ultimately, what we're getting at is or I'm going with is there's some pretty strong time line issues with Aon and Willis Towers Watson. And I guess some of your investors might be concerned that you, in an effort to meet their time lines, not that you're doing anything, but you might sacrifice your due diligence, if that makes sense.

[J. Gallagher, executive]

Greg, I'll take a shot at that. We did the Arrow deal in London in pretty short order. We're really happy with that acquisition. It turned out to be terrific. We didn't seem to sacrifice anything.

[Charles Peters, analyst]

Okay. And so one of the other areas that you referenced is culture. Maybe you can go back to the acquisitions, the large acquisitions you did in New Zealand and Australia and talk to us a little bit how you were able to ensure the continuity of your culture when you're doing large deals.

[J. Gallagher, executive]

Well, I think in that situation, you had very good strong stand-alone businesses that we could, in fact, get to meet the leadership of. I think you remember the story. We did fly to Australia, met leadership and gave them the choice. They were planning on going public in their own right. We met 2 leaders with -- the entire top leadership. And basically, that evening said, "You've got a choice to make. You want to go public on your own or do you want to join us?" Steve Lockwood, who's still with us, had that decision to make. I think he made a pretty good decision. Things are going great.

[Douglas Howell, executive]

Yes. I think, Greg, on that one, in particular, too, is that -- and this seems odd for the accountant to say this, but when you -- on that deal, it was owned by an industrial conglomerate that really didn't view brokerage as being its priority, insurance brokerage. And I've got to say, for the way our sales leadership and our operational leadership came down to Australia, combined with Steve's relentless focus on sales, we really -- it was really the Australia business that needed a positive shot in the arm when it comes to embracing and supporting a sales culture.

And we think that what works at Gallagher are people that want to come in and sell insurance. And we've worked hard over the number of years to show that we're a broker run by brokers and so we like to sell insurance. And that is the culture that we think really, really was the secret sauce to taking -- it was running negative 7% organic in Australia when we bought it and we think we did a terrific job. It's posting nice organic year in and year out since that -- since we did that.

[J. Gallagher, executive]

Canada, our Canadian operation was running negative organic as well.

[Charles Peters, analyst]

Well, the accountant didn't do too bad with his answer. So I'll pivot to...

[J. Gallagher, executive]

Remember, he's been around 20 years, Greg.

[Charles Peters, analyst]

Yes, I'm well aware. I'd like to pivot to the operations. Just the 2 things that stuck out. The employee benefits business clearly is still -- I don't want to say struggling but it hasn't rebounded the way it was pre-pandemic. Can you -- is there any ASC 606 issues as we think about the first quarter results relative to the year before? Or is there -- is it expected that as we move through the year, there could be some benefit in that if the economies do recover?

[Douglas Howell, executive]

There's nothing noteworthy on 606 in the numbers, what could happen in the future. If you had a substantial recovery in covered lives compared to our estimates -- covered lives compared to our estimates today, you could see some upside development in those estimates for the rest of this year. As you know, all that employee benefits business or most of it is a 1/1 renewal. We have to make our estimate of covered lives. And if there was a substantial surge in employment, it would probably pull up those estimates a little bit over the next 3 quarters as that develops.

[Operator]

Our next question comes from the line of David Motemaden with Evercore ISI.

[David Motemaden, analyst]

I had a question, just following up on the benefits business and hoping to maybe get a bit more granular detail just in terms of how you're thinking about organic throughout the rest of the year. And specifically, I know you spoke about, in your response to the previous question, just about your estimates about covered lives and what those do for the year. So I'm wondering what your expectations are for the rest of the year just for covered lives, like what's baked in that statement that you're assuming we can get back to 2019 organic levels here in 2021?

[Douglas Howell, executive]

Yes. So our assumptions in the 606 estimates are not substantial recovery in covered lives, different than where our brokers place the business as they put that to rest here in January. So there isn't a substantial uptick in expectation. Also on that point, remember, that business didn't fall off the cliff last year because the employers that we do are pretty stable employers.

And so while we didn't have a substantial decrease in covered lives last year, and so I wouldn't expect a substantial recovery of that for the rest of the year. So kind of flat where they renewed is what our expectations were used when we set that reserve -- that estimate.

[J. Gallagher, executive]

Where we see some opportunity to grow back is the fee business. That business was just -- it was slammed shut at the end of the first quarter last year and those are projects that need to be done. They need professionals to do them, and I think that there will be some more demand there.

[Douglas Howell, executive]

I mean the workforce talent is coming back, so, I think that's -- and that's where we excel and that is helping employers with that.

[David Motemaden, analyst]

Got it. No, that's helpful. And I'm sorry if I missed it, but did you talk about how that's trending thus far in the second quarter just on the consulting arrangements?

[Douglas Howell, executive]

We didn't comment but we're happy to. Not a substantial difference sitting here on April 29, as we saw, let's say, on March 29. But there is -- there are some green shoots. Our consultants are getting some more calls so I think that you'll see a little bit more active summer and fall.

[J. Gallagher, executive]

Let's hope.

[David Motemaden, analyst]

Got it. No, that's helpful. And then maybe just stepping back, a bigger picture question. Sort of on the M&A theme but I'm just sort of -- I'm wondering just how you guys are thinking about broader acquisitions as opposed to team lift-outs and sort of how you weigh both potential. Very similar ways of growth but obviously different in terms of the way the financials work. So just wondering how you think about both of those avenues.

[J. Gallagher, executive]

Yes. Let me be real clear, David. I think these players in the market, they want to ignore contracts, lift teams, litigate and call that a cheaper way to get talent. Let me see if I can clean up my comments. I don't like that. We like to see people that have built companies, entrepreneurial in nature, have a culture, respect their clients, respect their people and sell ongoing enterprises to us. Do we recruit individual people? Absolutely. And do we bring teams across? Yes, we do. But the other method isn't for us.

[Operator]

Our next question comes from the line of Mark Hughes with Truist.

[Mark Hughes, analyst]

On the Risk Management business, I'll ask a question about claims. You say that year-over-year, clearly, frequency or claims counts are going to be up. But it sounds like Q4 and Q1 and maybe even so far in Q2 are holding relatively steady. Is that the right way to think about that?

[Douglas Howell, executive]

Yes. I think there's a little bit of a crossover here, Mark. As COVID claims started to decline, we started to see regular workers' comp claim go up. You'll have a little bit of that in the second quarter but not much. I think the COVID claims are pretty well through our process at this point, and then the regular workers' comp claims will far exceed that going forward. So that might be what you're seeing in that number.

[Mark Hughes, analyst]

On just the pricing environment, there's some talk of moderation. You all seem to be pretty consistent that the trends are holding steady, similar rates of increase. I think in the text, you might have pointed to higher rates of increase in the second quarter. Are you seeing any sort of moderation?

[J. Gallagher, executive]

No, we're not. I think we're seeing consistent demand for proper pricing. We've been a couple of years now into some hardening numbers. So I do think that over time, that will moderate but we're not seeing any lack of discipline in the market at this point and underwriters are continuing to ask for increases.

[Douglas Howell, executive]

Yes. When you look at the dollar -- the year-over-year dollar-over-dollar increases, the dollars are still going up. The rate or the percentage might not be as big because you're on a bigger base. But there's still rate increases happening everywhere. Even workers' comp is getting rate at this point.

[Mark Hughes, analyst]

Then Doug, any green shoots about extending the clean energy legislation?

[Douglas Howell, executive]

There's a lot of infrastructure packages out there, and I think that there's opportunity to realize this process does contribute some pretty good value to the environment. So there's always hope. If we get an opportunity to -- in the infrastructure package or in the tax reconciliation process that might come through, there's always hope on that.

[Operator]

Our next question comes from the line of Yaron Kinar with Goldman Sachs.

[Yaron Kinar, analyst]

First question on the contingent commissions. If I'm doing my math correct, I think I get to like 120 basis points or so of margin expansion coming from contingents. Does that resonate?

[Douglas Howell, executive]

What did you assume as the margin on it?

[Yaron Kinar, analyst]

About 70%.

[Douglas Howell, executive]

Yes, it might be a little thick. I mean a lot of the contingent commissions go to -- when it comes to the leadership variable comp, there's a piece of that that fuels it. So 70% might be a little rich, but some of it, yes, maybe 100 basis points, maybe not 120.

[Yaron Kinar, analyst]

Okay, okay. So you got like 60 basis points of, call it, organic margin expansion, 100 coming from contingents and the rest coming from cost saves, if I wanted to divide it into buckets?

[Douglas Howell, executive]

Probably almost a point from regular trough then -- and when you take out the contingents and you can't take out the margin from that.

[Yaron Kinar, analyst]

Okay, okay. That's helpful. And did I hear you say that you're switching over to cash EPS in 2022?

[Douglas Howell, executive]

No. I think what I was saying is that in the clean energy segment, you're going to start seeing $120 million to -- $125 million to $150 million of additional cash flows that will come through our cash flow statement. We'll obviously make sure that we call that out every quarter on how much is that because it's the rundown of that deferred tax asset that sits on our balance sheet that moves from being a noncash asset into a cash asset. So we'll make sure we highlight it as we go forward.

[Yaron Kinar, analyst]

Got it, okay. And congrats on the quarter.

[Operator]

Our next question comes from the line of Meyer Shields with KBW.

[Meyer Shields, analyst]

I guess the big dumb question that I'm struggling with is that if we're seeing rate increases hold flat and we assume that the economy comes back, wouldn't that point to organic growth on a year-over-year basis well above 5%?

[J. Gallagher, executive]

Hope so.

[Douglas Howell, executive]

Part of that, though too, is remember, our job is to help our client structure programs that actually mitigate some of the rate increase. It's hard to mitigate exposure growth unless you want to take more deductibles or lower limits. Rate increases, there's some -- you can do the same thing. But if somebody adds 2 or 3 more trucks, you've got to insure those other 2 or 3 more trucks.

So if exposure units overtake the recovery from rate on that, the programs that we designed, you'd see more of that hitting the bottom line. But if it's just purely rate, you can mitigate some of that through different program structure.

[Meyer Shields, analyst]

Okay, that's very helpful. And then if I can dig just a little deeper on the claims -- the workers' compensation claims that you're seeing in the trends. Is there a material difference to your revenues when you're handling traditional work comp claims versus COVID?

[Douglas Howell, executive]

Well, there's 2 different -- there's different pieces. And there's the liability piece and then there's the medical-only piece in traditional workers' comp. I think that the longer-tail liability type workers' comp claim is more profitable to us than just the kind of the recurring medical-only claims, where we're basically paying the bills on it. So you would see that -- you would -- the revenues that come off of a liability-related workers' comp claim would probably exceed the COVID claims.

[Operator]

Our last question comes from the line of Phil Stefano with Deutsche Bank.

[Phil Stefano, analyst]

Just a few quick ones. Most have been asked and answered. But -- so as we think about the appropriate base for our margin for first quarter 2022, is it the 39.2% that was printed? Or should we make some kind of adjustment for the margin benefit from the contingents and supplementals?

[Douglas Howell, executive]

Okay. So you're asking about a year from now in first quarter 2022?

[Phil Stefano, analyst]

No it would...

[Douglas Howell, executive]

I'll help you think that out a second here as I think that, yes, when you look at our 39.2%, the base should probably start from -- you heard the earlier question. We probably got a little lift from contingent commissions in that number, so you want to start off a little bit lower base.

And let's say by then, we're holding half of our savings, long-term savings compared to where we are today. Maybe there's $30 million worth of costs that are back into the structure by that time and spread that across $1.8 billion or $1.9 billion. That's probably the right way to think about next year.

[Phil Stefano, analyst]

Okay. But it's fair to say any of this lumpy stuff should probably be normalized for.

[Douglas Howell, executive]

Say that again, I'm sorry.

[Phil Stefano, analyst]

It's fair to say that -- I mean the lumpy kind of impacts like a contingent over-earning, we should probably normalize for that as we think about the forward margin.

[Douglas Howell, executive]

Yes, I think so. Yes.

[Phil Stefano, analyst]

Okay, all right. Perfect. And then from the Risk Management segment, I guess, there was a comment around it being in the upper single digits for the next few quarters. Is the right way to think about this year-over-year or sequentially? I guess in my mind, when I think about your comment about claim counts being kind of flattish fourth quarter to first quarter, it feels like that's reflected in the revenues. And as we think about claim counts expanding with the economy opening back up, I guess, maybe 2021 is kind of one of the businesses where I look at this sequentially as opposed to on a year-over-year basis. Is that off base?

[Douglas Howell, executive]

Either way, as long as you understand that last year's second quarter there was a trough and there will be some recovery out of it this year relative to that quarter. But if you're basing it off the last 2 quarters and want to do a run rate that way, it's probably not a bad way to do it either.

[J. Gallagher, executive]

Thank you, Phil. Well, thank you again, everybody, for being on today this afternoon. We really appreciate it. We delivered an excellent first quarter, and I'd like to thank all of our Gallagher professionals for their hard work, our clients for their trust and our carrier partners for their support.

I'm confident that we can deliver another great year of financial performance in 2021 and truly believe we're just getting started. Thanks for being with us.

[Operator]

This does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation, enjoy the rest of your evening.