Arthur J. Gallagher & Co. (AJG) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Arthur J. Gallagher & Company Third Quarter earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is important to note that some of the comments made by Arthur J. Gallagher & Company today may constitute as forward-looking statements within the meaning of the securities laws and are subject to certain factors and risks described in the filings with the Securities and Exchange Commission, which may cause actual results to differ materially.

It is now my pleasure to hand the floor over to your host, J. Patrick Gallagher, President and CEO of Arthur J. Gallagher & Company.

Sir, the floor is yours.

Thank you very much, Holly, and welcome everyone to our first ever quarterly investor conference call.

I'm joined this morning by Rich Cary, our Chief Accounting Officer; and Acting CFO;

Jeff Lazzaro, our Treasurer and the CFO of our Arthur J. Gallagher Financial Services Operations;

Jim Gault, who's the President of our Brokerage Services Division, the retail side of our property casualty broker operation;

David McGurn, who heads up Specialty Marketing, which is our wholesale reinsurance and international operation; as well as John Rosengren, our Counsel.

We expect the call to have the following format.

We'll probably be presenting for about 30 minutes, after which time we will take questions and answers.

Today starts a brand new kind of approach for Arthur J. Gallagher.

We have listen hopefully to a lot of the input from the investor community.

And we're glad to have an opportunity to start a conference call approach.

The press release that we put out last night, we spent an awful lot of time on.

Eight pages of detailed information that is a totally new way of trying to communicate with you, and I hope that you found it useful.

I will not sit here and read our press release.

I'd like to make a few comments about the big picture, and then I'll have Rich Cary talk about the numbers themselves.

Jack Lazzaro will address the financial services issues.

Jim Gault will talk about what's going on in our retail brokerage operation.

And Dave McGurn will make some comments about wholesaling reinsurance, especially marketing, at which time I will take the floor after that and make some closing remarks.

From a big picture perspective, you never like to have your first conference call involve a $30 million write down from your investment portfolio.

Many of you have commented on our investment activities in the past, and I know that some people really don't like the fact that it's lumpy.

For the most part, the lumps that we've had in the investment side have been positive.

Unfortunately, this huge write down is a big negative.

Nonetheless, Jack will address the rate of return that we've had on this portfolio over the last four years and on an annualized basis this year, both of which we believe are very positive.

From an operating standpoint, our operations are very very strong.

We are pleased with the operating results.

We've never lost sight of Arthur Gallagher & Company that this is a people and relationship business.

The fact is that we give people the opportunity to excel and those people that have joined us are doing that.

It will take some time to see the organic growth catch up with the hires we've made.

But in the third quarter, our commission income was up 30 percent, organic commission growth was up 22 percent.

That's a testament to the people that we've put on the team.

The culture is very strong.

We've hired terrific people.

I understand that our margin has been hurt, we believe that's temporary.

Our new hires are selling and we view this as the capital investment in our future.

It's going to take 18 to 36 months to find out whether these new hires have truly been the right thing to do.

I think the quarterly results, in terms of top-line, show that we're quite a ways on track to proving that.

We've always believed that it's the people that build companies, not just the strategies and processes.

Now having said that, I'd like to turn the floor over to Rich Cary to take you through the results of the first nine months and the third quarter.

Rich?

Thank you, Pat.

I would first like to provide an overview on the presentation of our third quarter earnings release and the changes we've made from prior quarters.

We've put a lot of time and effort into our earnings release and the attached disclosures in order to provide more transparency, which will make you better understand our results.

As Pat indicated, we incurred losses in the third quarter related to the write-downs of several investments.

Jeff will discuss these in detail later in the call.

As previously disclosed in our SEC filings, we have several non-recurring income, gains and losses in the first and second quarter of '02 and in all four quarters of '01.

So in order to provide a more meaningful picture of our operations, we have prepared the income statements on pages three and four of our earnings release to present our operating results before the effects of the investment write-down and related expenses.

Net operating earnings for each of the periods presented represent GAAP net earnings before the after tax effects of non-recurring investment income, gains, and losses, net of incentive compensation and other expenses.

We define non-recurring investment income, gains, and losses as all one-time investment income or loss related items and the normal course will not occur quarter to quarter.

These gains and losses are presented net of the related incentive compensation expense or benefit that would be attributable to them.

The operating revenues and expenses in the earnings piece have been adjusted accordingly for these items.

On pages six and seven of the earnings release, we have presented quarterly spreads for our '02 and '01 operating results, which we prepared on the basis consistent with the '02 third quarter presentation.

On page eight is a quarterly detailed summary of the components of the non-recurring items that were excluded from operating earnings.

These three exhibits were prepared for this quarters earnings release presentation only, and will provided in our future reported earnings if warranted.

We also made certain changes to our earnings release presentation to be responsive to requests from the investment community.

These include breaking out interest income from fiduciary funds, investment income of the investment strategies and marketable securities portfolio; breaking out the installment gains that are being generated from the sales of our alternative energy interest, from income from equity investments and partnerships.

Two installment sales of the co-related partnership (INAUDIBLE) were completed in the third and fourth quarter of '01.

Amortization expense has also been shown separately from depreciation to highlight the impact of the '02 and '01 purchase acquisitions have had on our non-cash expenses.

Cash operating earnings have been added to the presentation.

We have defined these as net operating earnings for the after tax effect of depreciation and amortization expenses.

The balance sheet as of September 30 '02 and December 31, '01 have been added.

I now would like to talk about our third quarter operating results.

As Pat indicated, we are disappointed with the investment losses.

However, we are pleased with the operating results for the third quarter.

For the quarter, total operating revenues increased by 67.4 million, or 29 percent verses the third quarter of '01.

Commissions were up 41.6 million or 30 percent, including organic growth as defined on page one of the earnings release of 22 percent. (INAUDIBLE) were up 16.9 million or 20 percent, including organic growth of 15 percent.

Year to date total operating revenues increased 159.4 million or 25 percent over '01.

Commissions were up by 94 million or 24 percent, including organic growth of 19 percent.

Fees were up 44.5 million or 19 percent, including organic growth of 14 percent.

Commissions and fees from purchased acquisitions completed in '02 and '01 totaled 13.9 million for the quarter and 32.7 million year to date. (INAUDIBLE) achieved in commission and fees for both the quarter and the year-to-date period was generated primarily by our Brokerage Services Division.

Salaries and employee benefits increased 37.5 million, or 33 percent for the quarter, and 87 million or 26 percent for the year to date.

Salary and employee benefits as a percentage of commission and fees were up 2.7 to 54.2 percent from 51.5 percent for the quarter, and 1.7 percent to 55.4 percent from 53.7 year to date.

These percentages are higher than normal due to the investments we've made in new personnel during the past 15 months.

We added 580 new employees over the past 15 months, of which 130 are new producers.

That number is exclusive of the 450 added from acquisitions that we completed over the same 15 months.

Other operating expenses increased 11.9 million or 19 percent for the quarter, and 27.5 million or 15 percent year to date.

These increases are primarily due to increases in business insurance costs and commissions paid to sub brokers (ph) on our Retail PC Brokerage Business, both of which are (INAUDIBLE) effective of the higher market.

Also contributing to the increase in other expenses, is an increase in travel and entertainment costs, which is due primarily to new business development from our new producers.

These three expenses account for over 50 percent of the year over year increase in other expenses.

Operating expenses of Alternative Energy Partnership represents Gallagher's portion of the ongoing expenses associated with the operations of the synthetic fuel facility owned by the partnership.

These expenses decreased 6.9 million or 83 percent for the quarter and 14.5 million or 76 percent year to date.

These decreases are directly attributable to the two sales of our interest in limited partnership that operate these facilities that were completed in the third and fourth quarters of '01.

These two sales also had a significant impact on our effective income tax rate.

The overall effective tax rate was 30 percent for the quarter, third quarter, and first nine months of '02, verses zero percent for the third quarter and 12 percent for the first nine months of '01.

These rates also reflect the effective tax credit generated by our investments in limited partnerships that operates all by the affordable housing, an alternative energy product, which are partially offset by state and foreign taxes.

The increase in the effective tax rate in '02 and '01 is due to a reduction in tax credits earned on '02,which resulted from the two sales of limited partnership interests that were completed in '01.

Amortization expense increased 1.4 million in the quarter and 3.5 million year to date due to the amortization associated with the acquisition of (INAUDIBLE) purchases that were completed in the fourth quarter of '01 and the first nine months of '02.

As you know, prior to June 30th, '01, essentially all of our acquisitions were accounted for with pooling (ph) of interest which do not create any intangible assets.

Effective June 30th, '01, the business combination (ph) rules changed, and the pooling (ph) of interest accounting went away.

Since that day, we completed 13 purchase acquisitions, including one completed in this year's third quarter.

We are currently allocating approximately 50 percent of our acquisitions excess purchase price to goodwill and 15 percent to ammortizable intangible assets, the latter which is being amortized on a straight line basis over an estimated useful life of 10 years.

These allocations were initially established as of the acquisition date and are to be reviewed within the first year of operation to determine if (INAUDIBLE) for allocation adjustment.

Any necessary adjustments will be made on valuation (INAUDIBLE) qualified independent appraisers and will be made in the fourth quarter.

Net operating income, as defined earlier, increased one (ph) percent in the quarter to 39.2 million and 19 percent to 99.3 million year to date.

GAAP net earnings decreased 44 percent in the quarter to 23.3 million, and decreased one percent year to date to 91.4 million due to the investment write-down.

Operating cash earnings, as defined earlier, increased 2.5 million or six percent in the quarter, and increased 20.1 million or 21 percent year to date.

These increases in operating cash earnings are primarily due to the organic growth in our top line revenues which was substantially offset by increasing in salaries and benefits due to the investments we made in new personnel.

I would now like to highlight for you certain items in our September 30, '02 balance sheet, which is on page five of the earnings release.

In this third quarter, we reclassified the Marketable Securities Portfolio from available sale to trading.

As a result of this trade, the unrealized gains and losses on this portfolio, the market to market changes are now being recorded as investment income instead of stockholder's equity as in other -- accumulate other confidence (ph) of earnings or losses.

In addition, the net carrying value of the Marketable Securities Portfolio is now reflected as a current asset instead of as a non-recurring asset.

Jeff will discuss the income statement effective this change and the reason for it.

We have also broken out the debt on our balance sheet to highlight, which is directly ours and that which is directly related to our venture capital and equity investments.

As of September 30, '02, the outstanding borrowings are 150 million revolving credit agreement or 35 million, which is down from the prior '02 quarter end and is equal to the balance of December 31, '01.

This is the only direct bank debt that we have, which we believe is small compared to our total stockholder equity of 487.5 million as of September 30, '02.

The three debt lines on the balance sheet that includes limited partnerships and their description, represents a debt directly associated with three of our investments that we consolidated into our financial statement in the first quarter of '02.

This is the debt of the limited partnerships in which we are invested, and is secured by their assets to support their operations.

Approximately 29 million of this debt is reported to Gallagher through guarantees and letters of credit.

Overall, our financial position is very strong and compares quite favorably to others in our industry.

As of September 30th, '02, our tangible net worth was 378.8 million or $4.31 per share.

This represents an increase of tangible net worth of more than 72 million this year or 71 cents per share, which is net of '02 dividends of 39.3 million or 45 cents per share year to date, and an increase of tangible assets in '02 of 43.7 million.

I'd be glad to answer any questions you may have later in the call.

Now I'll turn it back to Pat.

Thank you, Rich.

I'd like to turn the call now to Jack Lazzaro, our Treasurer and Chief Financial Officer of Arthur J. Gallagher Financial Services.

Jack?

Thank you, Pat.

I'll take us through our investment income results.

As you see in the press release, we've separated out the non-recurring gains and losses to illustrate our recurring stream of investment income.

I'll discuss the revenue portion of the non-recurring transactions first, which is shown on the last page in the press release.

Non-recurring write-downs and losses for the quarter were almost $28.9 million.

Breaking this down by industry segment, 18 million is e-commerce related, six million is financial services related, and $5 million is related to energy.

When you look at the reasons behind this $29 million, almost 10 million was a direct result of other and temporary impairments culminating with the third quarter extraordinary decline in the equity market, most of which actually hit in September.

Depending upon which statistic you measure, the market had it's worse quarter in 30 to 50 years.

Included in this $10 million is a little over $400,000 which is the result of moving our Marketable Securities Portfolio from available for sale to trading.

What this means is that all market to market movements of our Securities Portfolio will be in our P&L instead of on the balance sheet equity adjustment line.

We feel this is a wise and conservative move.

$15.4 million came from the write-down of equity investments and loans of four venture capital type entities.

Through the third quarter of '02, we accounted for these either on the cost or equity basis, whichever was proper in each case.

In the two smallest ventures, we wrote down the remaining equity balance plus notes, which we've deemed non-recoverable.

In the two larger ventures, we wrote down just over $12 million of convertible loans, plus $1.7 million of equity.

With the stock market decline, the continued erosion of the economy during the third quarter, an absence of other venture capital funding, and the lack of cash flows to support a balance sheet valuation, we found it prudent and necessary to write down the investments and loans.

Having said that, these last two investments have some very positive activity, and we have a small continuing financial commitment.

We will continue to watch their progress very closely.

The remaining $3.6 million was a loss that resulted from the sale of one of our equity investments, which actually resulted in a net cash inflow of $2.8 million.

Moving on, I'd like to highlight a couple of '02, '01 comparisons.

First of all, in the third quarter of '01, there were just over $6 million of non-recurring gain.

This makes the negative swing from the third quarter '01 to the third quarter '02 almost $35 million.

Secondly, the first three quarters of '01 have $16.5 million of net non-recurring gains.

The first three quarters of '02 had $14.7 million of net non-recurring losses.

This makes the year to date negative change from '01 to '02 over $31 million, obviously, most of which is from the $29 million of third quarter '02 write-downs I just discussed.

Our team constantly reviews and monitors our investments.

We are very cognizant of valuations and other outside factors and how they effect accounting for these investments.

Because of the economy and the stock market, we've had to look hard at our entire portfolio of investments, and we believe that the investments remaining on our balance sheet are properly valued and stand a good chance of continued success.

Let's get back to the P&L statements from our press release to take a look at recurring income.

For the third quarter of '02, investment income and other is up almost $9 million with 10-and-a-half million coming from installment sales of synthetic fuel interest and a net $2 million reduction spread across the remaining investment income category.

Included in the $2 million reduction, fiduciary funds income is off about $400,000 or 15 percent.

Rates are off roughly 55 percent for the quarter, offset substantially by additional funds available for investment from increased premium flow resulting from the hard market.

For the first nine months of '02, investment income and other is up almost $21 million.

Included in the 21 million increase is $24 million from Alternative Energy Partnership gains offset primarily by a $3.3 million or a 32 percent reduction in fiduciary funds income.

Rates are off an average of 64 percent for the first nine months, again, offset significantly by increased funds available for investment.

Lastly, let's look at our company's investment income big picture.

Including tax credits, on a pro forma pre-taxed basis, the Financial Services Division has delivered, on average, an annual pre-tax return on assets invested since 1999 of 22 percent.

The annualized '02 pre-tax return is 15 percent.

Both of these statistics include the $29 million of third quarter write-downs.

As you review our results for '01 and '02, you will observe that all of our recurring investment income is fairly predictable and relatively steady on an annual basis.

We believe the overall prospects for our investment income are pretty bright.

Back to you, Pat.

Thank you, Jack.

Our largest business, our core business, is the brokerage business.

We've divide our Brokerage Services Division into two components, our retail property casualty division, which is headed by Jim Gault, and our specialty marketing, which is headed by Dave McGurn.

I'd like Jim to comment on what's going on within brokerage services division at the retail level, including rate environment, et cetera.

Thanks, Pat.

I'd like to discuss two things that are happening within brokerage services.

First, the excitement has been generated about our new production hires and secondly, our great positioning in this difficult marketplace.

Let me start with the new production hires.

When we looked at where the marketplace was going in the early year 2000, we saw that there was a lot of turmoil that was created by what I would call merger mega-mania within our business in consolidation.

We saw that buyers wanted more choice and their choices, they perceived, were being limited by the mergers that had taken place during the decade of the '90s.

We also saw that the insurance market felt that their distribution was being limited to some degree by this consolidation, and finally we saw that there were a lot of very good and talented production people who were disenchanted with the turmoil and the change in their firms.

We saw this as a tremendous opportunity for us, a hat trick if you may.

We thought that if we executed a strategy to bring buyers -- to help buyers' markets and producers with the change in the market that we could really take advantage of it.

We had a plan and we had a plan that we wrote about two years ago right now to take advantage of this.

We consciously turned up the efforts to attract the best production talent we could to build our company into the future.

During the calendar year 2000, pardon me, 2001, we hired an additional 80 net new producers.

Now let me put this in perspective.

During the entire decade of the 1990s, adjusted for acquisitions, we probably didn't hire any more than 100 to 110 net new production talent throughout the entire company, so this was a very big leap for us in the year 2001.

We set goals for ourselves as well in the year 2002, and through August, we had already achieved our annual goal of 50 net new producers.

And so at this point, we have suspended our offensive.

That doesn't mean that we're not still looking for good talent.

We just suspended the offensive on a goal basis.

We've always looked for good production talent and we will continue to do that.

We're very pleased with the results, what I would call the classic 2001 and the classic 2002.

The classic 2001 is right on track with our expectations.

Pat mentioned earlier that our hope is that this new crop of talent will bring results for us within the first year and a half to three years and I can say that in tracking them, it appears that that's exactly on target.

Some are out of the blocks and very fast and others we expect to bring us the results we hope for within that two to three years.

I can also say that we're tracking the classic 2002 and they're right on track where the classic 2001 was a year ago.

So we're very pleased with how this strategy has been executed and how it's developing.

Let me take a moment now and shift to the marketplace.

There's been a lot of questions about where's our marketplace going?

And where do we see it going?

Well, at the present time, this market is as difficult as I've ever seen in my 28 plus years in this business.

It's the longest, most deep and prolonged hard market that I've seen.

But that goes very well for brokerage services division.

We see ourselves as problem solvers and we positioned our company in the brokering side to bring alternatives to clients, especially in difficult markets such as this.

We want to help our clients and prospects manage the cost of risk, so what that means is that we want to give them other alternatives that maybe aren't traditional, such as alternative market -- alternatives like captives and rent-a-captives, self-insurance, self-assumption, pooling, that sort of thing.

Just like our plan to recruit, we have a plan to grow in this difficult marketplace.

In our plan, a large portion of it revolves around a niche strategy.

A couple of years ago, we organized our production staff into some very well defined niche practice groups, which represents a little bit more than 50 percent of what we do in brokerage services and there's about a dozen to 15 of these groups.

Each has a managing director and a participating group throughout the nation that helps us drive this business into our branch system.

Some of these groups are construction, public entities, not for profit, large commercial accounts, health care, real estate, that sort of thing.

I've been in contact over the last week and a half with every one of our niche managing directors and without exception, they tell me that the market is at this point exceptionally hard.

There are fewer markets willing to participate on placement.

There's less capacity.

Prices continue to rise.

There are coverage restrictions that have come into play in the last year or two such as terrorism and (INAUDIBLE).

The degree with which some of these problems affect each niche might vary, but it is across the board.

These problems are all across the board in every single niche that we planned.

The client response then is to generally purchase less coverage.

They can either afford so much or the placements can only be achieved to a certain extent, which means that there's less limits, there's an increase in deductibles and retention and yet, by the same token, our clients are searching for long-term solutions.

And that's where we shine.

Our captive operation is having the best year its ever had and it will continue to, we believe, through next year and hopefully beyond that as well.

Rent-a-captives, our rent-a-captives facilities are as strong as they have ever been and many clients are looking into self-assumption and retention.

So the near term outlook is great for brokerage services.

Our niche strategy has driven more business into our brokerage offices than we could have hoped to have pre-niche.

We're getting more opportunities just as we had hoped with buyers and prospects who want to see a fresh face.

We believe our new hires have brought us new skills and tremendous new opportunities and we're into new businesses that we weren't into just two years ago.

Our retention is exceptionally strong and our new business is very, very strong.

So we see no -- with no change in the market, we think this is great for the near future for us and we've positioned ourselves very well.

So in summary, we're very excited about our new talent and we're very excited about our positioning in this market going forward.

Thank you, Jim.

Five years ago, Arthur J. Gallagher essentially was not in the wholesale business and we were small in the reinsurance business.

We made a similar gamble at that time in terms of recruiting people to expand our capabilities in those businesses.

Today, these businesses have become major contributors to our organization.

This is our specialty marketing division headed by Dave McGurn, who will talk about wholesaling reinsurance and the like.

Thanks, Pat.

Good morning to our listeners.

Specialty marketing international has delivered extraordinary results for the first three quarters and continued positive results are expected throughout the year and into 2003.

Overall, this division's revenues are up significantly year over year with profit margins that exceed expectations.

Specialty marketing consists of three main operations, our wholesale operation, our domestic reinsurance operation and our international locations.

Our international revenue base comes from our London brokerage operation, which provides both direct and reinsurance placement services.

This operation, which we plan to expand, increased head count by 80 people in the last 12 months.

New specialists in marine, aviation, fine arts, medical malpractice and other professional liabilities have been brought on board to solidify growth potential for the future.

New business is up significantly and profits have increased nicely in 2002 in spite of these additional expenses.

Concentrating on reinsurance opportunities in this particular marketplace, both our Singapore and Australian operations are well ahead of plan.

As Jim mentioned, fueled by rent-a-captive operations, and the new Bermuda (ph) insurance marketplace, our Bermuda (ph) operations are showing excellent growth.

Continued growth is expected from this operation during the fourth quarter.

Domestic reinsurance continues to deliver very favorable results.

Our facultative operations have expanded with new offices in Los Angeles and Philadelphia and while profitability has been impacted by this additional expense in increased head count, the new business momentum achieved in 2002 will bring excellent growth in 2003 and beyond.

J. P. Woods (ph), the foundation of our domestic treaty operation, continues to show double digit revenue growth in a very difficult marketplace.

New expertise has been added to our capabilities while still maintaining more than an acceptable profit margin.

Finally, I could not be more delighted with the results of our U.S. wholesale operation.

As Pat mentioned, only five years old, risk placement services has become a major player in the wholesale marketplace and a major contributor to the Gallagher organization.

Outstanding new business, new office development and a continued hard market gave the 17 locations of risk placement services, outstanding revenue growth year over year.

The fourth quarter and 2003 will continue to see positive results coming out of risk placement services.

The results in specialty marketing have been exceptional, but I'm even more enthused about the future growth potential of these operations.

New business increases every month.

Our rentention levels are at an all time high and all indications are that the current market conditions should last through most of 2003 and perhaps into 2004.

All of these conditions bode well for the continued growth of our specialty marketing operations.

Pat?

Thanks, Dave.

As you can see, the broking side of the house is very strong and I hope you can see why we've hired into that.

I'd like to make just a few comments and then close and open the floor for questions.

The only thing missing from our press release that we just didn't time to put together was segment data and that data will be available in our 10-Q.

Also, the search for our CFO is going extremely well.

This is a job that there is an awful lot of interest in.

We have a very strong recruiter that's helping us and progress is being made with some very -- with some very interesting talent.

Let me summarize the call then.

I'm never happy to start a meeting with a significant write down.

That is not what our style and history's been all about.

Nonetheless, as we get questioned over and over in terms of why we do that, I continue to believe that getting a 22 percent return on our assets over a four-year period, invested assets, and 15 percent even in a year we take those write downs down, looks good in comparison to most investing opportunities.

Let me turn to our operations.

Our operations are very strong.

The culture is very strong.

This is a sales and marketing company.

Commission growth in the third quarter of 30 percent, we have never seen that since I've been part of this company.

Organic growth in the quarter on a commission line of 22 percent.

Again, I've never seen growth like that.

I'd make these hires again because I believe we're investing in our future.

The market looks fantastic.

We're good at alternative market solutions.

We're good at helping our clients through this difficult period.

Our merger and acquisition pipeline is full.

Our currency is a little weak and that's slowed us down a bit, but there are a number of people that understand we're building something unique in our industry and want to join us.

Our niche marketing could not be any stronger.

The fall team is together, we've recruited eight players.

I might comment on that.

In over five years, I cannot think of an A player, someone that we refer to as one of our real superstars, that's left our organization for someone else in our industry.

We are now focused on margin expansion.

We spent the money, we brought the people aboard and we believe they will prove themselves out.

The position in our industry, we're third largest in the brokerage and risk management services business in the United States.

We're fourth largest in the world.

I can remember clearly when we didn't hold those positions in our own city of Chicago.

The strategic plan is clearly in place.

We have a history I believe of delivering results.

If you bought this stock at the opening gun of our IPO, you'd have over a 20 percent per year compound average annual growth on your investment.

I personally have never been more bullish on where we stand.

And I've never felt more secure in owning the shares of the company that I own, which I know many of you on this call realize is essentially all I own.

Having said that, Holly (ph), I'd like to open the floor for questions.

Thank you.

The floor is now open for questions.

If you have a question or a comment, we ask you to please press the numbers one, followed by four, on your touch-tone telephones at this time.

We do ask that all participants please pick up their handsets while posing their question to insure optimum sound quality.

You may remove yourself from the queue at the point by pressing the pound key.

Again, that is one followed by four on your touch-tone phone at this time for questions.

Thank you.

Our first question is coming from Nick Fisken of Stephens Incorporated.

Please go ahead with your question.

Hi.

Good morning, everyone.

Good morning, Nick.

Good morning, Nick.

Can you kind of walk us through the series of events that triggered the write down and why weren't they done earlier in 2002?

Well, Nick, I'll make a comment from a general perspective and then let Jack take you through the details, but we review these values every single quarter and if they were impaired in previous quarters, we would have written them down.

This third quarter really went against us.

Jack?

Yes.

Nick.

We, you know, the accounting rules on marketable securities say that you have a six-month window to take a look at them and the market obviously hasn't been very friendly to us, to any of us, over this past nine months even.

And the results in the third quarter, you know, put us in a position where within all the accounting rules, we had no choice but to write them down.

Other than temporary impairments as some people might call them per minute, but we hope some of them will come back.

That led us to doing that in the third quarter.

We kind of had a six-month window there.

On the equity investments, we've looked at those long and hard.

The economy has not been good as everybody knows.

We've looked for venture, other outside venture capital money in those companies.

It has not come and primarily, and I've probably listened to 30 or 40 conference calls with different venture capital companies on trying to get money in there, and all good companies, all good technology, but from again an accounting standpoint, with, you know, the revenue not being generated, with venture -- other outside venture capital money coming in, us being the only means of support for these companies, really the whole thing came together in this quarter.

And it's pretty as simple as that.

On the -- on the loss, the realized loss that we had, that was a contractually prompted sale that our choice was to either put in, I can't remember the number, millions of dollars additionally or succumb to a sale, and we thought better of, again, good technology, good company, but we just -- we just thought it was going to be better to take our (ph) lumps now and walk away from that investment.

So that's what culminated in the third quarter and unfortunately, they all hit in the third quarter.

So do you look at the 17 investment (INAUDIBLE) in the VC (ph) category when you put out the K, how can you give us the confidence if there's not going to be other write downs in the other 13?

Well, when you have a big investment portfolio, you certainly always have a risk.

We believe right now that we're on solid ground with all those investments.

We have tremendously reduced our exposure with the -- with the accounting moves that we had to take this quarter, and could I actually guarantee anybody that we would never have a write off again?

No, I can't do that.

Nobody could.

But we feel very confident right now that we're on solid ground and, you know, that's the assurance I can give you.

And then lastly, and then I'll open it up, but the 9.4 million write down from marketable securities, what exactly is in that category?

Just give me a general ...

There's an internally managed stock portfolio basically.

And those have historically been run through our balance sheet as a -- as an equity item, as you well know.

That's when you account for it as available for sale.

And we just thought it wiser to move that to trading.

Some people don't like the other presentation in this new day that we're in now and different ways to look at things.

It's one of the alternatives we had.

We think it's a conservative move and, you know, it takes the guesswork out of that line.

Actually, Pat, one quick question for you.

If you look at the recruiting, and it sounds like you guys have basically slowed it pretty considerably, shouldn't the salaries and benefits cost line as a percent decline sequentially again?

In (ph) Q4?

You can't look to Q4 for that sequential decline and the reason is when you put these new hires on, as you know, insurance bills over the period of a year.

Many times we put someone on, they can even pick up broker of record letters.

In other words, they can be told by their clients that we want you to handle the business and receive no pay for doing that for a full 12 months until the billing cycle starts again.

Once that billing cycle starts, in many instances, those are 12 monthly installments.

So you can actually be working an account for 24 months before you've actually had one full billing cycle.

So depending on how the mix of business flows in, you're still going to be carrying a heavier -- a heavy burden of salary and fringe.

Now I think when you take a look at both our organic growth and the commission growth for the quarter, and I can't predict that that will hold through the fourth quarter, you see that we are in fact picking up that revenue.

But it will take some time, that's why I say it's an 18 to 24 to 36 months before we really know for sure if the people that have come on have on an individual basis become accretive.

Jim's comment about tracking each class, as we call them, of hires, the '01 and the '02, is done on an individual by branch, by region basis, and we know exactly what we expect the book of business to be, and we know exactly where they've billed, and at this point in time it looks like we're right on track to have this whole thing work out well.

OK, thanks.

OK.

I would like to, I'd like to limit this to one question and one follow-up if I could, so we don't have one person dominating the call.

Thank you.

Our next question is coming from Allison Jacobowitz of Merrill Lynch.

Please state your question.

Thanks.

I was wondering if you could give us a breakout of the specialty business, and what is contributing to revenue, maybe by each segment?

By each segment Allison, I don't have that information.

Our specialty, our specialty marketing division, what's your, what's your revenue so far?

Richard Cary (?): It'll be about a 30 percent to 33 percent of the total brokerage service division.

Which year to date, what's our brokerage service revenue to date?

I don't have it in front of me.

The commissions?

Commissions and fees.

Richard Cary (?): Well the commission (INAUDIBLE) without.

You've got to look at ...

We don't have them split up.

We don't have that split out right now Alison (ph), but if you figure that we'll be around a $600 million broker, figure specialty marketing to be in the 150 to 200 million range.

Richard Cary (?): That's exactly right.

And would you have as the follow-up the figures for last year?

So we can get a sense of the comparison.

I don't have those, no.

OK.

Thanks.

But we can talk about that later.

OK.

Thank you.

Our next question is coming from Liz Werner of Goldman Sachs.

Please state your question.

Good morning.

I'm trying, make it just two.

I just wanted a little bit more information on the invest, the nonrecurring investment results and what you think they might look like going forward if you assumed no change in the current market environment.

I know that's a big assumption, but just to kind of think about what that's going to look like going forward?

And then I have one follow-up.

Well, Liz, this is Pat again.

And I'll let Jack answer as well, but by definition nonrecurring is nonrecurring, so it's very difficult for us to tell you that, you know, we hope to, we hope to rollout some plums next year in '03, first quarter, second quarter, what have you.

We've never given guidance this detailed and we really don't know.

So Jack you go ahead and answer, but they are nonrecurring.

Yes, Liz.

I'll just echo what Pat just said.

We will not plan and/or budget for any nonrecurring.

Those things they happen when they happen, there is no plan for those with possible exception of if you, if you take a big gain, which we -- not a big gain, a gain on a stock sale or something like that, but those aren't planned, so it, you know, if I was going to give an, I'd tell you probably to put nothing in there for nonrecurring.

Quite frankly.

OK.

No that's what I would have thought, except that every quarter there's been something.

So that's ...

I think if you look at what Jack said earlier Liz (ph), this is Pat again, and you take a look at the synfuel (ph) projects that you all had to get your arms around over the last two years, are now normalizing.

And you can see that in the breakout.

So ongoing investment income with some up and down now, because remember in the synfuel (ph) world, if we get a warm winter, it won't be as good.

If we get a cold winter and a hot summer, it'll be better.

So there'll be some fluctuation, but it should be relatively predictable.

OK.

And a question on the brokerage side, when you are looking at your market share gains, do you see them coming from more of the regional players, or more the two big brokers, or where do you see them coming from?

Well first of all, we don't -- this is Jim Gault.

We don't - we don't track market share as a measurement, because the market is so deep and vast.

What we track is what our revenues are when - at the beginning of the year and what we want to try to do to grow those revenues.

So what we've done is kept records over the last three to four years since we've gone to this niche strategy of what are revenues have been nationally, and then we keep them up to date once a quarter, and I can, I can say that in, with the exception of just about every single niche, we're well into double-digits in terms of revenue growth.

But the sky's the limit in every one, and we don't dominate any single niche effort area that we're in.

So there's tons of potential into the future.

I think though, Liz, your question was more where are we taking business from?

Is that correct?

Well I would say that we're taking, we're taking new business both from our regional and local competitors, who just simply do not have the toolbox we have in this very difficult market, they're not comfortable with or as astute or as practiced is probably a better word, in the alternative market.

And so we're very good at taking clients that have never gone into the alternative market into some form of self-insurance, and that is typically an account we're taking from a regional or local broker.

We are also having success against our larger competitors.

That's by branch, by location, what have you.

So we're very pleased with our, with our competition at both levels.

Holly (ph) you there?

Yes.

Our next question is coming from Greg Locraft of MFS Investments.

Please state your question.

Yes.

The last time we saw a company I guess in the industry have problems in its investment portfolio is Aeon (ph) in the fourth quarter of 2000.

And subsequently it contributed negative - you know, was a negative number for a series of quarters and stuff.

And I guess what I am trying to get my arms around is just, you know, if the markets don't come back, if the markets are flat for the next year, what would that number sort of look like, and then can you run a sensitivity maybe, you know, a market up ten percent, and a market down ten percent?

And just, you know, in that can you compare and contrast it with what Aeon (ph) is doing, because clearly that's been a disaster for the last couple of years for them, for them?

Thanks.

Well Greg, this is, this is Pat again.

We're not here to make any comments relative to Aeon (ph).

We have a unique approach to our investing portfolio and I'll let Jack try to answer the question relative to what happens if the market comes back or doesn't come back.

And also you can take a look at the press release on things that we think will be recurring income and a get a feel.

Most of that recurring income is coming from the synfuel (ph) projects, which is not market sensitive at all, those are tax credit related, and are generated based on the, on the amount of synthetic coal that is burned.

But Jack, go ahead.

Yes Greg, I don't have all the statistics you wanted me to analyze there, but if you take a look at, I believe it's page six in our press release on the quarterly results for 2002, and it's got first, second and third quarter on it, again we don't, we don't give guidance.

But I'd like to maybe make a couple of comments.

If you take a look at the third quarter numbers for fiduciary income all the way through other, we believe current market conditions, this is pretty indicative of how we will move forward with investment income.

If the market -- you know, we've just had a relatively good October so far compared to the last three, six, nine months, that would help us on the second line, investment income strategy -- investment income from strategies and marketable securities.

Equity investments and partnerships is probably close to indicative.

If the economy and the market pick up, debt could be a little bit up.

Alternative energy, partnership sales is probably close to where that's going to move forward.

Income from real estate ventures is just about where it's going to be.

And other income has been very, very steady.

It's just about where it's going to be.

So those are, kind of, the market sensitivities from a 20,000-foot level.

And we think again, third quarter is probably pretty indicative and we certainly hope, conservative.

Does that answer your question, Greg?

Yes.

That's helpful.

And then, last is just a big picture question.

You know, there's been a lot of movement, I mean, certainly, having a conference call and a new CEO and stuff.

And I'm just wondering, philosophically, I know you said at the outset you like -- you like, sort of, the investment business.

But does it make sense, given the valuation on your stock, to be taking core cash flow and throwing it towards other investments and, sort of, non-core type (ph) activities as opposed to just simply buying back your own stock?

Greg, that's a great question I answer all the time.

And let me, kind of, give you -- give me -- give you my thoughts.

We have always said that the purpose of Gallagher Financial Services is to create extraordinary returns which we will invest back in our operating businesses.

I will tell you that we would not have made the new hires we've made this year if we did not have the gains from investment income that we had through the first six months of this year and the 12 months of last year.

That gave us the room to turn the spigot open and hire people.

We are always in and out of the market buying our stock back.

And we're always interested in increasing our dividend after a strong growth year.

So we don't see them as being mutually exclusive.

Now, I've heard the argument over and over again about getting out of this business and it's lumpy and you're giving up -- you're giving up multiple points.

And I understand that.

And obviously, from a strategic standpoint, we have to sit back and not be, in any way, cavalier.

But when I can have a $30 million write down and four years rate of return of 22 percent, I look at that and say OK.

I think -- I think, on balance, that's pretty darn good, especially when I know that that's what allowed me to turn to Jim Gault and Dave McGurn and others -- Jim Durkin, who runs our benefits operation and say get those new hires in here.

We can afford them.

I hope that answers your question, Greg.

Yes, it does.

Thank you very much.

Thank you.

Our next question is coming from Bob Glasspiegel of Langdon McAlenney.

Please state your question.

Good morning.

And first of all, let me say that I enjoyed the discussion in the increased disclosure and would have enjoyed (INAUDIBLE) disclosure if it was sooner than 6:30 the night before.

But we'll take it this way.

OK.

Bob, this is Pat.

The debate around here was whether to give it to you at eight o'clock this morning.

Right.

No.

I think the night before -- the night before is better but closer to four o'clock, 4:30 would certainly be...

Well, let me address that because you need to know this.

We did, in fact, work with the firm that was putting out the press release at the close of the New York Stock Exchange.

We would not do this prior to that.

And we talked to the exchange.

That was their -- that was their rule.

And it took over an hour to get the press release out.

OK.

I hope that didn't count as one of my questions.

So...

Jack Lazzaro (?): No.

You get - you get at least two more.

Go ahead.

I'm enthusiastic about your quote, "switch" to margin improvement as a focus.

I want to just, sort of, look back.

We've been growing salaries and employee benefits five to six points faster than - seven (ph) points faster than commissions and fees.

In prior cycles in certainly other companies, you'd actually, at this point, see them growing five points slower than commissions and fees.

If I - if I use that number instead of the number in (ph) your report (ph), it looks like your salary employment expenses are about 12 million a quarter above what trend line may be.

So I guess I don't understand how the mathematics of 130 raw hires chew up that much money.

Is it the experienced hires have employee - have bonuses - hiring bonuses that...

Richard Cary (?): No, Bob.

You've got - let me stop you there because you're not doing - you're not - you didn't catch - we have 130 new production hires.

All in, we're up - we're up 900 people over 12 months, 450 of those coming from acquisitions.

And when those acquisitions come aboard now under purchase accounting and the like, those are typically come with a higher salary and fringe than we would - we would have here.

So that starts off right away pulling that - pulling that percentage up.

But it's...

Richard Cary (?): Out of 130 production hires - I'm sorry, Bob.

What?

But still using, you know, even 900, it wouldn't get to 12 million a quarter, would it?

Richard Cary (?): Well, I'm not - I'm not backing into your number.

I'm just telling you what's happening here.

I mean, we've got - every new - every new production hire brings at least two additional support people with them if they're seasoned - if they're seasoned producers.

OK.

Well, I'll walk you through the numbers later.

But I guess the question is - listening to you, it sounds like commission and fees are ahead of plan because you're just blown away with how good the third quarter top line was.

And I think you're saying salaries were as expected, right?

There's no surprise on that versus plan.

So actually, you were expecting a much bigger margin degradation than you got.

Is that - is that a fair statement?

Richard Cary (?): I was pleased with how the quarter worked out.

OK.

When do - when do we get to the crossover point where commissions and fees and salary employee benefit growth are even with each other?

Richard Cary (?): I think you're looking at third quarter next year.

We have - we've got the - we've got the burden in the fourth quarter of this year of people that we didn't have aboard last year.

We've got the burden in the first quarter next year of people we did not have at the first quarter this year and second and to some degree, third, this year.

And we have put - we've put a real slowdown on it now.

So I think you should see, as these people become more accretive, some improvement.

But the lines should probably cross third, fourth quarter next year.

OK.

Thank you.

Thank you.

Our next question is coming from Ira Malis of Legg Mason.

Please state your question.

Sure.

I have a (INAUDIBLE), a couple observations and a question, a follow-up on Greg's comment.

I think you did a good job of defending the - why we were in that investment.

But on your call, you also - you expressed frustration with your share price.

And I guess you have to always look at the interplay.

I mean, you did a good job of harvesting that money.

But perhaps going forward, what you're giving up in multiple might not be worth it from here going forward.

And I imagine that's something that you're looking at.

Patrick Gallagher (?): We look at that very closely, Ira.

Right.

Next suggestion, then I'll get to one quick question.

Would it be possible for you to break out and maybe get to Glasspegel's (ph) question, how material the impact of the bonus accrual for the financial services business is in your salaries and employee benefits?

I know this time, it might actually have gone the other way because you were down.

Did that make this (ph) a truer picture of what's actually going on in the underlying salaries and benefits?

Richard Cary (?): Well, you know, we've broken that up in the - in our proxy statement.

We've never given that data as a breakout quarter by quarter.

And really, even if they - this quarter obviously, that's a pickup to us.

It's not - it's not a - it's not an increase in cost.

Got it.

Richard Cary (?): But having said that, even if they're hitting the ball out of the park, comparative to the whole - comparative to the whole of our salary and fringe, even to our bonus accrual, it's minuscule.

Got it.

OK.

And just one quick question.

On the tax rate, can you actually say how the gains from the equity partnership sales are taxable, I believe.

But what's (INAUDIBLE) to lower tax rate is when you're actually producing for what you still own, not for what you have sold.

Is that correct?

Richard Cary (?): That's correct.

Patrick Gallagher (?): That's correct, Ira.

In this quarter, was there - how material - how material was the impact of this quarter for what you sold to the tax rate?

Or what is the basic tax rate without that, however (ph) I'm trying to get around to that.

Richard Cary (?): Ira, I'll give it to you a little different way.

We do our tax rate on an annualized estimated basis and round numbers.

And our tax credits will be around $20 million this year.

So you can, kind of, back into the number.

Great.

Thanks very much.

Again, we thank you for the conference call and the increased disclosure.

Patrick Gallagher (?): Thank you, Ira.

Richard Cary (?): Thank you.

Thank you.

Our next question is coming from Alice Cornish of Prudential.

Please state your question.

Thank you very much.

I just wanted to clarify something, Pat, that I'm trying to make sure I understand what you're saying about the crossover point being the third quarter next year.

Are you indicating that salaries and employee benefits as a percentage of commissions and fees will remain in that 54-percent area until next year?

Well, Alice, you know, we don't give specific guidance on that.

I think you know that.

But we have a heavier load to carry than we would normally have had we not hired these people.

I'm not trying to be evasive.

The problem with giving you a prediction is if some of these new hires become more accretive more quickly than we might expect, we could see improvement before that.

However, on balance, across the whole, looking at the averages, I think that we will be slightly higher in salary and benefits than we have been historically.

If you look back to our salary and benefit lines in '97, '98, '99, 2000 (ph), I mean, we are expense control fanatics.

We understand how to - how to do that.

But at this point in time, with 600, 700 new hires, we're going to need - it's going to take a couple of quarters for that breathing room to show.

I can't give you a specific percentage.

I would hope that it would improve more quickly than what I'm telling you.

But it's going to be a matter of what builds (ph).

OK.

Now, let me - let me turn that question to Rich Cary ...

But (ph) if it did improve more quickly, Pat, we wouldn't hold that against you.

I'm sorry.

What, Alice?

If it did improve more quickly, we wouldn't hold that against you.

I was just trying to get some idea as to what you were saying as far as that number is concerned.

Well, to be conservative, Alice, I think you've got to look at it as being a pretty heavy load for a number of quarters.

OK.

All right.

And then, I had one more question on the venture capital investments as far as the carrying value is concerned.

I think that you mentioned that there were 17 investments and that you had write downs on four.

Is that correct?

Richard Cary (?): We've actually had - I didn't flip open the 10-K.

That was one of our - one of our guests (ph) that stated that.

I'm sure it's correct.

We've had - we had a write down in the first quarter of this year.

So several of them have come down, you know, a little bit more than the four.

OK.

What would have to happen for the remaining to be also have a write down?

In other words, is it related to the equity market or the specific industry they're in?

Richard Cary (?): I think it's more related to the specific industry that they are all in.

And that's probably more closely tied to the economy.

And I don't want to make that a negative thing because none of us thinks the economy is real good right now.

But again - not to repeat, but again, we believe that everything that we have left Dallas is on solid ground, poised and ready to be successful.

And some of them, quite frankly, are already very successful.

It is - you raise a good point, Alice.

We look at this every quarter.

We can't sit here and promise you that this won't happen again.

OK.

Well, thank you very much for having the call.

It's very helpful.

Alice?

Richard Cary (?): You're welcome.

Alice?

Yes.

Did we do our explaining OK?

Yes.

But I have to admit when you were going through all of the alternative investments I was writing frantically.

OK.

Good.

Thank you.

Thank you.

Thank you.

Our next question is coming from Jeff Thompson of KBW Incorporated.

Please state your question.

Thanks.

Hi, Pat.

Hi, Jeff.

I also want to thank you for this call.

I think it's extremely helpful.

Thank you.

My first question is an accounting question.

And I was wondering if we were to take every item in net investment income other than fiduciary and then less the energy expenses and real estate expenses, would I have a net pretax gain from non-fiduciary investment income items?

Richard Cary (?): Yes.

Yes, absolutely.

OK.

Second question ...

Excuse me, Jeff?

Yes.

In order to complete that circle, you also have to add in tax credits.

It's not pretax, but you have to consider tax credits as well.

Why do I have to consider tax credits?

Richard Cary (?): Because our tax rate is 30 percent.

Yes.

And they're directly related to the coal - synthetic coal investments and some housing ...

OK.

... low income housing.

Richard Cary (?): The normalized tax rate for us would be ...

Forty'ish versus 30.

Yes.

I - just a minute ago or so I told - I think it was Ira that our tax credits this year would be around $20 million.

They are directly related to those investments.

OK.

Just that completes the circle.

OK.

And then the second question has to do with your acquisition activity.

You talked about the currency, your use of stock.

And looking at the shares outstanding this quarter, they didn't go up that much, and I know you only had one acquisition.

But my question going forward are you still going to issue stock, or would you be more likely to use more cash and acquisitions?

How should we think about the shares outstanding going forward?

Well, Jeff, I think you know where I come from philosophically.

I would like to continue - I wish pooling had never gone away because we were building a partnership.

And it was virtually my family's equity, your family's equity.

If we put them together can we grow this thing faster.

And I think we have proved over the last 16 years that that works.

We do not want to get out of the partnership method of doing these acquisitions.

By that, I mean we want the sellers to be in our stock.

If I find someone that wants all cash, to be perfectly honest, I don't think I'll do the deal because that's not what it's all about.

Certainly some cash can go in the deals now because we are operating under the purchase environment as opposed to pooling.

Now, having said that, there's a lot of debate around the company right now.

I happen to think that we're the best buy on Wall Street, and the price of the stock is pretty dear.

Nonetheless, it's kind of interesting the psychology of the seller is very interesting to me.

When the stock was trading at 28 times people wanted all stock.

With the stock trading at 16 times, people would like more cash.

So, while that doesn't make a lot of sense to me, that's how it is.

I think that what you're going to see is that we will continue to issues shares for these deals and we will also, from time to time, have to use stock.

As that relates to shares outstanding, remember, we don't have a goal set for how many acquisitions we do or how much revenue we buy.

Every one of these is done as a single effort, bringing good people into the Company.

I think you have to go back and kind of look historically at the number of shares that were out (INAUDIBLE) and you can kind of extrapolate.

OK, but, that being said, you had mentioned in your presentation that the share activity-I'm sorry, the acquisition activity-slowed down and you sited your share price.

Right.

And I'm just trying to read into that, should we assume that maybe if the share price stays down you won't be as active a buyer?

You know, it's funny, we're a very active buyer, it-sometimes it slows the sellers.

OK.

Good, thank you.

You bet.

Thank you.

Our next question is coming from John Balkind of Fox Pitt Kelton.

Please state your question.

Morning, everyone.

Morning, John.

Quick question on the new hires.

When you look at sort of the new hires in aggregate, what percentage of their book typically comes over and doesn't that usually take place in the form of a broker of record or an RFP in the first calendar year?

Because looking-your comment on seeing out 36 months, whether the producers work or not, I would think the outside would be 24 months.

So could you just talk about the dynamic a little bit?

Yes, John, this is Jim.

That's a good question, but you have to remember that there-a lot of the people we've hired have non-compete contracts and we expect them to honor those contracts.

So many of the people we've hired, in fact the majority of them, are not bringing over broker record letters.

They're building their books of business because they're good professional people that have been in the business for a long time and we believe they can do it and they believe they can do it.

A portion of those hires are not encumbered by a non-compete and, certainly, that's a different story.

But I would say the minority of them fit that category and so that's the reason why we think it's going to take 24 to 36 months on-as a grouping, to get where we want to be.

What portion of the new hires of the-I guess the new producers-have non-competes and if a client brings over a broker of record, you don't turn it away do you?

We will, in fact, turn that away, John, if the client insists on working with the person that we've hired who has a non-compete, we will turn the broker of record letter down.

If the client will sign the broker of record letter to Gallagher and allow us to put another team on their account-and we truly mean that, we don't play games with looking over the cubicle or any of that stuff-we'll be glad to take the account as long as our person that we've recently hired has lived up to the terms of their non-compete.

We don't violate non-competes intentionally.

Now, from time to time, we slip up, we get sued, we try to get that behind us, but, on balance, that's our philosophy.

Ok.

And then just in aggregate the percentage of the employees booked, it typically comes over on average-I know it varies around the mean.

Well, it can be anywhere from a third to 80 to 90 percent, but I would say we usually look at very conservative one-third.

If they say they can move a book, we discount it and say it's probably about a third of that and that generally ends up being a pretty fair number.

Right.

Thank you very much.

Thank you.

Our next question is coming from Mark Dwelle of Ferris Baker Watts.

Please state your question.

Good morning.

I'll add to the kudos for a very thorough press release and a very good conference call.

Patrick Gallagher (?): Thank you very much, Mark.

One question that I think is a fairly simple, in general, are broker or producers compensated on variable basis primarily or on a fixed basis primarily?

Patrick Gallagher (?): They're primarily on a variable basis, based on what they hunt and kill.

Now the exception to that is when you're bringing someone over that's seasoned, let's say this is a person that's making, you know, X, $150,000, you're not going to bring that person at $25,000.

So that person will take some time to validate.

And then based on his or her business, will have the opportunity to grow that income.

Probably 90 percent of our production personnel are paid in that format.

So some type of a draw arrangement is set up or something like that as they bring in their book?

Patrick Gallagher (?): That's correct.

Richard Cary (?): Yes.

OK.

The second question, sort of generally on that one, just a comment on the strategy.

Do you view, I guess, the build out of your producer force, together with acquisitions as sort of parallel strategies or complementary strategies?

Patrick Gallagher (?): Both.

Both because some of our acquisitions will complement a niche.

For example, a construction.

We've done some construction - mergers of competitors that have a pronomic (ph) local construction business.

And then when it comes to hiring producers, you know, we will target or look for producers that we think will help us grow a niche.

So it's a combination of both.

Richard Cary (?): Also, I'd like to comment, Mark.

The - we've never done an acquisition with the intent of just synergizing out costs by firing people.

From time to time, we're lucky to have a role in acquisition.

That person comes with less staff, but we'd never have bought a location and said, "Now let's start downsizing."

So it really is parallel and it is - it's typical that it works together.

When we do an acquisition, the first thing we start talking about is who do we go to get to take you to the next level?

Right.

OK.

I think that's my two.

Thanks very much.

Patrick Gallagher (?): Thanks, Mark.

Thank you.

Our next question is coming from Michael Smith of Bear Stearns.

Please state your question.

Thank you, but my questions have been answered.

Thank you.

Patrick Gallagher (?): All of them?

Our next question is coming from Vinay Saqi of Morgan Stanley.

Please state your question.

Good morning.

Just a couple quick questions.

One, Pat, if you could just clarify on acquisitions, I know you mentioned that you were slowing down new hires.

Are you also slowing down your acquisition activity right now?

Absolutely not.

OK.

Second question is, if you guys could just give us what the balance sheet assets are for the venture capital investments?

Jack (ph)?

Jack Lazzaro (?): You're just looking for a total?

Yes, well the total I guess on your balance sheet right now, if I look at other non current assets it's $209 million or so roughly.

I assume most of that is your alternative investments?

Jack Lazzaro (?): Actually, I think I can give it to you a little closer than that.

OK.

Jack Lazzaro (?): The marketable or investment strategies trading and marketable securities trading, obviously, are part of our portfolio.

Yes.

Jack Lazzaro (?): In other words, we have about $30 million of basis in there.

In other non current assets, there are about $50 million of notes receivable and about $145 million of other equity investments.

And that should be the whole - that's all of it.

OK.

And how much -- is the $30 million basically all the venture capital?

Jack Lazzaro (?): No, no.

The $30 million in other is really the bases of our coal facilities that we've sold that are amortized over the seven year life of the tax credits.

OK.

The ...

Jack Lazzaro (?): The question was how much on the balance sheet is directly related to venture capital?

And if we don't have that broken out, and we haven't provided it, then we'll have to -

Patrick Gallagher (?): Yes, we're going to have to hold off on that.

Then I don't have it exactly that way.

That's fine.

Patrick Gallagher (?): So I'd like to hold off on that.

OK.

Thank you very much.

Patrick Gallagher (?): OK.

Thank you.

Our next question is coming from Ira Zuckerman of Nutmeg Securities.

Please state your question.

Yes, thanks, guys.

I think this is also a very good step.

My question goes back to the production.

You mentioned that retentions and new business is strong.

Can you give some numbers behind it?

Richard Cary (?): What kind of numbers you looking for?

Percentages or dollars?

No, it's basically, you know, what kind of - how is new business as a percentage of your total?

How does new business compare to lost business?

Richard Cary (?): Well, new business is very strong.

And I don't have that report in front of me right now.

Yes.

Richard Cary (?): Let me take a look here.

Do you have it right there?

Again, we've never actually put out a breakout.

All right, let me give you the way I've typically answered the question.

And I'm going to have to take a little bit of swag, because I don't the data right in front of me, but on balance, we have historically said that we have about a 15 percent top line growth.

And that's hard market or soft - that's hard market or soft market.

In any given year - we lose six to eight percent of our revenue, which takes us in a normalized basis to say seven, eight percent topline grow pre any kind of market.

We're doing better than those in this environment.

In the past, we get seven, eight percent.

If we had a three or four or five percent decrease in the market, that's how we got the low single digit commission growth.

In this environment, we probably get 10, 12 percent help or lift from the market itself, because remember, we're constantly showing people how to self insure and the like.

We don't - if a program is up 30 percent in premium, we don't necessarily get a 30 percent increase in commission.

So if you add the 12 percent or so to the seven or eight, you get kind of close to where we are.

So we're probably now at four of five percentage points better than our norm in terms of doing new business.

Yes, OK.

Thanks.

Richard Cary (?): Thank you.

As a reminder, if you would like to ask a question, please press the numbers 1, followed by 4 on your touch-tone phone at this time.

Our next question is coming from Dave Sheusi of J.P. Morgan.

Please state your question.

Hey.

Good afternoon, everyone.

Patrick Gallagher (?): Hi, Dave.

Boy, I need a quicker trigger finger here, I tell you.

Just as a follow up, on the insurance ops on the organic growth numbers.

Does that include the contingent commissions that you recognize in the quarter?

Or how do you guys look at that?

Patrick Gallagher (?): Yes, it does.

OK.

And -

Patrick Gallagher (?): Hold on.

My accountant's shaking his head.

Richard Cary (?): No, no.

No, it doesn't.

OK.

Only because my follow up question ...

Patrick Gallagher (?): I take that back.

What was the contribution I suppose?

OK, so that excludes that number.

So wow, that's fantastic.

And then, I guess on a separate issue, you know, I guess in recent filings with the SEC here in the latest 10Q, I just have some follow up on some recent litigation surrounding the synthetic fuel industry and what the impact would be relative to your business on that side.

And you know, could you just talk a little bit about the scope of that litigation and what impact, you know, there is out there relating to that?

Patrick Gallagher (?): You know, are you a shill for my counsel?

He's been sitting there quietly and lawyers aren't good at that.

So I'm going to let John Rosengran (ph) answer that.

OK, great.

All right, thanks for your question.

You know, we've provided the 10-Q disclosures that we and our counsel think is appropriate.

There really hasn't been anything beyond what the - is in our 10-Q has developed or that we can really comment.

I think it kind of speaks for itself that we, you know, we view our position as very, very strong.

And I really can't go beyond that in this call.

Great.

Well, I thank you for your comments.

Patrick Gallagher (?): Thank you, Dave.

Thank you.

Our next question is coming from Robert Heidenrich of Robert W. Baird.

Please state your question.

Good morning.

Patrick Gallagher (?): Good morning, Bob.

Richard Cary (?): Good morning, Bob.

Pat, what is your approximate time table on bringing on a new CFO?

Oh, Bob, you know, I wish I had one yesterday.

OK.

But the problem is when you read the job description, the only thing that can injure this person is cryptonite.

OK.

So he's got a tough job.

Oh, it's going to be an exciting job.

OK.

I don't think there's a better job in the business world.

Would you hope to do it by the end of the year, do you think or?

Bob, I'm not - you know, I can't answer it.

OK.

As you know from - you know it's a process.

It's going to take some time to sort through the candidates.

Everyone that is a candidate understands that there's a lot of people to meet.

We're not going to do this on a lone ranger basis, just walk in one day and say, "Oh, I found my person."

So it's going to take some time.

OK, thanks much.

Thank you.

I think we've got time for one more question, Holly.

Thank you, our final question will come from Robert Steiner of Rothchild Investment.

Please state your question.

Hi, Pat.

Hello, everybody.

Richard Cary (?): Hello, Bob.

Hello, Bob.

In your alternative portfolio, I guess you have something called asset alliance, which I believe at the beginning of the year, you had $33 million allocated to, and I think my notes show that you own 25 - could you tell something about this asset alliance and what the plans are in the future there?

Well, I think as you know, Bob, we helped form asset alliance a number of years ago.

This is a alternative money management firm that essentially has brought together a number of hedge fund managers and other alternative money management companies.

The plan for asset alliance from the very beginning was to take themselves public, which was underway.

The roadshows were very in fact to close to pricing at the very time that long term capital blew up.

And so that had to go on the back burner.

The plan still for them is to grow themselves to a point in time where they can become a public enterprise.

And you know, that's - it's just a matter of how - again, it's - there's no predicting that.

It's not a very strong IPO market right now.

And how has your return been this year for the asset alliance?

Jack?

Jack Lazzaro (?): Return's been very healthy.

They've had a month or two that have been not where they'd like it to be, but you know, mostly reflective of the equity markets.

So they tend to track with the equity markets.

But you know, the hedging is supposed to take care of that.

So they've had a very good year.

And we expect them to finish the year as well.

Thank you.

I'd like to thank everybody who participated in this call today.

I think this is a good start to our efforts to communicate with your investors and owners in a more transparent way.

And I appreciate your taking the time to listen to us today.

Holly, thank you very much.

I think that concludes the call.

Thank you for you participation, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a great day.

Thank you.