Arthur J. Gallagher & Co. (AJG) 2002 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Arthur J. Gallagher & Company Fourth 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 forward-looking statements within the meaning of the securities laws, and are subject to certain factors and risks described in their 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 fourth quarter conference call and year-end conference call.

In keeping with the format that we established last quarter, we are going to do about the same thing.

I am joined today by Richard Cary, our acting CFO and CAA;

Jack Lazzaro, who is our Corporate Treasurer and CFO of Arthur J. Gallagher Financial Services;

John Rosengren, our Chief Counsel;

James Gault, who is the President of our Brokerage Services Retail Division, a Property Casualty division; and David McGurn, who is President of our Specialty Marketing operation, part of Brokerage Services, that does wholesaling, reinsurance, and international.

Now let me apologize up front for a little bit of a scratchy voice here.

We have had some incredible weather here in Chicago.

And a couple of us have got the wonderful mid-winter cold.

So if you hear a little sniffle and what have you, we apologize.

As I said, we will follow the same approach.

I will make just a few comments.

We will not read the press release.

And then I will turn it over to the others to make their comments.

2002 was a year of some ups and downs.

But on balance, breaking through the $1b mark in our 75th year was really an accomplishment that I want to compliment my team on.

We set our sights on the billion dollar mark over ten years ago, and told ourselves that we could get there.

And I am very, very pleased that we did that.

Today there is really seven key points I would like to start with.

Number one, I think the fourth quarter was exceptionally strong.

It was a great operating quarter.

Our year was strong on an operating basis, with organic commission growth up 17%, organic fee growth up 15%.

We can all around this table remember 1999, when commission income was up a whopping 3.8%.

Number two, our write-downs of $33m were a very big negative for us last year.

We are glad that is behind us.

But even with that, our rate of return on invested assets was close to 15%.

Number three, our new hires are selling, and head count control is in place.

Since 9/27, since the 27th of September, through the 24th of January, our organic head count as an organization is actually down 11 people.

Number four, the market is very, very strong.

We saw that there was a bit of a decrease in the growth rate in the fourth quarter in terms of commission income.

That is because the ART, the alternative risk transfer market, is also growing at a rapid pace.

People are pushing back on these cost increases.

But the market is strong.

The alternative market is our sweet spot.

Number five, our balance sheet, we believe, is second to none.

Once again, our return on beginning shareholder’s equity was over 30%.

It was 35% in 2002.

That is our 38th year of a return on beginning shareholder’s equity of over 30%.

Our tangible net worth is approaching $400m.

Sixth, unfortunately our Gallagher Bassett operation – you see the fee growth.

It is not fee growth from claims management.

Gallagher Bassett was faced with a slowdown in 2002, as was our Benefits operation.

So all of our growth really emanates from our brokerage operation, which had just an outstanding year.

And the last point I would make, number seven, as we start today, is that 2003 should shape up to be another record year for us.

We are very, very excited about it.

As I mentioned, we will not read the press release.

But I do want Richard Cary to take you through some of the numbers, and give some highlights.

Rich?

Thank you Pat.

Hopefully everyone on the call had the opportunity to read our Q4 earnings release.

I would like to take a few minutes to outline some of the highlights of our Q4 and 02 operating results.

You should note the presentation of this release is consistent with our Q3 presentation.

Our Q4 and ’02 operating results are presented on pages three and four of the release.

For the quarter, total operating revenues increased $57m, or 23%, versus Q4 of ’01.

Operating revenues represent GAAP revenues before the non-recurring investment incomes, gains and losses that are presented on page eight.

Jack will discuss these items in detail later in the call.

Commissions were up by $30m, or 20%, including organic growth, as defined in the release, of 14%.

Fees were up in the quarter by $20m, or 23%, including organic growth of 18%.

For the year, our commissions increased $124m, or 23%, including organic growth of 17%.

Fees were up by $64m, or 20%, including organic growth of 15%.

Substantially all of the organic growth achieved in our commission and fee revenues for the quarter and the full year was generated by our Brokerage Services division.

In Q4 of ’01 and throughout ’02, we completed 14 purchase acquisitions, including two in the quarter.

The effect of these acquisitions on our commission and fee growth was $12m for the quarter, and $45m for the year.

Salaries and employee benefits increased $17m or 12% for the quarter, and $104m or 22% for the year.

Salaries and employee benefits, as a percentage of commissions and fees were 54% for the quarter.

This is down 4% from the 58% reported for the same period of ’01, and is flat when compared with Q3 of ’02.

The percentages for Q3 and Q4 of ’02 were lower than we anticipated, and do not represent our trends for the near future.

We expect this percentage will be higher in the first quarter, and throughout most of ’03, due to the following – the annualized impact of new employees that were hired during the past 12 months; projected increases in pension and medical insurance costs for ’03, the effects of true-ups and compensation accruals that occurred in Q4 of ’02, primarily related to the lower than targeted ’02 operating results of our Claims Management and Benefits divisions; and finally, due to the fact that on a quarterly basis our commission and fee revenues are lowest in the first quarter, while compensation is somewhat more fixed.

Other operating expenses increased $14m or 21% for the quarter, and $42m or 17% for the year.

These increases are primarily due to increases in business insurance costs, and shared commission [inaudible] on our retail [CC] Brokerage business.

Both of these items are related to the [hired] market.

Also contributing to the increase in other expenses are increases in professional fees, and traveling and entertainment costs, the latter of which is due primarily to new business development from our new producers.

Operating expenses of our Alternative Energy Partnerships represent Gallagher’s pro rata portion of the ongoing expenses associated with the operation of the synthetic fuel facilities owned by the partnership.

These expenses decreased by $452,000 or 22% for the quarter, and $15m or 71% for the year.

These decreases are directly attributable to the ’01 and ’02 sales in limited partnerships that operate these facilities.

The effective tax rate for ’02 was 30% for both the quarter and the year, versus 11% and 12% for the same period in ’01.

These rates reflect the effective tax credits generated by our investments in limited partnerships, followed by affordable housing and alternative energy projects.

The increase in the effective tax rates in ’02 over ’01 is related to a reduction in tax credits earned in ’02, due to the previously discussed sales of limited partnership interest.

The ’03 effective tax rates will be higher than the ’02 rates, due to the projected growth in our pre-tax earnings, and the decrease in tax credits that we generated for our use.

We anticipate that the ’03 tax rate will be in the mid-30% range.

Amortization expense for ’02 increased by $3m or 90% versus ’01, due to the option of FAS 141 in ’01 and the amortization associated with the acquisitions accounted for in the purchases that were completed in Q4 of ’01 and throughout ’02.

Amortization expense for the quarter decreased $339,000 or 22% compared to the same period in ’01.

In Q4 of ’02 we received valuations from qualified independent appraisers, and adjusted the allocations of the intangible assets to reflect the results of these valuations, which reduce the related ’02 amortization expense.

GAAP net earnings per share increased 17% to 42 cents for the quarter, and 2%, to $1.41, for the year. ’02 GAAP earnings per share represent net after-tax and return investment losses of two cents per share for Q4 and 12 cents per share for the year.

Net operating earnings per share increased 26% to 44 cents for the quarter, and 20% to $1.53 for the year.

Operating cash earnings per share, as defined in the release, increased 28% to 50 cents for the quarter, and 21%, to $1.74, for the year.

These increases in earnings per share are primarily due to organic growth in our top line revenue.

I would now like to highlight a couple of items in our December 31, 2002 balance sheet, which is on page five of the release.

As of December 31, 2002, the outstanding borrowings on our $150m revolving credit agreement were $25m, which is down $10m from December 30, 2002, and December 31, 2001.

This is the only direct bank debt that we have, which we believe is small compared to our total stockholder’s equity at year end of $528m.

The limited partnership related debt in the balance sheet represents debt directly associated with three of our consolidated investments.

Our financial position is very strong, and we believe compares favorably to others in our industry.

As of December 31, 2002, our tangible net worth was $393m, or $4.44 per share.

This represents an increase in tangible net worth of $87m this year, or 84 cents per share.

This increase is net of ’02 declared dividends of $53m or 60 cents per share, and an increase in tangible assets in ’02 of $70m.

I will be pleased to answer any questions you may have later in the call.

Now I will turn it back to Pat.

Thank you Rich.

I would like Jack Lazzaro to take us through our investment activity.

Jack?

Thank you Pat.

I mentioned last quarter that recurring investment income has become much more predictable than in the recent past, and that the third quarter 2002 recurring investment income was about where the results would be moving forward.

The fourth quarter recurring investment income results were actually better than expected, due primarily to the impact the favorable equity markets had on our investment strategies and marketable securities portfolios.

Our 2002 recurring investment income was $28-1/2m greater than 2001.

And we expect it will increase again in 2003, given the current activity levels.

I will discuss each line item in just a minute.

Including the net non-recurring loss of $19-1/2m in 2002, the Financial Services division’s pre-tax equivalent return assets is almost 15% for the year, and averaged 23% over the last four years.

The net non-recurring loss of $4.9m in the fourth quarter 2002 was the charge we recorded under the equity method of accounting for Asset Alliance’s previously announced write-down of its investment in [Beacon] Hill, plus the expense related to the limited financial support we are giving to venture capital entities we previously wrote down.

We expect future support to be limited to $2m.

Fiduciary income was about as expected for the quarter, in spite of the Fed rate reduction in early November.

The rate reduction will bring our 2003 return rate, at least starting the year, down by 30-40% from the average in 2002.

As I said before, the equity markets were favorable to our portfolio this past quarter.

Depending on the index, the market was up 8-14%.

All things considered, I cannot see the markets yielding the same favorable results each quarter in 2003.

I would anticipate the results for our portfolio next year will be similar to that of 2002, with some swings between quarters.

Income from equity investments and partnerships were strong for the quarter.

And I anticipate a run rate for 2003 comparable to the average for 2002, with quarterly results being in the $2m to $2-1/2m range.

I noted last quarter that installment sales gains at $10.8m were a bit higher than average.

I also mentioned that the ongoing gain would be in the range of $9-10m per quarter, with some increases moving forward.

The fourth quarter was about as expected, at $9.8m, and should be indicative of the results for 2003.

Income from real estate ventures was up a bit in the quarter, specifically due to property sales at the [Birchwood] project.

While we hope to see similar to increasing levels continuing through 2003, these sales could certainly be affected by the health of the economy.

Please note that the expenses of real estate ventures went up as well, as a result of increased marketing and advertising activity at [Birchwood].

Other income has ended up in the $2-3m range in each of the past several years.

Although we do not plan on specific items, it is probable there will be a similar amount in 2003.

As you can see from the results, recurring investment income ended 2002 on a strong note.

While we are all concerned about world affairs and economic conditions, we continue to be optimistic about the future for our investment income.

I will be happy to take questions later in the call.

Thank you.

Thank you Jack.

I mentioned earlier in the call that our Brokerage Services division, both the retail and the wholesale reinsurance side, had an absolutely fantastic year.

I would like to start with Jim Gault, to talk about the retail side of our business, give some flavor to what is going on there, and what we see happening in the future.

And then I will turn it over to David McGurn.

Jim?

Thanks Pat.

I would like to touch on three things – new hires and their validation; secondly, the markets and the current rating environment; and lastly acquisition.

Let me pick the new hires.

In the October conference call we stated that we had brought in about 130 new producers over the last two years.

At that time, we had projected how they might actually finish the year of 2002.

And it was very encouraging.

I explained as a specific objective we wanted to recruit proven production talent to build our company in the future.

Once again, this past quarter we asked our branch managers to update us on the progress of these new hires.

We asked what their billed revenues were, their new unbilled revenues, and their new business pipeline was.

That information was reviewed in comparison to the office and the region, other Gallagher producers, and the niches and expertise they pursue.

I am pleased to say we are very happy with how this strategy has been executed, because the year-end results tracked very closely with where we thought we would be in October.

We still believe the best will validate within two years or less.

And the others will validate within three years.

Let me go on to the markets and the rating environment.

The marketplace continues to remain hard.

There is continued pressure to raise premiums.

But unlike the hard market of the mid-1980s, this market is not driven by lack of capacity, but more by past poor underwriting results, and a newfound discipline by underwriters.

Recent publications have forecasted 2003 will be more of the same in terms of the markets and the rates.

For example, property is slowing a little bit.

But it could be as high as 25% for some risks.

Casualty continues to have pressure to raise rates anywhere from 15-25% or higher.

Professional lines – it is not unusual to see 25% or more increases in that end of the business.

Excess casualty also is very tight, with 25% and up increases at the present time.

And workers’ compensation continues to increase on a state by state basis.

We believe there will continue to be this type of upward pricing pressure throughout all of 2003.

Whether or not it sustains itself for the entire year remains anyone’s guess.

But no matter how it plays out for the rest of the year, we see ourselves as problem solvers and client driven.

If the client needs substantial limits, we will go out and get that done in the most economical way we can.

If the client has been hit with several years of pricing increases and wants to raise retentions or deductibles as a way to control fixed costs, we will do that as well.

If the client wants to look at the alternative market, and assume more risk and buy less insurance, we will do that as well.

And a good example of this is the explosive growth enjoyed by our Captive division, Gallagher Captive Services.

Gallagher Captive Services provides an opportunity for individual risks to start up a captive or to join a captive with other heterogeneous or homogeneous type risks.

And they share risk that enables that client to move farther away from the dependency of the insurance market.

To give you an idea of the demand for this type of alternative, last year Gallagher Captive Services saw submission activity increase over 200% from 2001.

And 2001 was a banner year for the ten years or so that Gallagher Captive Services have been in business up to that point.

The broker sources, both internal to Gallagher and external to Gallagher Captive Services, increased by over 50%.

Client count within those association and group captives was up over 70%.

And on top of that, several new captives were launched.

This is an outlet for plenty of new business in 2003, as buyers look to find ways to stop another round of pricing increases.

So in summary, for brokerage services retail for 2003, we believe that we will continue to have strong growth, fueled somewhat by the hard market, but more through new clients and customers who employ us to use them to help reduce their cost of risk.

Lastly, let me talk about acquisitions.

Our acquisition strategy and brokerage services has three parts.

We are looking to get agencies to join us that have an expertise, and will help us build our niche practice groups.

We are also looking for agencies that will help give us new geographic locations.

And finally, we are looking for competitors that can merge with us that are just good shops, good competitors in an existing city where we have an office.

2002 was a bit light in terms of quantity, but strong in quality.

We added six new partners to the retail brokerage network last year.

And in keeping with our three-legged acquisition platform, three helped us strengthen our niche practice strategy in construction, agriculture and hospitality.

Two gave us new office locations – one in Fairfield County, Connecticut; and the other, two locations in the great state of Iowa.

And the last was a good shop that rolled into an existing branch.

We think that the future looks really bright for 2003 acquisitions, because we bring a great and strong-focused retail presence to the marketplace that interests competitors.

We can help them grow their business.

And they can help us grow as well.

Currently we have got a very strong pipeline of prospects, from small to very large opportunities, which hopefully will provide us with 2003 niche practice expansion, and new geographic locations.

Thanks much Pat.

Thank you Jim.

Dave McGurn, as I said before, heads up our Specialty Marketing operation.

David, do you want to take a moment?

Yeah.

Thanks Pat, and welcome again to our listeners.

I would like to take my discussion today and break it down into two distinct parts.

First I will address the fourth quarter and year-end results of Specialty Marketing.

Second, I will touch on some of the market conditions that my team and I are seeing as we enter 2003.

As I indicated in the third quarter conference call, Specialty Marketing in international was having an outstanding year.

I am delighted to report that Specialty Marketing in international continued this success throughout the fourth quarter, thereby making 2002 a banner year.

Our wholesale division delivered extraordinary results, both top and bottom line.

Although we did not complete any wholesale mergers, we did open two scratch offices in Kansas City and Philadelphia.

In addition, we hired a number of new experienced brokers, and many of these new hires have validated themselves with strong year-end production results.

Our U.S. re-insurance operations also finished with better than expected results.

In spite of hiring many new production people and opening three new offices, margins remained higher than anticipated.

Our expertise has been expanded, and our new business opportunities are at an all time high.

Internationally, all of our offices delivered excellent results.

Our London brokerage office delivered record earnings.

The emerging Bermuda insurance marketplace, plus the growth of our [rent-a] captive facility, fueled exceptional results for our Bermuda office.

Moving from operations into market conditions, I would like to share with you a brief overview of what our operations are seeing as we enter 2003.

Property re-insurance, both facultative and [treaty], throughout the world has stabilized.

Most places have been completed at terms near expiring.

And there appears to be an increase in capacity.

Re-insurance from managing general agents and program administrators who underwrite on behalf of insurance companies continues to be in turmoil.

The number of carriers willing to write programs and re-insurers willing to support this business strategy has decreased significantly.

Re-insurers must be convinced that this business can be written with adequate margins.

And rate increases to further improve margins are commonplace.

Facultative re-insurance rates, excluding property, are continuing to increase, with general liability at 5% to 10% on the low end, and commercial auto, specifically trucking at the high end, at 20% to 25%.

Workers’ compensation is continuing to increase at 7-1/2% to 15%, or even higher, depending on the jurisdiction.

Our U.S. [treated] people are seeing overall levels of increase of 10% to 15%.

The hardest market segments include professional liability, medical malpractice, B&O and umbrella.

General casualty and low hazard class shows no material change from last year.

There is ample financial capacity.

But our buyers are continuing to evaluate higher retentions to offset re-insurance increases.

Our wholesale operations in both the U.S. and London are continuing to see great new business opportunities, and have retention levels that exceed our expectations.

The U.S. market continues to be firm.

And the excess in surplus markets are filling in voids left by exiting or retracting markets.

These wholesale opportunities should continue in the foreseeable future.

In closing, overall the insurance marketplace is continuing to increase prices.

But the pace and the level of this increase is not as great as it was in 2002.

Pat?

Thank you Dave.

A couple quick comments.

Our CFO search is going extremely well.

We have a tremendous number of candidates.

We have narrowed those candidates down.

And while I don’t have a date, or someone that has actually taken the job, I believe that in the next couple of months we will have that spot filled very, very well.

2002 was a great operating year.

And as I thought about my closing comments, I realize that all of you on this call and all of you listening over the Internet that are investors have lots of choices.

And then there is [A.J.

Chico].

We are a little tougher to understand.

We have got investment results, tax rates, synthetic fuel, claims management, brokerage, excess, surplus, re-insurance, etc.

So as I thought about these remarks, I thought why do I remain so totally invested?

Why do I believe that this is the best investment that anyone can make in the market?

We had great operating returns last year – 17% organic commission growth, 15% fee growth.

What is driving this?

Well number one, it is our people.

And it is our culture.

With the competitive environment, we love to sell.

We are growing, bringing people in, and making things happen.

Number two is our niche focus.

We have got the culture that allows this niche focus to work across profit centers.

Very few other companies can do this.

It is a high growth strategy.

And it is working extremely well.

Number three are our merger [carters].

I can’t tell you how proud I am of the people that have decided to join our company.

It is unbelievable.

Just this week I was down in Lexington, Kentucky, with two firms that have joined us over the last 18 months.

The power that these people bring to the marketplace is incredible.

And more of that will continue.

Number four is our balance sheet.

We protect your investment.

Everybody talks about trading broker stocks based on what the earnings or EBITDA are, as a multiple of this, or a multiple of that.

Very few people look at the fact that we have got a dividend track record that has increased the dividend 19% on average a year since we have gone public.

We buy our stock back, and we build tangible net worth.

The fifth reason is really the future.

Our growth is all ahead of us.

We survived a difficult time in the 90s.

This decade is going to be our decade.

We have the people and the strategies and the culture to pull it off.

And we are excited about 2003 and beyond.

I will now stop flapping my gums, and give you a chance to ask some questions. [Holly], would you go to questions and answers please?

Thank you.

The floor is now open for questions. (Caller instructions.)

Thank you.

Our first question comes from [Vaney Saki] of Morgan Stanley.

Good morning.

Good morning.

Just a couple quick questions.

One, I guess, is an operating question.

One more a strategic question.

On the strategic side, Pat, are you seeing anything in the environment today, outside of alternative risk transfers, where customers are actually pushing back on commission rates, and your commission is actually getting squeezed?

And the second question is just on salaries and benefits heading into 2003. you mentioned that it is going to be higher as we look into 2003.

Do you mean that for a whole year basis?

In other words, in 2002 it was running around 54% to 55%.

Should we expect that percentage to increase in 2003?

Let me take those questions in reverse order.

And I would like to ask the audience please to limit ourselves to one question and a follow-up.

I don’t want to anybody dominating with too many questions off the bat.

Let me take your second question first if I may.

We talked in the third quarter conference call about the cost of new employees.

We have a tremendous additional number of people on board.

The fourth quarter is a true-up quarter.

We have bonus numbers that will have to come through.

And we have to adjust those.

So we do think that the salary and fringe line will bounce back up in the first quarter.

You also have to remember the first quarter is a smaller quarter from a revenue standpoint.

And the salary line is more fixed than that.

And we will be accumulating bonus dollars in the first quarter that were actually some taken down in the fourth quarter.

Now there is another impact in the salary and fringe line that comes from our acquisitions.

Most acquisitions come aboard with higher salary and fringe than we would typically have running the company.

So that is the wild card in this thing.

Having said that, we know that the new hires are becoming accretive.

And we look for some relief in terms of that expense as we get towards the end of next year – not in Q1 or Q2.

As far as your question on commissions, I would like to turn that over to Jim Gault to talk a little bit about what is happening on the commissions side.

Would you repeat that question?

Because I heard two questions in the question.

One was customers pushing back, which to me is a premium issue.

And then you brought up commissions.

So is it both issues?

Or which one did you want to know about?

I just wondered the one, which is the commissions.

Are you seeing commissions squeezed in any way?

Not any more than the start of a couple of years ago.

No.

In fact, it is less of an issue, I think, today than it was a couple years ago.

The biggest issue now is clients are getting hit with a second and third round of increases.

And many of them are saying I am mad as hell and I am not taking it anymore.

Our healthcare divisions had several large clients go bear, and just say I am not paying those premiums.

So that is really where we are seeing some pressure on the commissions, because they are not renewing at anywhere near where they were.

And are more customers going towards fees at this point in time as a result of this?

Is that part of the fee growth story here?

Yes.

A lot of that fee growth is in the brokerage area.

Okay.

Thank you very much.

Okay [Vaney].

Thanks.

Thank you.

Our next question is coming from [Alison Jacobawitz] of Merrill Lynch.

Yeah.

It is actually [Jay Cohen].

Good morning [Jay].

Good morning everyone.

A question on the operations that didn’t seem to do so well – Bassett, and the benefits business.

Why was there weakness there?

And what would you expect to see in ’03?

Gallagher Bassett had a double-whammy.

After 9/11, we not only had a recession in the country.

But we also had a tremendous drop off in a lot of the business that Gallagher Bassett was doing with their customers.

About 40% of Gallagher Bassett’s business is in transportation and entertainment.

We did an awful lot of hotel adjusting, for instance.

People just stopped traveling.

Airlines and trucking companies are also a big part of what Gallagher Bassett does.

And those businesses really decreased.

In addition, you had just the general slow-down in the economy, which is fewer employees, fewer claims.

Now the good news is claim counts are returning to the level that we saw pre-9/11.

And we think 2003 bodes well for continued growth.

In the benefits side, it is strictly related to two things.

New hires – we really bulk up our new salespeople there.

And we had the impact of the economy.

All of us as employers are very concerned about our employee benefits costs.

I know my communication with our troops has been one where we are pushing more of the costs to our people.

Not as a percentage, but the costs are just going up.

So much so that you have both push-back there from clients, and concern about their benefits cost, and also the impact of fewer heads in the companies that we insure.

Isn’t that offset to some extent by just higher healthcare costs?

Not as much as you would think [Jay].

In the benefits side, remember, on any employee benefit placement, I am talking health insurance now, all commissions and fees are disclosed.

That is part of the Federal law.

So with healthcare costs racing up, many times our compensation does not follow it.

Okay.

Thanks Pat.

Okay [Jay].

Thank you.

Our next question is coming from [Adam Crauber] of Cochran, Caronia Securities.

Good morning Pat.

How are you?

Good morning [Adam].

I am fine.

How are you?

Pretty good.

I estimate that the financial services pre-tax income has comprised roughly 20-25% of pre-tax over the last three quarters.

And it is tough because, as you know, it is tough to do segment analysis on the fourth quarter.

Would you say that is close, number one?

And number two – I know you don’t like to give forecasts, but can you give us some idea of how much you would like the financial services component to comprise pre-tax or any level of income going forward?

Well [Adam], number one we don’t give guidance.

You know that, other than Jack has said that we think we have got a stable, modelable revenue line that we have just gone through in the call.

So I guess in that regard we have given some guidance that we think that what you see in Q4 is probably what will go on through the next four quarters of 2003.

With regard to the percentage of our pre-tax that comes from this division, we have no target.

We don’t sit around at any point in time and say we really want that to be smaller or larger.

Every single division, every single operation is measured in this company by pre-tax profit growth year over year.

And everyone has the mission to go out and build that profitability.

They do that by getting new business, or by becoming more efficient at the business that you have.

Financial Services is no different than that in terms of their operation.

Our job there is to take this unbelievable money machine that we have been able to build, and make it be even more successful as we go forward.

I don’t think that really answers your question [Adam].

Why don’t you hit me again?

Well I think Pat, I think you have given us a good idea of your philosophy.

And in general I think you did answer the question, that you don’t really try and benchmark, that this division will be x percent of profits, versus this.

So I think you did answer my question.

Thank you.

Thanks.

Thank you.

Our next question is coming from [Robert Glasspeegle] of Langen McAlenney.

Good morning everyone.

Good morning.

I was wondering if you could put some numbers on Bassett.

Number one, the revenue shortfall on the top floor.

And then number two, the reversal of bonuses in the fourth quarter.

[Bob], we have never broken Gallagher Bassett out all by itself.

It is in the segment of [inaudible], which includes also our medical [PPA].

But I will share with you Gallagher Bassett’s fee income was up 7% for the year.

We finished at about $251m.

Now you also have to adjust that.

We sold off a smaller division that was an investigative division in that company.

So it is probably, on a restated basis, fee income was probably about 9%.

I was actually more interested in the [inaudible] versus expectations.

Well let’s put it this way.

I am not going to share our budget with you.

But they didn’t make it.

Right.

What would have been a more normalized salary, employee benefits, if you didn’t have Bassett reversing versus positive in the quarter?

What was the normalized fourth quarter run rate?

The fourth quarter is a bad quarter to check that out with us [Bob], because there is so many true-ups going on.

There is always fluctuations in that quarter.

We can get hit with increases.

We can have a great year, and people finish.

Then we have some quick bonuses plans out there that people can hit.

And you accrue them through the year.

But you really might not think that you are going to make them.

And then they blow through in December.

So it is a bad quarter for me to try to help you model.

There is a lot of moving parts.

So to try to give you an idea of what it looks like going forward, I would simply say that the first quarter, remember, is a lower revenue quarter.

And these are more fixed.

So if you take a look at what was going on in the third, and then I will turn it over to Rich and Jack, if they want to make a comment.

Well Pat said it correctly.

There are a lot of moving parts.

To give you a number, number one, we don’t have a specific number, because you would have to decide what would the operations would have been.

What would the bonus have been had they done whatever.

So you are actually trying to give a number that doesn’t exist.

Certainly if you just do the calculations for all the producer true-ups, which is we have, I think Rich, $56m of total bonus expense for the company this year.

But the variance in the quarter was several millions of dollars.

But again, you are measuring against something that doesn’t exist.

Gallagher Bassett didn’t make it.

So what would it have been if they had been over?

And it is a [inaudible] kind of formula.

So it is very, very difficult to answer.

Okay.

Since I got non-answers to those two questions, am I allowed one more?

Or have I usurped my questions?

Sure.

On the new hires, could you characterize what – and I know you are not going to give me a number on this – but what roughly the average experience level of them are?

And once they are productive, per person, what the sort of commission run rate is looking out three years?

Well we are not going to give you the commission run rate, because I don’t want to give you averages and what have you, and every quarter being asked what are we doing on an average per producer thing.

But let me tell you about the experience level.

And I will let Jim pipe in as well.

The experience level on the new hires over the last two years have been at senior level positions.

Our scratch office in Atlanta, these are all very seasoned players.

Our scratch office in Manhattan, incredibly seasoned players, who have brought with them over the last two years accounts that – again, I won’t mention names – but they are unbelievably well-known brand names in America.

The hires throughout the company in the other branches range from seasoned players, such as those in Atlanta and New York, all the way down to our raw recruits, who come to us through our internship program.

The real cost in this whole thing has been on the seasoned players [Bob].

And I can’t tell you how pleased I am with how these people have done.

They have come into the company.

Most of them have just been ecstatic with the culture that we have in terms of being focused on selling, and getting out and getting after business.

And they are in fact bringing their books of business.

And they come in with draws up front, so there is up-front expenses ahead of the revenue generation, correct?

Yes.

Absolutely.

What you have got now – this is important for the audience – even if someone comes aboard and gets what we call in the industry a broker of record letter – in other words, a client says Jim Gault is my guy.

And I am giving him the business.

Until that business actually bills on the next billing cycle, we see no revenue.

We have all the expense for having Jim Gault on the team.

But we see no revenue.

And oftentimes that can be nine, ten, twelve months away.

So we are actually doing the work, creating expense in the company, putting new people on to handle the account, and then billing it in the future.

Then, when you finally get to the billing date and it says you have got 12 monthly installments.

So you can be 22 months handling an account before you get a full billing cycle.

Yeah [Bob], that is why I mentioned that we want to know what their projected client revenues are, because what they bill and what their client group is on a what we call [inaudible] is going to be two different things.

And we are tracking what the real value of their book of business is, to really get a handle on how quickly they are getting out of the blocks.

Got you.

By the way, Pat mentioned that of the producers we have hired, that we have gone out and recruited, they go all the way down to inexperienced new hires.

Those are not in those numbers.

The 130 that we referred to in the last two conference calls are seasoned producers.

Probably the least experienced has ten years of experience.

And the rest are probably in the high teens and twenties.

These are very, very experienced people.

Thank you very much.

And I am glad I was able to get a few numbers at the end there.

Thanks.

Hey [Bob]?

Mr. [Glasspeegle], your line is live.

Yeah, I am all set.

Thank you.

Thank you.

The next question is coming from [Michael Dion] of [Sandler O’Neal].

Good morning everyone.

Good morning [Mike].

Just a question also on new hires.

With the hiring freeze currently in place, when do you expect to list that, if so?

And how does new acquisitions affect the hiring base?

[Michael], in terms of new producers, where we have frozen is an actual goal to go out and aggressively recruit and to take on new producers that may take two to three years to validate.

We do not have a freeze on producers that want to join us, that we feel can be accretive in a very short period of time.

So our – it is a little bit of a change in terms of what we are targeting.

But there is no freeze on trying to get talented people to come into the company that can produce.

I think that is an important differentiation.

Having said that [Michael], yes.

We have our foot on the air hose.

And I think we will keep it there until we see – until we know that the people that we brought aboard are in fact accreting.

And so we are measuring that every single month, by person, by branch, by region.

And at some point in time when they start to be really, really profitable to us, we will once again open the floodgates a bit.

Your question – I am going to try to answer your question relative to acquisitions.

What the acquisitions do is make it more difficult for you, just looking at numbers, to track how we are doing relative to margin development, because acquisition will typically come in on salary and fringes.

It might be in excess of 60% of the commissions and fees.

Now that is good news for us, in the sense that it gives us a bit of a buffer in an acquisition.

If something were to go wrong, we have got a place to kind of go to see if we can’t become more profitable.

It is bad news from a straight margin standpoint.

But it is also good news because in pricing the acquisition, we are not pricing at a 50-52% salary and fringe line.

As I say, it gives us a little bit of buffer.

So you just have to keep track.

And we will give you the organic growth rates as we go forward.

And do you think the run rates for the fourth quarter ’02 are good for ’03 as well on the organic side?

That is a really tough question for me to answer.

In fact, I am not going to give you an answer.

I am absolutely thrilled.

I was blown away by our third quarter.

I will be honest with you.

I just thought geez, we just hit the ball out of the park.

But our organic growth for the whole year, at 17% for commissions and 15% for fees, is – I am just flabbergasted, that is so good.

And so I am not going to give you a number to target or to model.

I would love to have those repeat in 2003.

Okay great.

Thank you very much.

Thanks [Mike].

Thank you.

Our next question is coming from [Hugo Warren] of J.P. Morgan.

Good morning everybody.

Good morning [Hugo].

A quick couple questions.

Rich, I will pull you into the fray on this one.

Numbers wise, if I am looking at amortization and depreciation – and you mentioned kind of quickly in your comments that you had someone come in and evaluate your amortization.

And you have now changed some of those, due to the new rulings or I guess new valuation parameters you set up.

Those lines seem to be actually pretty volatile.

Why would depreciation and amortization be popping around so much?

And what should we be thinking about?

Is this new levels, reasonable levels we should look at as we go forward, minus M&A?

Well the impact on the quarter is we adjusted our amortization and our allocations on the amortizable versus non-amortizable assets, based on the appraisals we had.

So the fourth quarter is going to be somewhat down from what it normally would be.

The ’02 expense for the year would be reasonable for the year, at the acquisitions we have done through 12/31/02.

Right.

So that would be something you can go forward on.

However, we will do more acquisitions.

And we will continue to grow as we do more and more acquisitions.

Depreciation – that one there I think is somewhat -- it steadily increases as we grow.

And I just don’t see the volatility there.

But we did have an adjustment for the amortization expense in the fourth quarter.

The first quarter was like 5.5m, and the second was 7.7, 6.9, and then 7.1 for depreciation.

So it seems to be popping all around.

But amortization, for any M&A that you do, what is the percentage of the excess purchase price that you assign to the intangibles?

Well we initially had done an estimate of roughly 50/50 between amortizable and non-amortizable.

And we were using our 10-year estimate.

You have got to understand, prior to 6/30, we were doing poolings.

And we didn’t have a lot of purchased acquisitions.

And so now we are doing that now.

And we got the valuations.

We now have put them into non-competes, expiration lists.

And those have different useful lives.

Non-competes are probably going to be about five to six years.

And the expiration lists are going to be somewhere between ten and fifteen.

It depends on the acquisitions.

You have specific values that you are assigning to each one.

So we really can’t get a general percentage.

We will disclose all of this in the annual report that will be out in February or March.

Okay great.

And then Pat, just a broader question.

I mean obviously the firm has just gone through an unbelievable development stage over the last five years.

It has been fun to watch.

When you are thinking about where you want to go, and you are thinking about clients, and you are thinking about opportunities, what is your vision of the future of the type of clients, the niches that you want to focus on as a firm as you go forward?

You have got a lot of fire power.

I am just trying to understand how you want to deploy that.

Is that new areas?

Is it greater market share in existing areas?

Well people are going to accuse me of having paid you to ask that question [Hugo].

Yeah, I know.

I will take heat from my clients too.

So we will just call it even.

But I mean thank you for teeing me up.

And I will try not to go on for more than an hour.

The platform that we built is absolutely second to none.

If you go back – take it not five years, but go back ten years, and look at business insurance, the top 20 brokers.

In 1990 we were the twelfth largest.

And people outside of the religious and public entity sector didn’t even know who we were.

You go the RIMs Conference, which is our Risk and Insurance Management Conference very year, where all the large accounts and brokers and companies congregate, and no one came to our booth.

We would have to go out in the aisle and bite them in the ankle and give them a flashlight.

Well today it is a different story.

Clients want choice.

Employees want choice.

We have built a team and a platform that is really just getting started.

So as we break through a billion dollars, I look out and say that we need to be able to keep this thing growing at a compound average rate of nothing less than 15% all in, which means we need to double every three to five years.

And if you look back at our history, we have only done that for 37 years.

And that is what we are going to keep doing.

Now what that means is it is going to take us into all kinds of new areas.

Five years ago we were not a wholesaler.

We just really didn’t do any wholesale work at all.

Today that is one of our fastest growing areas.

Our international opportunities and our international capabilities have just become fantastic in the last five years.

So I think you are going to see us do more in the niche area.

We will continue to develop new niches as a broker, because that strategy has worked extremely well.

We will continue to do acquisitions, both here in the U.S. and, if appropriate, overseas.

We will continue to move up the food chain a bit.

If you take a look at item count, we don’t have our fair share of the large account market.

And yet we have got the talent that those large accounts need.

On the claims adjusting side, I think that is a billion dollar company easily in the making.

Everybody is going to be [unleveling] [ph] their claims.

So [Hugo], thanks for teeing me up.

I could go on and on and on.

But I will tell you, over ten years ago, when we were just – in 1986 we built the $100m mark.

And we started talking about being a billion dollar company.

The mantra around here now is how do we get to $10b?

Since I gave you the softball, I have to have one follow-up.

If we think of the 130 producers that came in, would you be able to say whether they were more trained towards the larger account business, the middle market business, the niche business?

I mean is there a sense?

Is there a pattern?

Or how does that kind of work?

And then I will be done.

I will let Jim answer this.

All of the above.

It depends on what office you go to.

If you go to our Manhattan office, they are all large account producers.

If you go to our Houston offices, it is probably going to be healthcare.

And in some offices, where they tend to do a lot more middle-market, Main Street America business, they are going to want to fit in well there.

So I would say that if I had to pick one of the sort of three categories, they have tended to be larger account producers.

Okay.

Thank you very much.

I appreciate it.

Thank you.

Our next question is coming from [Liz Warner] of Goldman Sachs.

Good morning.

I just had a couple follow-ups.

First on acquisitions, I was wondering if you are seeing more people competing for transactions in the marketplace.

And then secondly, I just wanted a quick follow-up.

After that I had a quick follow-up on the salaries and benefits.

All right.

Well let me talk about mergers and acquisitions.

There is clearly more competition than we had before the market firmed.

There is more public brokers.

But it is very interesting.

The business is so fragmented, [Liz], that we don’t actually run into those competitors all that often.

We will bump into [Brown & Brown] from time to time – a very good firm, very strong acquirer.

We will bump into [Hill Bogall] from time to time. [Inaudible].

But it is very interesting that we do not bump into those competitors.

Out of ten deals, we probably bump into each other two or three times.

The banks continue to be active in our industry.

It is interesting to me that some of the banks now are beginning to spin some of their acquisitions back out.

Fifth-Third bank sold all their broking operations this past quarter.

And I have been very verbal about my belief that that’s a failed strategy.

But they will pay a lot of money.

And oftentimes it will evolve with a firm that their ultimate goal is a quick fix, or a quick amount of money now.

They will go to a bank, and not to us.

But I think that nonetheless, with the fragmentation in the industry, there are tremendous opportunities for us to continue doing these acquisitions for many, many years.

Okay.

That sounds great.

And when we think about the salary and benefits as a percentage of the commissions and fees, I know you don’t want to nail down numbers.

But you had mentioned that the first quarter is going to be a little higher.

And you said something about the third quarter.

But when I look at even just where that ratio is in the first quarter of 2001, it was certainly higher than the third quarter.

And you also mentioned your historical 50% to 52% ratio.

I mean is that something that you would target, or think you could get closer towards the end of this year?

Or do you have any sense for where those numbers are going?

The fly in the ointment with that question – and I will let Richard and Jack pipe in – but the fly in the ointment with that question was acquisitions of course.

Every time we put an acquisition on now – I mean we love the pooling rules.

And my friends at FASB changed all that.

So now every time we throw an acquisition in, the salary and fringe line is going to go up.

Margin is going to go down.

And that is why we try to direct everybody - and I know you people look at this very closely - to really, really focusing on our cash earnings.

Now as it relates to salary and fringe on an ongoing basis, operations that have been aboard and are part of the company, historically our salary and fringe line in terms of total revenue has been closer to 51-52%.

And I think that on an operating basis, ongoing, once someone is on board and not being fluctuated with acquisitions in and out under purchasing accounting, that is the target we have set for ourselves.

Now will we get there at 2003?

No.

Okay.

And since you mentioned your strong cash flow, can you comment on either your preference or your ability to use cash for acquisitions as opposed to stock?

I know you prefer stock.

And also, any thoughts you might have on share repurchase?

Yeah.

I would be glad to do that.

We have very definitely, philosophically, said from the beginning of our acquisition efforts that we are building a partnership.

My family’s equity, your family’s equity – can we build this thing together faster than we can separately.

And so we still prefer to use our currency, our stock in the acquisition.

And part of our due diligence is trying to find people that are going to take that stock and hold onto it.

And we have been very good at that.

Now with purchase accounting, we do put some cash in most deals.

Because even under pooling, most of these people would hold for the holding period, and then sell a little bit of their stock for some diversification purposes.

So we will put cash in the deal.

But I don’t want to do a deal if anybody wants all cash, to be honest with you.

I don’t want to do that.

So we still will have a limited amount of cash that will go out the door in terms of acquisitions, depending on how our level of acquisitions come up this year.

In terms of stock buy-backs, we are always interesting in buying our stock back.

We don’t have a targeted goal.

We do it based on an opportunistic basis.

We don’t have a target quarter-by-quarter.

But that is a key part of how we use our cash.

[Liz], this is Jack.

I will add just a little bit to what Pat said.

On the acquisitions, when they are taxable transactions, we have talked about it.

So we probably will try to put cash into the transactions, to let them pay the taxes on their sales.

That way the shares that are going to get sold, we can control.

And we don’t have them [dunking] in there for the market.

And I think that is a good philosophy.

And number two, on our balance sheet, we believe, going into next year – and Rich talked about it at the end of 2002 – is very, very strong going into the year.

And we expect that we will be stronger by the end of the year.

So we have cash to do both.

And we will look at that as the year unfolds.

Okay great.

Thanks a lot.

Thanks [Liz].

Thank you.

Our next question is coming from [Jeff Thompson] of KBW, Inc.

Good morning.

Good morning [Jeff].

I had two questions.

The first is a numbers.

And the second one is more broad.

First, on the tax rate, I want to make sure I understand you.

You had cautioned it would be higher next year.

You said mid-thirties.

So I assume that is about 35%.

And I am just wondering, is that because you have sold more tax credits?

Or is there less production out of those credits?

No.

It is because we have sold small pieces - a couple smaller sales this year, one on December 1 of this past year.

But it does have an impact on there.

And also, the ratio of operating earnings to tax credits.

Just as the operating earnings grow, we are changing it mathematically anyway.

So it is both of those.

Okay.

And then secondly, more broader, what is happening in the market when something like Kemper stumbles?

What kind of push-back are you getting from clients?

Are they really moving up in the quality of paper they are choosing?

Or are they looking for someone else in sort of a similar bracket to fill their need?

Well unfortunately we have gotten good at this drill.

And we hope that our friends at Kemper are able to stabilize and go forward.

What ends up happening, [Jeff[, when a company moves from A rating to B, we have made it very plain to our clients that we are not a rating agency.

We do not have that capability.

And so we make the ratings available to clients.

And we have our own solvency requirements, which basically say we do not place coverage with a B+ company, unless the client directs us and signs off on that.

So as soon as the company moves from A to B, we contact formally every client with that company, and tell them that this company has moved, and their rating has dropped.

We then tell our people to make sure to get on the phone and offer, if the client chooses, to get an alternative quote immediately.

Many times the clients will say let’s do a wait and see what is going on here.

And in the case of Kemper, they are working their way through a [cup to endorsement] to [Bircher Hathaway], pretty creatively, to possibly solve their problem.

But any client that chooses to stay there will in fact sign our notice, or sign the paper that says we chose that market.

So in some instances there is a flight to a perceived higher quality.

And how many clients sign the paper and stay?

And how many move?

Is it 50/50?

Is it something else?

It is too early to tell [Jeff].

But let me just tell you that, from my understanding and what Kemper told us – they came out here to tell us what their plans are and all that, and we are trying to support them as best we can – they told us that in the year 2001 the wrote $5b in premium.

And their goal at the end of this year is to be at $2b.

So with 60% of their writings will be moved, and will be actively marketed around the market, we will be very busy with our share of Kemper business in terms of replacing it.

Okay great.

Thanks.

Thank you.

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

Yes Pat, I just want to follow up on [Liz Warner]’s questions.

How much of your stock is held by the partners that you have acquired?

You know, [Mike], I don’t know the answer to that question.

Many of them put it in street name.

We believe that we have held internally, by management, merger partners, and the like, and my family, which has been diluted down substantially, somewhere in the neighborhood of 20%.

Okay.

One other thing as a follow-up.

Could you expand on your view that bank ownership of brokers is a failed strategy?

Well, you are going to also get accused of feeding me one.

Yeah, I have never seen it work.

The credit relationship, people believe, is stronger than the broker relationship.

So it makes sense.

Bank managements have told me that they taught their people how to sell foreign exchange.

And sure, it should be easy.

And every single time I see one go together, the culture clash is unbelievable.

It takes no time at all for senior management at a bank to start wondering why they are paying 25 and 30 year olds so much money.

Why do these people have BMWs?

What is going on here?

And that begins the crunch.

The culture differences just boil down to this.

Bankers have to be rule people.

They have to follow rules.

It is a very specific culture of following the credit rules.

Brokers hate rules.

You can give a broker a rule.

And it says it is a fence.

He will try to climb over it.

He will go under it.

He will go around it.

He will do anything so you are herding cats.

And bankers can’t herd cats very well.

That is just my own personal opinion.

And I recognize that it flies in the face of conventional wisdom.

And you can look at – some people will buy – banks will buy brokers, and everybody will declare success.

I will tell you, in almost every instance it impacts their competitive nature.

Okay.

Thank you.

Thanks [Mike].

Thank you.

Our next question is coming from [Shane Diamonte] of Stephens, Inc.

Good morning gentlemen.

A couple quick questions for you on the investment portfolio.

First one is whether or not all the issues with Asset Alliance are kind of behind you now.

And the other one is just if you could give a quick update on the number of VC investments remaining.

[Shane], this is Jack.

Yeah, we believe all the Asset Alliance issues are behind us.

We talk to them at least once every week, and probably several times a week.

And there is nothing new that has come out of that, that has any kind of impact on us.

And on the VC ventures, I can’t remember the exact count, if it was 12 or whatever that we had left after the third quarter write-downs.

We have not put any new money into new venture capital ventures.

And we probably have learned a little bit of lesson.

And we are more cautious and more conservative.

And I see venture capital being a probably little bit slower area, that we will venture into here in the next couple of years.

I just don’t see that being a big area for us.

And Pat, you can comment if you want please.

Yeah, [Shane], we think we are very, very good at investing in a couple of focused areas.

I have put us as the leaders of tax-advantage investing in the country.

I mean our ball team knows that better than anybody.

And because of that, we are seeing other opportunities that are actually coming to us from people who want our help in managing their investments in that area.

We are also very good at real estate.

That goes back to our low income housing - our first efforts in real estate.

And we do believe that we are good at asset management.

And Asset Alliance is a good investment.

And I think you will see us stay focused there.

All of this will be – and as we did last year in our 10K, it will all be laid out for you.

Okay.

Thanks.

Okay [Shane].

Thank you.

Our next question comes from [John Wolkind] of Fox-Pitt.

Good morning guys.

Good morning [John].

Two quick questions.

One, how much of a drag on the commission line has been declines in exposure basis or audits on guaranteed cost programs - i.e., revenues going down, head count going down, autos going down?

And then two, in the claims management business, could you tell us who your largest airline clients are?

[John], I don’t know if I have got permission from the clients to talk about them.

But I better not go there.

Your first question relates to the economy.

And I don’t have a number.

I will see if Jim has an actual number.

But the economy is a drag.

And reverse audits and head count decreases, autos and the like, are clearly – that does decrease the amount of commission on any individual account.

Jim, you have a comment?

We don’t measure that [John].

So it would be very difficult for us to do, with thousands and thousands of clients, to determine how much the exposure base has reduced their premiums and/or our revenues.

I am sorry, I couldn’t give that to you.

Okay.

But –

From a client perspective, [John], that is a big part of this push-back in moving to the alternative market.

Sure.

I mean you have got people that are saying look, my business – this is the worst time to be hitting me with an increase of premium.

My business is soft.

Maybe it is even backwards.

And now I have got to have this increase in premium.

What can you do for me?

And that, luckily for us, plays right into our hands, because we are the alternative market people.

Sounds good.

And those audits, when they do take place, are on a rolling basis with the one year anniversaries or at the renewals?

Yes.

So there wouldn’t be a major impact?

Just in the fourth quarter.

Correct.

Okay, thank you.

Thank you.

Our next question is coming from [Steve Gavarros] of Dreyfus.

Good morning everyone.

Good morning.

There has been a lot of rumor out in the market that your hiring has come at a very high expense, i.e., that you have been chasing people with a lot of money.

Can you address sort of how you have gotten these seasoned, high-quality producers to you please?

Yeah.

That is nonsense.

You are not going to attract someone to your company by paying them less.

But I will tell you, when they join us, we are frankly not paying them more on the up-front.

They can make more money ultimately with our company, because we will still pay on a formulized basis, when some of our competitors will not.

They can ultimately make more money.

But they don’t typically join us with any increase in salary to them.

[Steve], let me add to that.

I mentioned this at the October conference call, that there continues to be a lot of dissatisfaction, especially at the larger brokers, who are those people that have come through acquisitions.

And we are of a culture and a company that was merged with some of the bigger brokers.

Those people are looking for a place where they can go back to, the type of entrepreneurial company that they felt they joined in the first place.

So there is still a lot of potential out there for us.

And those people are joining us because they want to join us.

They see this as a great place to build their careers.

So to throw a lot of money around to entice them is not necessary something we have had to do.

[Steve], does that answer your question?

Yes.

Thanks for clearing that up.

We have got basically time for one more question.

Thank you.

Our final question is coming from [Alice Cornish] of Prudential Securities.

Thank you.

And good morning.

Good morning [Alice].

I believe that part of your organic growth reflects price increases.

With all of these new producers you have hired, do you know what it would look like in a flat insurance market?

By that I mean flat pricing.

Yeah, [Alice], not being totally scientific about it, I would say probably 11% to 12% of our organic growth is [coming free].

Okay.

All right.

Great.

Thank you very much.

Okay.

Thanks everybody for tuning in. [Holly]?

Thank you for your participation ladies and gentlemen.

This does conclude today’s teleconference.

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

Thank you [Holly].