Arthur J. Gallagher & Co. (AJG) 2004 Q3 法說會逐字稿

Good morning ladies and gentleman, and welcome to the Arthur J. Gallagher & Co. third quarter 2004 earnings conference call.

At this time all participants have been placed on a listen-only mode.

The call will be open for your questions following the presentation.

It is important to note, that some of the comments made by Arthur J. Gallagher & Co. today may constitute as forward-looking statements.

Within the meaning of the security laws and are subject to certain factors and risks described in our 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 & Co. Sir, the floor is yours.

Thank you very much.

And welcome everybody to our conference call this morning.

I'm joined by Doug Howell, our Chief Financial Officer, John Rosengren, our General Counsel, Jim Durkin, who heads our Gallagher Benefits Operations, Dave McGurn, who heads our Specialty Marketing and International, which is our Wholesaling and Reinsurance Operations, as well as our International Operations, and Jim Gault, who heads up our Retail Property/Casualty Operation here in the States.

Welcome this morning we are glad you joined us.

Before we talk about our quarterly results I feel it's very important to make some comments regarding the issues that I know you are all very well aware of in our industry.

I want to reiterate that we have not been subpoenaed nor named in any lawsuit by the Attorney General of New York.

However, yesterday we received a subpoena from the Connecticut Attorney General requesting information concerning possible violations by the Company of the Connecticut anti-trust laws in connection with the solicitation of bids for insurance.

Gallagher intends to cooperate fully.

Remember that we have a very different business model than Marsh.

We are decentralized with no global broking offices.

Instead our offices do all their broking locally.

Since the New York Attorney General's lawsuit we have taken a number of steps to communicate with our employees, as well as to insure that we are operating in line with our stated commitments to serve our clients first.

We have, No. 1, communicated directly with all 7800 of our people by email.

This email is available at our website for your review.

In it we reiterated our commitment to clients and asked our employees to call our confidential hotline should they be aware of any behavior or incident that is not within our standards.

I am pleased that to date we have not received any calls, but we will continue to monitor our hotline very closely.

No. 2, we've hired outside counsel to perform an independent review on be behalf of Management.

This review is intended to look carefully at our our own conduct.

You can be assured that if we do find any conduct which is not up to our stated high-moral and ethical standards it will be dealt with immediately.

No. 3, we are listening to and talking with our clients about our contingent arrangements.

Remember, for the past 5 years we have been disclosing to all of our commercial clients that these arrangements exist.

The message to our people in the field has always been simple. 100% transparency and an open and honest answer to any client inquiry.

As we stated in our release last evening as of 1/1/05 Gallagher will not participate in any volume or profit-base contingency agreements as a retail broker.

When you look at our business model, you have to remember that not only are we decentralized, but the great preponderance of our clients are commercial middle-market clients who have always paid us on a commission basis.

In this market we have always known that to win we have to bring the most competitive alternative to the table.

Note, I did not say the cheapest.

The best alternative needs to combine price, service, knowledge of our clients' industry, claims paying ability, and many other attributes before we will propose them.

An insurance policy is not a commodity.

I have spoken often about our culture at Gallagher.

We are proud of the Company we have built and we are proud of the people we work with daily.

We always try to put our clients' interest first.

In 2003 we conducted an employee survey in which 78% of the potential respondents did respond. 92% of our respondents said they understood that at Gallagher our clients come first.

On a more personal level I want to say that over the past 77 years, 4 generations of my family have worked at this Company.

My name is on the door.

My grandfather always referred to the insurance business as a noble industry and I still believe that to this day.

We've always been guided by moral and ethical values.

The insurance industry in general and my Company in particular, are here because we provide a needed service to our clients.

The reputation of the insurance industry as a whole matters very much to me.

I am extremely concerned when anything happens that calls that reputation into question.

I welcome the opportunity to answer any questions or provide any disclosure that will get the industry I love past these problems and back to the business of providing quality service to our clients.

Now, let's take a look at our third quarter.

First, I am very happy with our quarterly results.

On a Risk Management and Brokerage segment combined-basis I think that we really show the strength of our business model.

Our Risk Management segment which is comprised 98% -- or 90% rather by Gallagher Bassett Services our Property/Casualty third-party administrator, just had an outstanding quarter. 44% growth in earnings per share, 14% revenue growth, a 17% operating margin.

This business you'll remember is extremely labor intensive.

For years we have worked on margin improvement at Gallagher Bassett.

Remember also that 85% of Gallagher Bassett's revenues come from brokers other than Gallagher.

The Team just had a fantastic quarter.

The Brokerage segment also had a solid quarter in spite of operating in an ever-softening market.

We're selling a lot of insurance.

Our niche marketing strategies are working extremely well.

I thought that 4 hurricanes might slow things down, that the market slide would maybe cease for a bit, but it has not had very much of a great impact on the overall rate environment.

Rates are going down approximately 10 to 15% on average.

Carriers are getting very, very aggressive.

We have had some accounts in the last quarter that have seen reductions as much as 50%.

The last quarter we have seen the rate competition continue to intensify.

So for 9 months we're up operating segments 11% in revenue.

Our merger and acquisition pipeline is full.

We're proud of the companies that have joined Arthur J. Gallagher this year and we're hoping for a good strong close in the fourth quarter and another record year.

Doug?

Thanks, Pat, and good morning, everyone.

I have just got 3 comments for everyone this morning.

First, some comments related to our cash.

During the quarter we used 23 million to pay dividends, 19 million to repurchase shares, and 11 million for capital expenditures, and we used about 10 million in acquisition.

Also, please recall that we have no debt for General Corporate purposes and we maintain a $250 million line of credit.

My second comment relates to our margin improvement initiatives.

About 8 months ago we retained a firm to help us look at how we buy goods and services.

Over these months we have identified about 15 expense categories that have savings opportunities.

To date we have renegotiated our contracts on about half of the categories and we are in various stages of implementation.

In the third quarter a modest amount of the savings began to show-up in numbers in risk management and we expect to see a modest amount of savings in our brokerage segment in the fourth quarter.

However, most of the savings from this first half of the expense categories will start hitting our numbers late in the first quarter of 2005 and we are well on the way of the second half of the categories and we are expecting the target to have many of those savings begin to hit our numbers later in 2005.

My third comment relates to the financial services segment and our tax rate.

If you recall during our second quarter conference call we forecasted that the financial services would lose a penny or two in each of the third and the fourth quarter.

During the third quarter core production cost were about 1 million to 1.5 higher than what we had originally forecasted, and our equity, and our earnings of our Asset Manager was about $1 million below our forecast.

That is what contributed to the loss of 4 cents in the third quarter.

Looking forward to the fourth quarter we expect our tax rate to be about 20%.

At this tax rate financial services might show 3 to 4 cents of loss in the fourth quarter.

Again, much of this loss is due to additional core production costs and lesser expectation from our Asset Manager Investment.

For 2005 we are still evaluating our core production plan which will contribute to our tax rate.

It's getting a little dicey with oil prices getting so high.

I think it is important to highlight that if oil prices get too high the value of our tax credits decrease which erode the economic value of synthetic coal production.

Here's why -- there is a provision under IRC Section 29 providing for a phaseout of the Section 29 tax credits when the calendar year average oil prices reach certain levels.

We estimate that the 2005 phaseout would begin if the entire calendar year 2005 wellhead prices average above $52.

Note, that the phaseout begins at $52 and credits will be fully phased out at $65.

Now, before I go on please note that wellhead prices typically average 3.50 to $4 below the popularly published spot price.

Anyway let me repeat myself.

The phaseout prices are based on average 2005 calendar year prices.

In other words, it is not a point-in-time look.

If prices spike-up for a day, a week or even a month it doesn't disallow the credits for that period.

Rather the entire 2005 calendar year would have to average above the $52 trigger price, and that is the wellhead price, for a phaseout to begin.

So we are going to have to evaluate out production alternatives over the coming months to see what our coal costs are, to see where the oil prices are, and to see what other alternatives we have to producing coal for next year.

I hopeful that we will be able to provide more guidance with respect to the financial services segment during our January 2005 conference call.

Okay, those are my 3 comments, Pat, back to you.

Thanks Doug.

Holly, why don't we go to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS].

Bob Glasspiegel, Langen McAleney.

Quick question on contingents looking out to '05 how much of the number that is you disclose year-to- date should we think about potentially going going away on the top line and I assume the margin on that is 90% type margin and I guess the third question is what sort of tax rate should be applied to that?

Bob, this is Doug Doug thanks for the question.

I if where you go back to the second page of the press release we laid out a table that that lays out the continue generals I think the 0.1 million is MGA, MGU program administration contracts these are relationship not with retail customers those fee as long as the rules and r~glations don't change related to those, that we can keep those.> The rest of it is volume based or profit based, by in large so most of those will go away.

We say in our narrative narrative narrative here that the expensens associated to those are minimum and a tax rate will apply to those when they go away.

That would be 38 or what is your full tax rate.

Full tax rate without coal credits is 38%.

Second question I know coffin tin gents played a small part of it it but margins were down a bit year-over-year year-over-year was there any knowledge of the business slowing faster than your thought or unusual expenses in the quarter?

I think again if you go back to broke age segment in the pressorelease we way out two point of margin there between expensing stock impaced compensation last year we didn't have that.

Foreign currency translation that impabed a little bit increased amortization of tangible assets andless contributed to that.

We had all that in the first half and you were able to have up margins so --

If you are looking for quarter over quarter there wasn't -- if your are looking to 2003 we didn't have stock based compensation we didn't which F X there is a difference if F dep~rks compared to 3rd quarter last year.> In addition you see Sarbanes-Oxley cost was about about .3% in answer to your question, yes we believe there are cost happening inside the organization that would not be repeated year-over-year especially Sarbanes-Oxley cost implementing sourcing projects are in there.

That contributed probably to a point and a half in crease in the margin.

Okay thank you.

Thanks bob.

Thank you next question is coming from Jeff Thompson with Keefe, Bruyette & Woods, Inc.

Gom Jeff.

Good morning everybody just to follow up on bob so I'm clear dire the nine month it is 5.1 million is what you would keep in those contingent revenue collums?

Jeff, yes one of the thing wess put in the release is the number of agreements we have if model of being being decent rale liced our offices, we're look at over a hundredoffices out outthere are responsible for know gauche yeatlying at a local level so Beth to our knowledge that 5.1 we have not a had a chance to review the those cram crantings.

As Doug said we think those are appropriate but intill we get finished with reviewing all the 590 I can't give you a firm number.

Okay, it is safe safe to annualize the 9 month rate there?

If you go back and look at our trends least year our 1st quarter is our largest quarter and the 4th quarter is typically smaller than the 1st quarter.

I think last year we reported about 8 million of continue jents in the 4th quarter.

Okay.

All right.

On the taction rate issue rate tax rate issue just to fry fry try to frame it.> I don't expect this, but just aassume the wost case oil goes to hell at 65 a barrel what do you think the loss of benefit is is if at all has to be un unwound.

I think tax rate goes to 381/2%.

Sot impenses would go I way right.

If you assume 371/2% you get close.

Okay then on the savings you started to identify the 15 foins, will there be a time in if next couple of quarters where you can quantity fie how much that is?

I just want to make sure, you said 15 points r~m it is it is 15 expense categories categories to clarify.

We are not look for 15 points of margin improvement.

I didn't mane that.

Good we actually have savings that will identify here is the thing I rather rather not tell anybody until we renegotiate the contracts bet the numbers in place and get the the idea of the run rate.

Because Because some of the numbers I have we are not going to spend money on those things I would rather way to see how it developed before I commit.

Okay last yes on the new on weeker commercial pricing how does that change the acquisition outlook does that help you people certain parties maybe less interested, how does that shape out?

Noo this is Patt, I think in general what we have now is greater interest in terms of possibly joining with us I think the value proposition we we bring to the table now is real clear to the potential sellers.

I didn't mane it that way Patt I meant banks or other entities buying from the same commeans are they stepping back this the market.

Jeff, that is a good question, I can't comment comment comment on that.

I haven't seen that we have had two Weeks of time here I think we will see the potential step back on the banks as we see the industry going forbard but I have not seen that yes that yet.

Okay thakes.

Thank you our next yes is from Nik Fisken with Stephens Inc.

Good morning anything.

It is actually Schon filling in in for anything.

Quup of questions for you how do you exbent to replace the contingent revenue you that you loose are you going to renegotiate with underwriters what are are your thoughts there? ? ? noo I think I it is safe the say the landscape ask changing I think we will see the change being driven by regulator it is ledge legislators insurance company and clients it is too early in the game to see how this all shakes up.

Oosay do you see any opportunity it is there as far as another revuting program like you had a couple yearsing a maybing catching some of the larger brokers and the if you believes there?

It is way too early to tell.

I don't feel comfortable commenting on my competition at all.> We are always looking for good people.

The one this at your culture we bump into feel in the plarp all the time and we are always p~s prying to recruit the best talent to join our company.

Fair enough.> Then a couple of yes questioning for Doug the acquired Revenue this quarter do you have any parameters for that how much you actually acquired?

It was about 18 million on an analyzed basis.

That was for the four bills you annoyanced?

.

And then the impact of the sale of the facility, was there a in the quarter for that?

No, when we sell a facility we get the earnings over time in and installment sale basis so there is not a one time pop.

So that is disclosed over temperature next few years?

Correct.

And the P&L impact going forwar ward, I guess it is masks by the other fuel issues absent any changes there would you contract rise the thish run rate as a good run rate to go with?

As I I said in any comments I am trying to short cut it we think thefootball services will loose 3 or 4s in the 3rd quarter.

Realize the team is working hard hard at work out situations we took work out gains this quarter we wrote up up off a property of prots last year awe are working hard at that and the team is is is good job.

Follow up question how many facilities do you still have up and running.

We have 3 substantially we have 3 in the process of burning coal for us and we have another one that we've had for quite a while that ' 'ear starting to go through the process of the IRS to get all PLR.

Thanks.

Thanks Schon.

Thank you our next question is from onof fox pit Kell on the.

Good morning everyone three quick questions one one some to have smaller brokers are pointing towards the difference between an agent relationship versus a broker relationship as it relates to the contingents one do you think that that will make any difference at the end of the day.> Two on the tax credit issue, in the highier oil prices exist for the null year is is that a ret retro active irk issue and lastly will the sar banks expenses be in the 4th quarter as well.

Let me take question one Doug ask take two and three.

In terms of the agent broker thing we have a lot of discussion over the last few queer weeks inside the company as you know the preponderance of of our business is in the company in term of item count most is in the middle market you can go respond and round of this argue of whether you are a broker on on an agent in the end when we have a restate relationship we represent the client.> We are We are putting a steak in the ground saying get technical or legal if you want but in the end we represent them in if plarp and we'll declare ourselves a broker.

The others trying to use the agent broker discussion or or dialog I think think it the matter I don't think it put it is client first first Doug do ask you want to take two and three.

Yes on the tax credit credit it is a retro active look as a mat other of fact the trigger pries won't be announced till April or May of 2006 but it will apply back to January first 2005 that oois why it it gets dice as we look at this.

We look at an anticipated oil price, going forward.

One thing I can say show is I don't think we will go into 2005 with an uncertainty there there are there are hedge techniques you can use, oil is a commodity and there are futures that can hedge that if question decide to do that.

Are with respect to Sarbanes-Oxley we think ifif cost that will incur this year those are reduced by 60 or 70% next year.

Great one one quick follow up in term of the management business obviously the poll low ups have within jouted stabbeding I recall post 911 when account p~s fell off obviously things have rebounded are you concerned about client exposure as it relates to certain demeans may go into bankruptcy.

Yeah, there are all kind of scenarios out is there.

Another set of the economy we are big in is the whole entertainment and hotel area if people stop traveling for some reason, that impacts auce as well.

Our claim accounts dropped off at 9/111 they came back after a year and a half based on the economy so so for economy tanks airline industry tanks Gallagher Bassett will feel that that they are very sensitive to those industries.

Thank you guys.

Thank you.

Nation next question is from Dan Johnson with Citadel.

Thank you very much in terms of the opportunity to sell some of the coal facilities obviously a buyer would be looking at the oil issue as well, and that would influence the value they they consider paying for the assets, have you seen this, obviously this isn't new news to anyone buying facile facilities, but do ask you see it as postponing the facilities.

You have to look at at it this way you have 3 properties we sold off and the other three really up an running, like I said before we'll look to sell those but if if we can't sell them we well burn them for our own account account so twer not dependant on selling those to continue on with the plan on that.

Having flee we sold sold substantial whether I already is fine with us having three that we burn for your account is fine with us too.

The other one, I realize there was a lot of numerous minor head winds in the brokerage segment how did the margins come outcome faired to what you had been thinking internal maybe six months ago you would have known all of with the exception of foreign exchanges you would have known most of those items.

I think dan, the only surprise surprise to me has t~b been the cost of sokes this really cost the company a lot of money.

It is costing every company a lot of money.

That ask the one thing that is an unpleasant surprise for us.

Remember too, this is Patt, the acquisition activity we have is typically margin did lieutive that activity has been very strong strong for us this year.

Thank you very much.

Thanks gym.

Is there any question?

Oh hay are you there --

Once again ladies and gentleman to ask a question please press star one on your the phone.

Holly, do we have any other questions?

Once again ladies and gentleman to ask a question please press star one, please hold while I pole for questions.

Guys I'm in the middle of Q and I'm frozen.

Holly we can hear in on the conference call in in in our office it sounds to me look we might have a technical difficulty here? are we having difficulties?

Please hold while we we pole for questions.

Pardon me.

Holly, are you not hearing me.

Please hold while we're poling for questions.

I'm sorry those of you out there that that can hear us looks look we're having technical difficulties I'm not fining it able to communicate with the operator, holly, are you there?

Sir one moment please.

Holly, are you there?

Sir one moment.

For tose of you on the call we understand we are having technical difficulties we apologize for that the service is trying to get this all back connected again . we may have to drop this call an do a dial in stand by for a moment.

Thank you sir next question is from shaker investments.

Sorry for the technical delay there.

I just had a question principally we are trying to understand the tax credit issue again and the impact upon fimer service income you talk about if you loose the tax credit your tack rate would go to 38% but what what would be the pick-up on temperature temperature other hand in terms of the relate panhandle pick-up in term of fige services income.

I'm sorry I had a difficult time hearing your question but I think you can asked the you if you tax rate goes to 371/2% or 38% what would be the other sidover it? the other side is mostly the expenses associate w~d that would go away so would the the pre-tax income we get sold would go away.> Those two numbers offset so the true impact of the company asset reinvesting and other vehicles with our access compeap is basically basically 371/2% tax rate.

Did that answer your question?

I guess, yes.

Thank you.

Next question.

Thank you next question is coming from Andrew of green light compeap.

Morning Andrew.

Good morning guys couple of of questions.

First of all in the risk management segment it seems like the other operating expense line been fairly flat lately, is that what we can expect to it continue to be roughly all the 25 million level?

I think the answer to that is that business as has cost that escalate that volume.> Regardless Regardless most of the head count escalation but we do rent new ill silty ains more telephone cost so it does have a variable component with it so it will increase at the volumes of the business increase.> Some of of of flat has the team has been doing a good just just making sure they watch their expense during this time.

I think it is also fair to say that we have had had such an inforward-looking statements of new business that there is catch up an expenses that will come along over the time.

You guys said you don't want to communicate on the call the long term expense would be can you give us a range of thoughts is is it 15 million 50 million what are the numbers broadly?

I think it is clearly more 10 than 50 maybe in January January we'll give better answers.

Next question you referred to the acquisition cost affecting affecting brokerage segment margins can you give us a sense of how much of a personality you had in this quarter what effect that might have had on the margins this quarter?

We think the pre-tax margin with respect to action we signifigants was somewhere around 19- 20 %.

19- 20 % on an --

It is a couple points below what the broader brokerage set is was reported.

What was the total last 12 month acquisition revenue in this quarter.

Say the question again I didn't hear you.

The amount of leverage in this this quarter of action we signifigants over the last 12 months?

Oh, the amount in the quarter, I don't know if I have that number right here at hand but we bought at o about 18 million worth of deals many the quarter.> I think if you go back to date we bought about 40 million.

So maybe there's 6-8 million in the quarter related to acquisitions from this year and maybe from the year before there is another 6-8 so maybe you are looking at 15-20 million in the quarter.

10% of revenue that would be 20-30 basis point of margin impact there.

Sure.

My last question I have on the share count you guys do a great job of buying back stock in the quarter I am new to story so I don't no the whole story it seems like share counts goes up even though you are spending a lot of none none of whying back shares can you then on that and and might we see it trend down with all the share buy backs.

We call that will we we use shareed in our acquisition that is a an important part of out strategy to make sure we are going to do business with people wanting to stake our shares remember we are looking for partners not people to do an adequate strategy we want want them to have a signifigant piece of your business or signifigant piece of the purchase price in our share price.

Understood, so would you expect for the first few your we should expect the share count to trickle highier as a strategy or some some point see the balance fip in favor of a a stable sathes or slight decline.

I think that the trend we've shown over the last year and a half are probably typical trends.

Okay.

Okay.

We're getting stat I can on the line here there are noises out there we are having a little bit of a hard time hearing people? the if you could speak up we'd appreciation yated it.

Can you gives any sense as to what organtic growth might look like in broke age in the '05.

No, I've been wrong every quarter softening faster than we ever thought next question please.

Thank you our

Thank you our nexty is somming from J.F.

Tremblay with CSFB.

Good morning.

First of all I have a question regarding commissions in 2005, just to be clear we should not expect to see contingent commissions in 2005 drived from agreements in in in place in 2004?

Correct.

Okay.

Then regarding your internal investigation can you give us a sense for the time line there, when you expect some some form of report and when you think you will feel feel more confident about the nature of transactions that took place through out the offices.

Next 30-45 days.

Okay.

Regarding potential change in the business models.

Patt you highlighted how Gallagher has been the client forecast and forecast and the value you provide your clients have you started did cushioning more fee based arrangements with the client base?

No.

Do you think that could be an option eventually?

pens it is too soon in the whole see nair grow to see where this goes we operate on a I basis if that client prefers to pay an a fee basis we're happy to do is that it is up to the client to determine how they'd like to pay us.> We've had a position as a company we are auces open and honest with the client when they they ask us how much we are make.

Finally the current investigation into contingent commissions and, may have an fact on the acquisition pipeline from a standpoint of some smaller agencies might like to sell sooner than later?

I can't speculate on that.

Okay, thanks a lot.

Thanks Jeff.

.

Once again ladies and gentlemen please press star one on your the at that time.> Our next question is coming from David of first man haten.

Hi thank you I have four questions.

First can you tell us what sort of compliance programs Gallagher has had in the past.

We come from an industry that's had compliance programs compliance officers testing and all that sort of thing for a long time and I woppeder if that it's existed in your company or in our industry in the past? another question, is can you tell us what sort of communication, typically has taken place this the the past between Gallagher and its clients concerning the veater of variety of bids that insurancers have made to cover your clients has that been very thorough or not and do you see the nature in thoroughness of the the communications changes in the future?

Another question is, have you been getting very many calls from our clients and if so, can you give us some sense of what their concerns are? and my final question is, obviously there is a lot of restructuring that is going to take place between the insurers and the ers in this country generally, can you give us any sense as to who you see's a faking the lead in that sort of restructuring.

Or is there a particular industry association that is likely to take if lead or some particular organization or leading insurer or broker.

Let Let me try to take all four of of those, if I can, in order.> Number one compliance programs Gallagher has had professional standards for well over a decade that are well written, extremely well communicated, in my my opinion, and audited too, very, very frequently.

We have not only the financial awe audit but we have also our professional standards auditactivity that has been going on for years.> Our branches are reviewed graded and asked to respond, they come back with a second follow up and a thir poll low up, if necessary, this is activity that I think puts us in the a position where we feel pretty continue my dense we've communicated well what the standards are what our our tathes are and and we've in audited to those now the review we established with outside counsel is to bring in in an outside second set of eyes to look to our our continue that we have in fat been behave the the way we said we should behave all along.

If we findactivity outsigned the bounds we'll do it it very, very districtly.

Now the commown cicing with Gallagher and your client regarding bids, the second question.> Remember we are operating in the commercial market market market for most parts both as a retailer firm.

This is a very competitive competitive marketplace we always communicate to our clients the markets and the response.

And that communication takes place at every single renewal obviously we don't bring don't believe in big rigging excetera.

Third are we getting calls from our clients.> we are getting call from our clients we took took an approach to lispening to people in the in the field has ever vie late nid regulation or law our producers are are not some ten ten pen sated or based on continuety gent gent rapes with clients we don't want any doubt nour clients mines as to who as to who we represent an how we we want them to feel about your relationship.

Your last question, as it relates to restructuring is way to to too soon to call it.

Don't no what kindover restructuring would be I don't want to try to prea dint that and I don't want to pick from my Poe six someone I think would lead that I did I answer you our cans?

Yes.

Next question is from Adam.

I have some questions on the claims business and has obviously sold Cambridge, March may not be able to subsidize claims business with the PSA's do you think Gallagher Bassett will benefit from these two factors.

Gallagher Bassett does not PSA's on contingents there is no tie no relationship to do business business with your care yes it is a stand ablown ser vice contracted for by the clients individually I stay away from commenting on my competition I believe we g~rd guarded the rep tayings as the high quality provider and I think we have opportunities to expand in the future.

I guess the question is do you think there will be fall up off from the larger two competitors?

I don't know it is too soon to tell Adam.

Okay.

If If we get a chance to compete with them we home we ride the business.

That I can our next question is a Goll low upcoming from Bob Glasspiegel with Langen McAleney.

I was wondering can you give me more clarity on the tax creed didn'ts, are you saying that if oil says where it is, they are reduced or eliminated, I missed the guidance you were trying to give on '05.

Let's go back 2004 the price levels would have to spike sneerly a hundred dollars a barrel for the rest of the year to have a face out for for 2004.

With respect to 2005 if oil prices remain at their current level today and don't go up any more, we would have no phase out by in large, if they go up signifigantly more or between 52 and 65 a barrel in in term terms of well head prices then there would be a phase out if they exceed 65 dollars on average for the full year the full phase out would be there.

So 52-65 there would be some phase out?

Some phase out.

It goes from some to full that that seems dramatic.

.

Say that again bob.

At 65 its goss from some to full.

If oil reaches 65 a barrel and stays there all year then the tax credits would not apply.

Okay, I got you.

Just on the troubles of thus far seem to be more no the cross hair of regulatory interferences today I was wondering Patt if you could get your crystal ball out and tack about what your vision of what the overall insurance brokerage market is going to be look like competitively overthe next 3 to 5 years? would you lack for more consolidation or less consolidation is the industry going to get -- what is the end game?

Well bob, my crystal balls has never been very good anyway.

It is hard to pull it out here and give you an answer to your question first I am not going to comment on the my competitors or what the attorney in New York is doing I talk about your company.

I think we have a culture second to none.> I believe we are the acquisition partner of choice and the revuting partner of choice.

I think we have lots of opportunities to continue to expand our company I think that will include mergers and acquisitions of people around saying if I am going to to make a pick who would you join join with.

I think it is a trouble 0 time nour business and I hope our our outside review will show we operated appropriately I think that will come in loud an clear for people wanting to join us.

I think we are in a great position with trems opportunities to grow we have all sales culture culture of meem knocking on doors.

The interesting thing to me over the last last two weeks we haven't been getting phone calls from our people saying oh my gosh what is happen the to us.> We are getting phone callings saying this is the thing I am being being asked about about my client I think that is a real haul Mark of your company I think it is quoining to look real good for us.

Two year-ago you announced to the world you had an opportunity to high experience producers as opposed to new action action we signifigants while it would hurt margins it would greatly improve your competitive position and I think you feel happy that you made that move.

What I I I'm hear yowing say, is you don't see an opportunity from squitching to doing acquisitions to hiring experienced producers in todays enviroment.

Let me be real clear, what I think we did two three years, three or four years ago it was right on in term of strategy age building our company those players who joined us have been outstanding resources for our customers and company.

We have now, over 67% of property/casual my retail revenue in 30 of 32 niches.

They are talking to people all the time.> We have opportunities to revute every someday.> There is people coming here that I am interviewing or Jim Gault is intervewing that we may bring in to to join the the company we think there are opportune 2s to hire new players I I don't see an opportunity for whole sale matic jump in head count.

Okay appreciate it.

Thank you bob.

Once again ladies and gentleman to ask a question please press star one on the the at the time.> Next question is a follow upcoming from Nik Fisken with Stephens Inc.

Is this anything or Schon.

Sill hain.

I figured anything gets me further up in the Q so ever -

What can I do for you.

Can you talk about the middle market customer who you are seeing from their their another Tuesdays are they at the point where they are buying more conch or seeing exposure units come ugh up or talk on an industry outlook from that perspective.

I think we define the middle market of the company paying 250,000 up to 4 million in premium.

There is a lot of companies dropped coverages in the tightest part to have market our people are advicing that many of those now is a time to repurchase some of that cover we are seeing excess liability limits increasing protolimits increaseing coverages coming back into the program.

I think they are recognizing that insurance now is becoming a little bit more reasonable again.

I think yoush people are responding to our clients needs to term of what they should be doing? term of risk management aven coverages.

Are you seeing much there an employment standpoint or exposure unit increase?

Yes.

You are seeing that as well.

I think this economy, from where we sit a pretty strong economy, we are seeing additional premiums and you happy increases premiums are up with with our customer companies.

Now you guys do you get most to have preem yulls on on policy adjustments, say post year is that how it word works for you guys.

It spreads through out the year but they typically come at audit.

Thanks guy snoose well ladies and gentlemen I think it is time to time to wrap this up.

Obviously it has been a very two weeks our industry has all all shadow shadow carst that none of us in our career every expecked at Gallagher we've always tried to put our clients first first I I ask you to look at the anythings statement in if Gallagher way as well well as my e-mail at our web-site we don't think informthese need to be rewritten we think it speaks for itself in the documents we used over the years.> We reiterated this to all our people an we are continue my didn't our people understand our values thanks for join us this mortgage and look to, hopingly a good 4th quarter.

this does conclude todays teleconference you may disconnect your lines at this time and have a great day.

Thank you