Arthur J. Gallagher & Co. (AJG) 2004 Q4 法說會逐字稿

--Arthur J. Gallagher & Company’s Fourth Quarter 2004 Earnings Conference Call.

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

The call will be open for questions following the presentation.

It is important to know that some of the comments made by Arthur J. Gallagher & Company today may constitute as forward-looking statements within the meaning of the securities laws and are subject to certain factors and risks described in 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.

Welcome everyone and good morning.

Welcome to our Fourth Quarter and Year End Conference Call.

We appreciate your being here this morning.

This morning I am joined by Doug Howell, our CFO, John Rosengren, our General Counsel, Dave McGurn, President of our Specialty Marketing operation, which is our wholesaling, reinsurance and international operation, and Jim Gulf, who is the President of our Brokerage Services Division retail operation.

Let me start this morning by saying I’m extremely pleased with the results of 2004.

There were obvious challenges to us that we had to overcome on the way to another record performance, with very strong sales team who sold an awful lot of insurance, while at the same time renewing a large number of clients.

I’m extremely proud of the team’s accomplishments this year.

Remember in 2002 we did $1b in revenue.

It was our 75th year.

We said at that time that we were just getting started and we recognized that we had three to five years if we were going to keep on growth track to get our next billion dollars of revenue.

We finished the year at $1.480b of revenue, 75 years to get to $1b, two more years to get the next half a billion.

You know what, you stop any of the people on our team, you stop them in the hallway and ask I believe they’d all tell you that we are just getting started.

As is our custom I’m not going to read our press release, but I will mention some key highlights from 2004.

First, we are in the business of helping clients manage risk.

That’s how we look at ourselves, that’s the basis in which we manage our activity.

In other words we look at our operating business, our brokerage and risk management segments on a client basis.

We do report them separately.

We measure our success on a combined basis.

On that basis we’re proud to report an 18% earnings per share growth for the year. 11% revenue growth and we’re very please with the fact that 6% of that growth is organic.

And our margins improved one half of one percentage point for the year.

Our stated goal is and has been for many years to continue growing our earnings per share at 15% a year.

Our operating business is better than that for 2004, in spite of the drag of over $6m in costs for the external help to meet our Sarbanes-Oxley 404 requirements and over $2m in legal bills for regulatory matters.

Let me touch on about nine additional highlights from 2004.

First, Gallagher Bassett, our property casualty claims third party administrator had an outstanding 2004.

Remember GB makes up out 90% of our risk management segment.

This business is incredibly labor intensive.

In 2004 GB turned in a 17% operating margin.

Their business in the UK, US, Australia all turned in record results.

Our claim count on a monthly basis is now reaching 46,000 new claims reported a month.

RISX-FACS, that’s our proprietary information system, has 10,000 licensed users and is receiving approximately 17 million hits a month.

We use an awful lot of metrics that I could go into today to measure GB’s success.

In every measurable way GB excelled.

By the way if my voice is a little scratchy that’s not because I have a cold, it’s because last night we had Gallagher Bassett’s marketing and sales awards meeting, and we had an awful lot to celebrate.

Secondly, Gallagher Benefit Services, part of our brokerage segment also had an incredibly strong year.

Remember GBS helps our clients navigate what I think is the most turbulent waters for our clients and their employee benefits.

Our opportunities to grow this business in ’05 are incredible.

Number three, mergers and acquisitions were a true highlight of 2004.

In 2004 we did 19 acquisitions all spread nicely through all three divisions that do acquisitions.

That’s our retail operations, especially marketing, and our benefits shop.

We acquired approximately $85m in new revenue to the company.

Most of all though I’m extremely proud of the many people who chose our company when they had other choices that they could have made for their being acquired.

Number four, my brokerage services division niche marketing strategy continues to expand in the company.

Our niches are growing faster than our general book of business.

Our culture supports the teamwork that is required to make this strategy work.

Fifth, within our retail operation, two operations in particular had outstanding growth, our Chicago region and our Mid-South region both turned in solid organic and acquired growth years. growth is possible even in a softening market.

We’re constantly looking at best practices and pushing ourselves to learn from our own best.

Sixth, specialty marketing, again, our wholesale and reinsurance international arm, had a couple of very strong performances.

In early 2004 we completed the acquisition of the other 50% of risk management partners in the UK.

You might remember that RFP pursues the public entity market in the UK.

They had a very, very successful year, in spite of our having to replace the underwriting company who actually provided the coverages.

Secondly, within SMI, our wholesale operation risk placement services, which we started from scratch in 1997, now has annualized revenues approaching $100m.

The great majority of this revenue is coming to risk placement services from brokers other than Gallagher.

We are truly building an independent wholesaler.

Seven, in 2004 we had 86 interns in the summer.

We formerly kicked off our career launch program.

We believe we can be the best college recruiters in our industry.

We have a tradition and a culture of bringing young people into our business. 2004 was our best year ever.

With continued focus and effort we believe we will build the team of the future.

Number eight, Sarbanes-Oxley’s 404.

What a Herculean effort.

Over 40,000 internal man hours.

Over $6m spent on outside help.

As of yesterday we received a preliminary sign off from Ernst & Young.

I’d like to take a moment to thank all of our people who put out such great efforts to get this project done.

Nine, all of these successes and many that I did not mention gave our Board of Directors confidence in our last meeting to increase our dividend 12%.

This would give us indicated dividend rate of $1.12.

At yesterday’s close this would be a yield of about 3.7%.

Now let me address a few items from our fourth quarter results.

In the fourth quarter our brokerage segment had a drop in organic growth, as well as an increase in our brokerage compensation ratio.

We recognize during the year that two of our operations were going to have to change their strategies.

Our London operations were not only hurt by currency moves, but also had a number of operating issues that we do feel we have already addressed.

However, this did cause some additional redundancy charges in the quarter, and at the same time we had some higher recruiting costs.

Our domestic reinsurance arm had a tough year and a tough fourth quarter, mostly due to facultative placements that did not renew in 2004.

As you might have noticed from our press release recently we’ve reorganized our US operations forming Gallagher Reed[ph.].

We feel that we’ve brought our team together and are positioned to have a much stronger 2005 and beyond.

Let me now address the compensation ratio.

Excluding foreign exchange and stock option expenses, our full year compensation ratio would have been flat 2004 to 2003.

In the fourth quarter the ratio was up 3.6% because of foreign exchange, staffing changes in London, acquired operations and an increase in production bonuses related to Gallagher Benefit Services, which is part of the brokerage segment.

When I reflect back on 2004 I would have to say that I never thought we’d face the challenges that we face today.

Today we have requests for information from 15 states, as well as 8 lawsuits from private parties.

It seems as though the world somehow has gotten turned upside down.

As I said at my last conference call this is disconcerting.

My management team and I have been together for the better part of 25 years.

We started in a small privately held brokerage firm in Chicago.

We’ve been joined by families and entrepreneurs through acquisitions over the years.

We look at these companies very carefully before we bring them into the fold.

We believe in what we do.

We believe we are taking care of our clients.

We are cooperating fully with all agencies acting about our practice.

In this regard we hired Winston and Strawn, an outside legal firm to do an internal review of our operating practice.

They did a very detailed review looking for evidence of bid rigging, price fixing or time.

They found none.

Even though we are now a company of 8200 people I believe our culture of doing the right thing continues to be strong and resonant.

I look forward to the time when questions regarding our industry are behind us.

So in conclusion another record year.

What do we see going into 2005?

Let me mention five items quickly.

A softening market.

Insurance underwriters have clearly had a significant return to profitability in ’03 and ’04.

It’s only right that our clients see some relief from the rate increases of the past.

According to the Insurance Information Institute, 2003/2004 should be one of the few years where insurance underwriters have returns that nicely exceed their cost of capital.

However, for us this means we are returning to the classic soft market environment.

For two, as I said in 2004 we had a great acquisition year.

We have a full pipeline and expect another great year.

We’ve already closed a couple deals this year.

Number three, we will continue to see organic growth, especially in our risk management segment.

Number four, throughout the entire company we have a strong focus on new sales and client retention, and I believe we will have a record new business year.

Fifth, we have hiring opportunities that are just brisling.

We believe we will have our best new hiring year in a long time in 2005 as well.

At this point let me turn the call over to Doug to go through some the numbers.

All right, thanks Pat and good morning everyone.

Today I have three items.

First, some comments related to our cash.

During the quarter we used $23m to pay dividend, $19m to repurchase shares, $7m for capital expenditures and $67m in acquisition.

Also, please recall that we have no debt for general corporate purposes and we maintain a $250m line of credit.

My second comment relates to our cost containment exercise.

I mentioned in our third quarter call during 2004 we retained a firm to help us look at how we buy goods and services related to about 15 expense categories.

I told you then that we expected to see the savings beginning in 2005.

During that call and in various follow up calls many of you have asked for a more specific amount and expected date.

We prefer to wait until we begin to actually see the savings and so we’re going to continue to resist giving a specific number.

But I can say that it’s progressing nicely.

Unfortunately, somewhat offsetting these efforts are new costs, such as legal bills related to recent industry matters, and internal and external costs related to Sarbanes-Oxley, just to name a couple.

But in the end I think the important message is that your management team is constantly working on ways to build a high quality organization that is much more efficient and effective in its daily operation.

My third comment relates to our financial services sector.

We continue to make progress and selling off those investments that are not tax advantaged.

Since December 31, 2002, for the last two years, net assets under management and related off balance sheet funding commitment are down nearly 50%. 2004 was a good year as the team continued to work down these investments.

Over the last month or so we locked into our 2005 coal production plan for generating tax credit.

Our plan right now is to generate enough tax credit to raise the tax rate from approximately 23% for the entire year.

To generate this credit, the financial services segment will report a loss of about a dime for all of 2005.

However, for 2005 we intend on front-ending our coal production into the first and second quarters.

This means that the financial services segment will report about $0.08 of a loss in the first quarter, about $0.04 of loss in the second quarter, will about break even in the third quarter, and show a gain of about a penny or two in the fourth quarter.

Let me explain why.

The accounting rules effectively require us to levelize our tax rate for the year, but the expenses associated with generating a tax credit must be expensed in the production quarter.

On an annual basis you get a good matching of revenues and expenses, but on a quarterly basis the accounting does not produce such a straight match.

Now of course what all that means is that has to continue to work off our investment.

If we have gains or losses that will also affect the quarterly result, and for that we don’t really have an idea at this point.

My last point on financial services.

I’m sure you have all read the paragraph in our earnings release relating to our specific [inaudible] field litigation.

While we will not make any further comment about the status of this ongoing litigation, there is some background information.

Recall that we are being sued by Headwaters Corporate.

While litigation was first asserted in late 2000, it just came to trial on January 11, 2005, in Utah, which is Headwaters’ state of domicile.

Their demand of $140m was made known as the trial opened, but frankly the large amount surprised us.

So in the end what’s this case all about?

I’m not an attorney, but in layman’s terms, Headwaters is asserting that we have been using their chemistry in the production process in our coal plant and not paying them for using it.

We know that we have not been using their chemistry or production process and the jury will hopefully see these facts during the trial.

But in the end, as we stated in the press release, we believe their claim lacks merit.

Okay, those are my comments, but before I turn it back to you Pat I just want to make special mentioned of what an outstanding job our team did in complying with Sarbanes-Oxley.

You mentioned it, I’d like to make mention of it too.

It was an expensive and exhausting effort and it’s great to have behind us.

All right, Pat, back to you.

Thanks Doug.

Holly, why don’t we open the floor for questions now.

Thank you, sir.

The floor is now open for questions.

If you do have a questions, please press star one on your touch-tone phone.

If at any point your questions have been answered you may remove yourself from the queue by pressing the pound key.

We do ask that when you pose your question that you please pick up the handset to provide optimum sound quality.

Once again, ladies and gentlemen, that is star one to ask a question.

Our first question is coming from Dan Johnson of Citadel.

Great.

Thank you very much.

Pat, just a couple of small in as far as the organic growth numbers in the brokerage segment.

Do those include the contingent payments?

Yes, they do.

And historically those numbers include that as well.

Yes.

Okay.

The headcount overall you reported I think is up now double digits on a year over year basis.

Can you give a little more color as to where that’s going and just kind of looking at it on a revenue per headcount or an earnings per headcount from the brokerage and risk management segment?

And it looks like the, I don’t know, the productivity numbers has come down a bit.

Do you have any other numbers that you look at that would give a little more color on that?

Well we look at head revenue per employee all the time, but the problem with doing that in a snap set is our acquisitions, Dan, are really what’s driving the headcount increases.

Two areas that the headcount increased last year, first and foremost acquisitions in the brokerage segment, and secondly Gallagher Bassett Services, as you could imagine.

For every dollar of fee income that we put on, there’s claims activity that’s coming with that.

So GB is now up to almost 3,000 people and their productivity per employee has actually increased.

But you bring on the acquisitions and often time you’ve got the people before you’ve actually got any of the billings for the year.

Okay.

So--

Because we’re doing purchase accounting remember.

Under pooling you could look at it.

When you see pooling acquisitions, if you did something in November and you restate it for the year you can really get a handle on that.

But we had a very strong acquisition quarter in the fourth quarter.

Gotcha, gotcha.

And then finally on your commentary about an outlook for organic growth in 2005, especially in risk management.

It sounds like you’re still hoping for organic growth in the brokerage segment as well.

Yes, Dan.

I definitely am not the accountant.

I’m not going to give you a number because every time I’ve done that in the past every quarter I’ve been wrong.

So maybe I’ll just shut up and hope that I can have a good quarter.

But we hold ourselves accountable in every single operation for organic growth year over year nonstop.

And we’re not happy when we don’t have that, even though the marketplace has taken some out of our hide.

We’ve got an awful lot of projects going on right now to make sure that we are focused on getting a lot of new clients in here, because we are a sales culture, and retain the accounts we’ve got.

And I do believe we will show organic growth in 2005 as a broker.

And just generally what are you assuming the kind of the market environment that will allow you to do that?

Well right now I’d say, and I’ve heard from virtually almost all of our operations in the last two or three days, that if you want a general feel for what the market’s doing on a trend basis, it’s off 10% to 15% on any account that really is a solidly good account.

If it’s non-[cat] property it’s going to be off more than that.

If it’s high index, as casualty, it’ll be less than that.

But if you’re looking for a general trend figure accounts off 10% to 15%.

Now what do we do to offset that?

Number one, clients are buying more insurance.

So when we have a chance--in the hard market you might remember we said that many past clients have said, look forget the marine, forget the access umbrella, I’m not spending that kind of money.

We are able now to show them where they can make a prudent buy and they’re doing that.

Secondly, we do negotiate hard at the underwriting desk for more commission.

So, again, I’m not giving any guidance, but I do believe that we can turn in hopefully an organic growth year, unless this market just really falls out from under us.

Finally, in the M&A environment, when you’re looking at new deals, I believe you won’t be accepting contingent commissions in 2005.

How do you value the contingents in an acquisition candidate that’s historically had received contingents, especially when you’re competing with other people who appear not to be giving up contingents?

Dan, let me make a comment before I give you the answer.

We have very clearly said that what we’re doing is not entering into agreements as effective 1-1-05.

We have contractual relations with our insurance companies through all of 2004 and if we’re owed a contingent for 2004 we’re accepting that money.

Now I don’t know how much of it’s going to get paid in or what have you.

So we will accept the contingents owed to us from ’04.

But you’re correct in saying that we have to look at our acquisitions going forwards in an environment where we’ve said we no longer will enter into those arrangements.

And basically what we believe is that the insurance companies view this as acquisition cost.

They don’t view this a windfall for them.

And every CEO I’ve talked to said, look we understand this is an important part of the income to our distribution network and we are willing, pending the outcomes in New York and with the efforts of the NAIC to find a way that is proper and legal to make sure you get your money.

So in essence in an acquisition situation we’re saying to those people, look join us and we really do have confidence that we’ll find a way together to get those revenues and I think you can have confidence in making your earn out if you join the company.

So we hope not to have a great slow down in acquisitions.

So you are valuing them on the assumption that you’ll find a way to get that money one way or another.

Yes, but remember, even prior to this we always discounted contingents because they are contingent.

Right.

So they’re still--it’s still not a revenue stream that’s as solid as your account revenue stream.

But, yes, in essence we’re not penalizing them.

Great.

Thanks for taking all my calls.

Okay, Dan.

Thank you.

Our next question is coming from Bob Vasegal of Blanken Hakelmany [ph].

Morning Bob.

Good morning.

I was a little late getting on on our end so I thought [inaudible], but could you give us some expectations and clarity on the reinsurance consolidation announcement and hires.

Should we view this as you looking at this as an important growth engine going forward?

Which part of the announcement is more important, the hires or the branding?

Both.

And what is sort of the expenses to get this thing launched to what you’re sort of expecting?

Well frankly we’ll probably have slight expense reduction because we were operating in the United States under of myriad of names the reinsurance world with a myriad of operations.

And all of you I think are familiar with our acquisition of JP Woods a number of years ago.

We also operated in New York as Arthur J. Gallagher & Company, Intermediaries.

And we’ve operated in the reinsurance world in London as AJGUK.

What we’ve done is pull of these operations together under a banner called Gallagher RE[ph.].

And in the United States we’ve reorganized our operation to be one reinsurance operation operating under Gallagher RE[ph?] with leadership from one place and some reduction in cost.

The recruiting effort is ongoing.

So do I think this is a driver for future growth?

Absolutely.

We are commitment to the reinsurance world.

We think we can develop a very significant book of business there.

We’ve got tremendous talent.

We really do believe technologically we can compete with the best of them.

We’re just now going to do a better effort of getting the word out less than one trading name.

Were the hires in London meaningful as far as revenue, potential revenue contribution?

Yes.

Okay.

And any numbers you just want to throw out as far as expense costs in the fourth quarter and accomplishes?

No.

Okay, you mentioned it as an item, but you don’t want to quantify it?

No, I really don’t want to quantify it.

Okay.

It’s really--Bob, it’s not--it’s the start of a branding exercise that’s not really costing us a lot of money.

The acquisition of the one team that we did from the London company was a very modest price paid.

So I’d have to say it’s not material in terms of an expense.

Okay.

You just mentioned the staffing, which you did quantify.

I mentioned staffing in London.

Right.

I did not mention staffing in the United States.

And in London I don’t really have a number that I can give you specifically for that, but it’s--

About $3m

Call it $3m.

The number in the press release when we say we had 1.1%, it’s $3m basically and those are London staffing changes, not necessarily related to, in fact not related to the reinsurance [inaudible].

Correct.

These were not reinsurance.

Okay.

So it’s two different things.

Then this is classic, everybody on the call will understand.

There were certain teams that had to go and certain teams we wanted in.

You end up with a double whammy in the cost.

Okay.

I was confused on that.

So that’s helpful.

I was just trying to get a [inaudible] with [inaudible] and that was one item that you highlighted.

But it sounds like even more items than you’ve said that you’re not quantifying.

Well basically we quantified in the press release the foreign exchange, the staffing changes, the acquired operations.

In addition to that in our benefits operation we had a very strong quarter and we had an increase in production bonuses there.

And we didn’t quantify that, as well as the new hires that we made in the fourth quarter that were just organic hires, we didn’t quantify those either.

That makes all the difference.

Okay.

Thank you very much.

Okay Bob.

Thank you.

Our next question is coming from Charles Gates of Credit Suisse First Boston.

Hi, good morning.

Good morning Charles.

My first question, you said you saw I believe in the answer to a question from Dan Johnson, pricing down 10% to 15%.

That was both property and casualty?

What I said was that on a combined basis if you’re just looking for a feel for where the market is going that’s what you could use.

Property’s actually up more than casualty.

Interesting as well, the reinsurance market is not softening to the same level.

So you’ve got retail insurance companies, multi-lined companies that are very, very flush, taking package policies and life down 10% to 15%.

Property, non-[cat] exposed, even though we thought the hurricanes would maybe forestall this, is down anywhere from 15% to 30%.

That’s non-[cat] exposed.

Correct.

Okay, and so my only other question.

I believe in your introductory remarks you basically said something to the fact that you saw a classic soft market environment emerging.

And this is basically your assessment of a classic soft market.

That’s right.

Okay.

Thank you very much.

Good.

Thank you.

Thank you.

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

Good morning Jeff.

Good morning Pat, how are you?

Good, thanks.

How are you?

Great.

I had a question on the organic brokers revenue growth.

Are you seeing any impact positive or negative from the bid rigging investigations?

Well this is a very interesting question that I want to answer carefully.

We have no customer uptake on the issue.

I have met with many, many of our customers and they want to know what’s going on in the industry.

They want to understand what good rating and time mean.

And they really do understand that, but in terms of the whole concept of contingents, practices in the industry, there’s virtually no client uptake on the issue.

So we’re not seeing huge amounts of new business.

Now having said that, we are being invited to an awful lot of requests for proposal presentation, which at this point have not generated any significant organic growth.

But we do believe over time with the people that we are recruiting and the people that we have on our team, I’ve said this over and over, I think we’ve got the best team in the market, we do believe that our organic growth opportunities should be very, very good.

And the people you’re recruiting you don’t say they’re from Marsh or you don’t say they’re from Willis or, I mean--

No, in fact I would say what I’ve always said is that we’re constantly, regardless of the market frankly, we are constantly on the lookout for the best people.

And we feel we’re a great home, whether you’re coming from a regional broker or whether you’re coming from one of our larger competitors.

And, no I wouldn’t put a name on any of the recruits in terms of where we’re getting them.

Okay.

The reinsurance brokerage segment then, did that have an impact on your brokerage margins, or like sort of the brokerage organic growth and importer measurable?

Yeah, reinsurance performed equal to last year.

Our organic growth rate would be one point higher for the quarter and one point higher for the year.

Okay.

So it’s fair to say then that’s really all price competition then.

It sounds like.

No, I think it’s a continuation of many clients just not placing reinsurances companies.

Yeah, particularly on the facilitative side of the business, which is basically casualty business.

When you have one dominant purchaser of facultative coverage that has really ceased purchasing that type of coverage, or has limited the amount that they will accept reinsurance from, from [inaudible] carriers?

So has it has had a dramatic affect on our reinsurance operation, as well as our competitors reinsurance operations in the facultative arena?

Okay.

Maybe I didn’t ask the question right, but I just want to make sure I understood what you said.

In the organic revenue growth, or I’m sorry, yeah, organic growth for the reinsurance segment was in line, worse, better.

I mean it sounds like it’s worse because of these large facultative--

Oh, it was worse.

It was definitely worse.

Okay.

I’m just trying to understand that in your overall negative 1% in brokerage, that had an impact.

Sure.

Stated in another way had reinsurance just performed equal to last year, we would’ve reported a flat organic growth rate for the quarter and it would’ve been one point higher for the entire year.

Okay, I get it.

Then looking forward is a lot of that business facultative into shifts in the market?

Are you going to naturally lose it?

No, the amount of our facultative business has shrunk over the year.

And our focus going forward is more in the traditional P&C treaty business.

Okay, and then one last question on organic and I’ll shut up.

The impact from the market decline, that’s usually a little bit of a lag in your P&L.

So if pricing was down the second half of ’04 we may see more of that reflected in the next couple quarters?

And this might look weak before it starts to look better, is that fair?

I think that’s fair.

Okay.

Your fiduciary investment income was like up, it was $5.1 in a quarter, up a lot.

Is there anything going on there?

Is that a run rate?

No, it’s just a timing of our cash flows.

We have potentially more cash that comes in the third quarter as we do third quarter placement, and so it just grows during the quarter.

Okay, it’s up a lot from the prior year’s quarter.

Yeah, I think the prior year you’re seeing rate decreases that were continuing to take care of--that was offsetting that.

And we’re actually getting some rate increases too now.

[inaudible].

Investor yield.

Yeah, right.

Shorter-term yield.

So we can expect to be a little better then.

Yeah.

Yes.

Okay.

The margins on the Gallagher Bassett were very high.

Was there something unusual there?

Are they sustainable?

No, there’s a couple of things that were one-time items there.

We had a bonus situation from some activity that we had in Australia that added $2m that is a non-recurring item.

Okay.

So they had a very, very strong year though, even without that one time lift.

Okay, I’m going to stop there and let someone ask.

Thank you.

Thanks Jeff.

Thank you.

Our next question is coming from Adam Culver of Bachman Caronia[ph.].

Good morning Adam.

Good morning Pat.

Expense growth in the brokerage has been running around 10%, 11% for the last two or three quarters.

Because there’s obviously been higher client’s cost and you’ve had some higher employment cost.

Going forward for next year, what type of growth rates can we look for in that expense line?

Well, Doug mentioned in his remarks that we’re working hard on sourcing and the like and that we’re trying to stay away from giving much guidance there.

I’ll turn the question over to Doug.

Yeah, Adam, I think what you’re seeing there as you’re talking about the expense growth, a lot of that has to do with our acquisitions.

As we roll an acquisition in all of a sudden they’re going to start producing expense in the quarter.

So I don’t have a specific number for you, but I know of our core operation without being back of acquisition, we’re doing a pretty good job of holding expenses, operating expenses flat.

All right.

So what’s saying is is that our core business, our non-acquired entities our expenses are about flat.

So the impact of the growth is largely acquisition oriented.

And that’s in the brokerage segment.

Right.

Because Gallagher Bassett in the risk management segment will not be flat on expenses.

Right, right.

So those will continue to grow, I believe, at the historic level.

Right.

So we should see the expense growth slow down as we go into next year, is that correct?

Well not necessarily.

Remember what Doug said, if we have a good acquisition year those expenses will grow.

Right, but acquisitions we should see it slow down once you get Sarbanes-Oxley and some of these other issues.

Yeah.

Yes.

Okay.

And as we’ve said, Sarbanes alone was a $6m expenditure that we’re certainly not going to have a repeat of that amount.

There will be ongoing costs, we don’t know what they are yet, but that will not be a full $6m spend.

Right.

How much are the legal costs?

A lot.

If you want to make me cry let’s get on that subject.

We’ve got $2m in the fourth quarter.

Okay.

Good.

And that’s legal costs associated with all these new activities.

Right, right.

Above and beyond normal.

Right.

Pat, you mentioned you’ve had a lot of discussions with carriers and you said that it sounded like one way or another that they understand the situation and will help you get revenue.

Does that mean although you’re not going to continue having contingents next year, do you think that revenue will come through in another way?

Well I have to be very careful here, Adam, because I don’t want to say anything here that would used by anyone outside the industry as inappropriate.

We look at that ourselves as meaningful income.

We believe that we’ve operated properly in regard to our contingents.

And our insurance companies that we partner with to the benefit of our clients do not feel that that is revenue that they shouldn’t be paying.

How we work this all out is really up in the air.

Let me get to the core of your question.

I do believe that once the dust settles and the rules are clear that we’ll end up in a situation where carriers will then act within those rules to make sure that we receive the proper remuneration.

Now that may come in the form of upping, of increasing their front-end commission payments.

In other words let’s say that the average commission payment on a placement is 10%, we may have an arrangement with our insurance companies that in fact when we make a placement in that area it’s 11%.

If we’re placing a piece of business that would not typically fall into a contingent arrangement, [hate] loss, retro, any kind of risk management type approach, there would not be a commission increase because those are always negotiated right at the desk anyway.

I think if you look at our contingents in 2003 as disclosed, if you take our retail contingents of about 25 million on $7b of premium placed, we had on the order of 30 basis points.

And our insurance companies are not pushing back at all saying that they don’t want to find a way legally, transparently, appropriately to make sure we get those revenues.

But I certainly can’t sit here and give you any guidance.

Okay, I think that’s very fair.

One last question.

You mentioned that you are seeing an increase in RFPs.

Are those in the global risk area?

And if you win a couple of those could they have a material affect on our brokerage revenue?

Yes, they’re primarily in the global area and at this point I would not say that what we’re working on today would have a material affect.

Okay.

Thank you very much.

You bet.

Thank you.

Our next question is coming from Ron Bobman of Capital Returns.

Hi, thanks for taking my call.

Sure Ron.

I had a question about--I need to be better educated in the area of premium finance.

Does Gallagher finance premiums or is it a third party that [inaudible] that any client would want to finance the premiums?

We will arrange the financing through a third party.

Okay, so that’s what I figured.

Then what about is there any sort of consideration in it for Gallagher as a result of that arrangement?

Sort of what I’m trying to understand is, is there sort of if there is consideration, what sort of a discloser level has been provided typically?

Typically over the entire relationship--I can’t--because we have a number of these financing relationships of people who come to us through acquisition are working with different parties than we’re working with.

And it depends on the state in terms of whether or not you can have any kind of remuneration.

In those states where it’s appropriate, yes, we’ve participated, but it’s a very, very small amount.

We have in our disclosers, in our typical proposal disclosures that there are other areas where we may be remunerated.

Okay, thanks a lot.

You bet.

Thank you.

Our next question is coming from Paul Newsome of AG Edwards.

Thank you.

Good morning.

Happy New Year.

Happy New Year.

How are you Paul?

I’m doing very well.

Good.

Just a real quick question, I just want to make sure I understand some of the guidance that came on the tax rate at a little bit higher level of 23%.

I assume that because essentially the tax right offs are about the same and your earnings are up slightly, is that an appropriate interpretation?

And then as we look forwards are we thinking about reducing those investments further as we approach the--and I understand that they go away in 2007, but do they--should we think of that as diminishing over time on it’s affect on the effective tax rate?

Good question Paul.

The answer is, is the tax rate is exactly how you explained.

It is that if we earn a finite amount of coal it produced an [inaudible] amount of credit and that might offset less income in securing that.

With respect with what we intend on doing with our coal production plant, recall that we have six of these up and running.

Three of them we burn on behalf of our partners, which generate installment gain income for us, pre-taxed income.

And then we have three that we burn on our own account.

And our intentions are is to continue to use those in that fashion in 2005.

If we get an opportunity to take one of the plants that we’re burning for our own account and modify that and turn into to, in other words turn into pre-tax income, we’ll look at the economics of that.

Then if we want to do that during the year we’ll let everybody know about that when we do it because it’ll obviously change the tax rate and change the pre-tax income expectations.

But right now we’re happy with the [inaudible] plant.

The activity--the IRS is in the business of issuing private letter rulings.

And oil prices are back down nicely so we’re happy with those plants as we see them now.

So don’t see us doing anything dramatically different between now and the end of 2005 with respect to our coal production level.

Also you had asked if those will wind down through 2007.

We would expect that these would not wind down.

They will go and fall off the cliff.

If I recall that’s because the law essentially gives you the tax rate essentially of [inaudible], right?

Exactly.

Correct.

The plants actually stick around and you don’t sell them, you just don’t get any benefits from them from them from the tax perspective.

Correct.

Correct.

Great.

Thank you guys.

Appreciate it.

Have a great New Year.

Thanks Paul.

Thank you.

Our next question is coming from Nick Sisken of Stevens Incorporated.

Hey, good morning guys.

Good morning Nick.

Let’s say you get a dollar for dollar contingent to commissions ratio.

Do you think you get a dollar for dollar net income impact by cutting, let’s say, producer payout?

Nick, you’re touching on a very good--that’s a good question because that’s a tough nerve.

And the answer to your question is I’m determined to be able to answer that yes.

Okay.

Now what that means is and there’s systems issues and everything else, but if, once again, when the dust settles, appropriately so and within all the regulations, a company can say that in these lines of coverage we will take your base commission from it’s normal contractual amount of 10% to 11.5%.

We will have to be disciplined in making sure that that 1.5 points comes to the house and that’s not easy.

Yeah, okay.

Then to look at this confrontation expense for the brokerage segment again.

If I back out the London changes, the comp for the year was about 54.8%.

Can you talk about the expectation for ’05, excluding FX, in light of your comment that you think this is going to be the best hiring year in a long time.

I think that what you’re looking at in terms of a run rate, if you go back to our 16 quarter spread and if you look at the compensation ratio recently, we’re hopeful that we can replicate those going forward.

All right.

There’s going to be seasonality just like Pat discussed, as GBS does 40% of their business in the fourth quarter.

In 2002 and 2003 they didn’t achieve some of their target so their bonus levels were not as high in the fourth quarter as they were this year.

So I think that if you look at it on an overall year-to-year basis, our compensation was basically flat on a year-to-year basis.

So I think we should be able to achieve that next year providing we get the growth that we’re expecting also.

Nick, I’d also like to make a comment on that.

In ’00 and ’01 you’ll all recall that we hired a tremendous amount of people.

And we did that just at the time we could go forwards and double our earnings.

We’re in a soft market mode now.

So we have great opportunities and never in our history have we stopped hiring people.

We’re always looking for good people.

But the controls and the due diligence that goes into this hiring is very, very strenuous.

So I do not sit here and have you think about some sort of a ramp up that’s off the Richter scale.

Okay.

And then, Doug, last question.

Can you give us the acquired revenue in fourth quarter and YTD?

$85m for the year. $39m for the quarter.

So $39m for fourth quarter and how about YTD this year?

$85m.

Well no, that was--

I mean ’05.

He said ’05.

Oh, ’05.

You have [inaudible].

I don’t know Nick.

It’s small.

It’s $5m.

Great.

Thanks so much.

Use $5m.

Thank you.

Thank you.

Our next question is coming from Tommy Savaugh[ph.] of Viking.

Yes, thank you.

Just a couple of questions.

On your share buy backs that seems to have slowed down in Q4.

Was there any particular reason for that?

Well we used $57m of our cash for acquisition during the quarter.

And so we just didn’t have the cash in this quarter that we had had in the past.

I think if you look on YTD we still acquired quite a bit of our stock back this year.

It was slightly lower than last year and that’s just because a couple of the acquisitions, one in particular, we were required to use more cash in it than we would normally use because of it’s being sold out of a reorganization.

Okay.

And just to understand on the tax side, now you say your taxation will rise in ’07/’08.

No, ’08.

In ’08.

Do you get any [inaudible] for that?

Like how much will you be getting back in terms of cash on your balance sheet?

Say the question again.

When your tax rate goes up I think you have money invested in those coals units.

Will you get that money back and how much would that be?

Yeah, the amount of cash that’s in our financial services coal assets will be turned into cash and that will be in turn invested in what I consider to be more traditional investments.

And then how much--

Tommy, ask that question again because I’m not sure I understood.

If you’re expecting that the assets, i.e. the plants--

That’s right.

We’ve written those assets, we’ve amortized those assets down to zero during this process.

So there will be no sale of plants that emanates in a big cash influx.

Okay.

So ’08 your cash balance will not actually go up.

Correct.

[inaudible].

Okay.

So basically you’ve got [inaudible] earnings, but you [inaudible] on the balance sheet.

Is that correct?

But there’s no hit to the balance sheet, that’s correct.

Okay.

And one final thing.

On the bonuses you said this year the bonuses were higher.

Do you have any guaranteed bonuses or are you suffering from--some other brokers aren’t guaranteeing bonuses and then maybe [inaudible] their target?

Nope.

I mean, on a new hire coming aboard that may be walking away from a bonus we will guarantee that bonus this year.

But, no, we do not have multi-year contracts with guaranteed bonuses.

We don’t play that game.

Okay.

Excellent.

Thank you.

Our next question is coming from Meyer Shields of Legg Mason.

Excuse me.

Good morning.

Good morning.

One questions.

With the increased RFP flow, first of all can you characterize that?

Is that an increase in RFPs for the total account or to participate in the account along with along with other brokers?

And secondly, how much expense is associated with the RFPs?

Now that’s a very good question Meyer.

Number one they’re really all over the board.

There are some that are very specific to the cover that they want you to talk about, i.e. we just want you to talk about our property, we just want you to talk about our executive lines.

There are others that come in and say, we’re interested in what Gallagher or other brokers can do across all the coverages of the spectrum of our accounts.

In some instances the clients are saying, we are going to make sure that we have more than one or two brokers on our account.

And to date I have to tell you we haven’t had a huge amount of success.

There’s an awful lot of looking going on.

There’s some kicking the tires here and there.

And as you know we’ve said all along, we’re very, very good at large accounts when we get a chance.

We do a number of large accounts, I won’t mention on a conference call, that we’ve had for years and year.

And frankly if you think back our start in the business of risk management is [inaudible] School it’s one of the country’s largest firms.

But by either account the line share of our business is in that commercial little market where we’re making a cold call, working with an owner, working with his CFO and writing their insurance and virtually acting as though we were that risk manager.

So the RFP flow is good.

We want to participate in those, but they are costly.

Again, I won’t mention a name, but just last week we had seven people on an airplane flying to another city, and these are seven people from various offices coming together.

Solid team.

Really, really good team of people making presentations across the entire spectrum of the client’s account.

And the told us they were very, very impressed, so impressed that we’re not actually going to get any of their account.

Okay.

So should we set a measure of margin contraction from--

No, I don’t think so.

It’s not that level of activity.

Okay.

And then secondly, sort of shifting gears.

The M&A market pretty much all the brokers reporting has significantly improved and that’s not a shock.

Is there any distinction in the brokers, in the size of brokers that are now seeking to affiliate with one of the national brokers?

No, I wouldn’t say there’s any distinction in size.

Okay.

Great, that’s very helpful.

Thank you.

Thanks.

Thank you.

Our next question is coming from David Tussie of Davie Morgan.

Good morning Dave.

Hey, good morning everyone.

How’s everybody doing?

Great.

How are you?

Good.

Just a couple quick questions.

I wanted to [inaudible]

Dave, I’m losing you.

Do you have the handset picked up?

Yeah.

Okay.

Speak into the speaker because I’m losing you.

Okay.

Thank you.

On the new business side it seems like Gallagher Bassett is running on all cylinders.

Is this where the market’s playing into your strength?

I guess as another way as we think about the incremental margin for the business into ’05/’06 should we see an increasing importance or a greater concentration running through that risk management segment?

Well I think that the organic growth opportunities for Gallagher Bassett are just outstanding.

And if you look at that business historically, take out the blip after 911, you have a run rate of new revenue there of about 15% a year and that’s historical for a decade.

I would feel, even though we’re not getting to a much larger base, I feel confident that we’re going to have another good year.

I mean I’m not going to sit here and give you guidance because anything could happen.

The tough thing for Gallagher Bassett is they do business with an awful lot of large risk management accounts.

If we lose one of those accounts for any reason it can have a significant material affect.

Nothing that I know of right now is in serious jeopardy, although it’s a very competitive market and I’m confident that they’ll continue to grow.

The difference between that business, which is if you think about an outsourced service business, is that we do actually get renewal increases.

And we recognize our internal rate of inflation at Gallagher Bassett is something we have to cover with rate increases.

And that gets to be a tough negotiation, but we’re pretty insistent on making sure that we get a few percentages points, more than a few percentage points at every renewal.

So I think that that’s the area where we clearly have the greatest opportunity for organic growth.

Having said that we’ve got a very focused retail and we’ve got a very focused reinsurance and [inaudible] and surplus alliance team.

And we’re planning for 2005 to show positive organic growth as a broker.

And just back to the risk management side of things, is there anything unusually running to the cost side of the equation that we should be thinking about that is non-recurring [inaudible] business?

In the cost side I would say no.

And you did hear my comment earlier about the $2m in revenue?

That’s right.

Okay.

And just lastly in terms of the bigger picture on the risk management side, are you getting a sense that your relationship with the brokers as--it was my understanding that they access some of the business services across that segment.

Is that continuing at a greater pace or less?

I’d say it’s steady, but it’s now over 85% of Gallagher Bassett’s revenue is coming from sources other than Arthur J. Gallagher & Company.

We account as a broker for on the other of 13% to 15% of Gallagher Bassett’s revenue.

So they’ve got very strong relationships with many of our brokerage competitors.

And I see those relationships getting stronger not weaker.

The more business you do with someone, the more they believe that the Chinese Wall does exist.

That they really aren’t going to lose their brokerage account because they gave the service, the claim service to Gallagher Bassett.

I think the only threat on the horizon for Gallagher Bassett, which is one we have to be looking at as we go into this new year is the threat of what I call re-bundling by underwriters.

The underwriting community does not really like or prefer unbundling.

Although the risk management clients more and more are demanding that and what you see in a softening market sometimes is a tying of the renewal at a lower premium, to a re-bundling of the claims work.

And we do fear that.

Great.

Thank you.

Okay David.

Thank you.

Our next question is coming from Nick Pirsos of Sandler O’Neil.

Good morning.

Good morning Nick.

I have one pricing question and two clarifications.

Just on the pricing if you’re comparing third quarter organic, which was +2, versus the fourth -1.

And I think you said that if reinsurance was flat in the fourth quarter we wouldn’t be at -1 we’d be at zero.

So I’m just trying to get a sense for what other things may have been occurring.

Is small business more competitive that large business?

Is it the loss of any account or anything of that nature?

No, significant one account or two accounts or an area or niche that we’re losing business.

The market is very competitive.

I’m not happy with our lost business.

We have more lost business than we should and historically we believe that we’re a company that never loses accounts.

And we see ourselves as tenacious spiders for our renewals.

But remember virtually all of the clientele out there are still angry over three years of rate increases.

So this market is very competitive.

I’d say also you’ve got some regional carriers that could make a dent on us in certain places.

Companies like Cincinnati, [Acuey] and the like that we don’t have contracts with, but from time to time can surprise us.

But I don’t make excuses for that.

I think that we look at we’ve got to stay very focused on a lot of new business and just virtually eliminating lost business.

If we do that our organic numbers will go off the chart.

Great, that was helpful.

Then just on the clarification front, you had indicated Pat that I guess in ’05 you’re excited about the hiring opportunity.

And I guess I just want to clarify did any of that start in the fourth quarter, or not really and it’s really an ’05 initiative, for lack of a better word?

No, it started in the fourth quarter.

We’ve had some great success and you’ll notice that we don’t typically put out press releases or make a big deal about that.

Yeah.

We’d just like to have the best people in the industry come and kick the tires of our culture and see if maybe they wouldn’t fit here.

Okay, great.

And then the other numbers question I had, I think the numbers were quote we had $6m Sarbanes cost, $2m legal costs.

So the $2m legal cost is that in connection with the internal study that was done with regard to timing and bid rigging, or is that a different 00:59:01:00?

No, it’s all the industry issues.

As I said we’ve got a number of states and attorneys’ generals and we have a number of commissioners that have asked us for information.

So those legal fees are including the internal review and responding to all these inquiries.

Great, thank you.

Thank you.

Thank you.

Our next question is coming from Alex--Alison Jacobowitz from Merrill Lynch.

Hi, thanks.

Good morning Allison.

That’s so funny, I was supposed to be an Alex.

It’s true, my mother was going to name me Alexandria.

You were supposed to be an Alex that’s a [inaudible].

I was.

Anyway, that being said, I don’t think I heard this in here.

For the growth in Gallagher Bassett could you possibly break out the difference between the growth rate maybe in the number of clients versus the claims per client?

Oh, that’s a tough question.

I don’t have that information, Allison, but I will say this.

The rebound in the economy is helping claim counts.

You’ll recall that our claim counts dropped dramatically after 911.

And I forget the numbers we gave you at the time.

Yeah.

I think they were running 32,000 a month and they dropped by December of ’01 to something like 26,000 a month.

We’re now, as I said, over 40,000 a month, and some of that as attributable to clients hiring more people.

But I’d also say that over the last two years we’ve just had phenomenal new business.

And Gallagher Bassett’s retention rate is nicely in the 90s and we very rarely lose an account of significance.

It does happen, but it’s very rare.

And I think that the two together are what pushed those claim counts up.

I just can’t give you a split on it, I don’t know.

Okay, thank you.

Thank you.

Once again ladies and gentlemen to ask a question, please press star one on your touch tone phone at this time.

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

Just a little follow up Pat.

Can you give us a sense as to how much contingent commission will go away in ’05, and if it’s possible any sense of how the timing might work as to when it will be recognized?

Jeff, I’ll take a whack at it operationally, then Doug can comment on it.

Typically we get a good chunk of those contingents in the first quarter.

Many of our insurance companies are saying to us that they had a contract with us, they know they owe us the money and they’re going to pay it.

We also have some of our companies that are saying, we have a contract with you, we know we owe you the money, we’re holding it in escrow.

So it’s a numbering flux as we go into this first quarter.

I think when we get to the first quarter conference call I’m hopeful we’ll have kind of a better feel for how this is all going to flush out.

So you know anything on the numbers?

I think I recall that Gallagher is a cash basis rushing geyser of contingent commissioning [inaudible].

It’s important for you to understand that we book contingent commission when we receive the cash.

So in the first quarter if you go back and look at our contingent commission activity, we receive a substantial amount of contingent income in the first quarter related to the previous years business.

Like Pat said, we’ll see how that develops out.

In 2004 we recognized $20m in the first quarter.

So and that almost all related to 2003 contracts.

So we’ll see what comes in the in the first quarter of 2005 related to 2004 contracts.

Then there is some trail over into the second quarter, but by in large most of our 2004 contracts will be settled up by the end of the first quarter and into the second quarter.

So just to size it up, what’s the total bucket up for grabs?

Well I think you have to take a look at last year’s number and if it was $20m in the first quarter last year I believe that we will collect a good portion of that, but it’s yet to be seen.

I just mean what’s the total number for the year that’s up for grabs?

$39m in all continent, but in terms of our retail distribution it’s about $25m.

Okay, you did give that.

Retail brokerage and then we also have on the benefit side about another $8m or $9m too.

So it’s $30m.

Okay.

And then the last question, you talked, or maybe you didn’t, but what’s your outlook or sense of maybe doing a larger acquisition with some of the winding down of the other investments and a pretty good chunk of money internally?

Jeff, I’ve said it forever on these calls and even before we did these calls, that there were some properties in the market that were of size that I would be very interested because I know the people and I know the culture and we would’ve I think made a great fit.

Unfortunately a couple of those are off the table now and owned by somebody else.

So the chances of us doing a sizeable acquisition are very greatly diminished.

I also found that our sweet spot are these $5m to $15m shops.

These are great people.

They’re involved in the business everyday and they love the business.

We know how to tuck them in.

We know how integrate them.

We’re not dealing with overlap issues and redundancy issues.

So I think for the focus for ’05 and ’06 will be to continue that strategy.

Okay, thank you very much.

Yeah.

Thank you.

Our next question is a follow up from Tommy Savaugh[ph.] of Viking.

Yeah, thank you.

Just on the organic growth you mentioned that you’ve lost a lot more business than you thought you would have.

Just to dig into that a little bit, I mean I would guess that the two large guys in the market are having difficulties of their own.

So from the [inaudible], I may be wrong.

Maybe if you could just give us the of broker you’re losing business to.

I think it’s fair to say that it depends on the part of the country your [inaudible] to.

If it’s Baton Rouge, Louisiana we’re going to lose business to a local competitor.

If it’s New York City, if it’s Los Angeles, if it’s San Francisco or Chicago, our larger competitors are still very tough on the street.

So, I mean eventually you’re seeing some clients moving to the clients that have [inaudible]?

Yes.

Okay, thanks.

Sure.

Thank you.

Our next question is coming from Tom Cholnoky of Goldman Sachs.

Hi, good morning.

Hi, Tom.

I just wanted to ask a question on something I believe you touched on.

It’s a two-part question I guess.

Number one, roughly what percentage of your business are you part of a consortium of brokers dealing with an account?

So in other words, multiple brokers on one account.

Boy that’s a tough question Tom.

I don’t have a stat for you.

I can give you kind of an anecdotal.

Yeah, I mean I’m just curious is it 10% of your business, 5% roughly?

I would say if you look at our business as a brokerage you’ll see that about 85% to 87% of our business pays us on a commission.

The other 13% to 15% pays us on a fee.

Right.

By item count, however, I would say 95% to 96% of our clients in terms of just the numbers of clients, so that would be taking you all the way down to our small accounts, prefer to pay us on a commission.

No, I’m sorry, I meant--sorry, maybe I didn’t ask the question correctly.

As you look across your clients, let’s take IBM, or just pick a company, and you say if you’re doing 100% of IBM’s insurance, are there certain accounts where you may be doing a portion of that insurance and Marsh is doing the other portion?

There’s tons of them.

Yeah, we do that all the time.

Okay, roughly, I guess the percentage I was curious on.

I don’t know.

Okay.

Do you expect that percentage to increase over time where there are going to be more multiple brokers on accounts?

Yes.

You do.

Is it meaningfully or just marginally?

I hope meaningfully.

So does that mean that it could also work against you as well?

No.

No, okay.

I see if you gain nobody else will.

Okay.

That’s right.

Okay, no, that’s fair.

That’s fair.

God bless you if you can do that.

I was just curious just from a trend standpoint as to whether you’re seeing more movement from the buyer’s perspective to split up the brokerage.

On the smaller accounts, no.

On the larger accounts, yes.

Okay, great.

That’s all I wanted to know.

Sure.

Thank you.

Operator Thank you.

Our final question is coming from Dan Ferrell[ph.] of Cox [inaudible].

Good morning.

It’s John Balcime [ph.].

Hi John.

How are you?

Doing pretty well Pat.

Thanks.

Just a couple of quick questions.

On all of the RFP activity I know you guys haven’t seen a big pick up in business yet.

Are you getting the sense in talking to your folks that there’s been much movement?

And then second question on the commission rate bump up, do you think you will be seeing commission rate increases above and beyond what you would normally expect at this point in the market cycle?

And then does that present an issue for you with clients?

Because I always sort of view the contingents being paid by the carriers, but the clients ultimately pay the commission rate.

So I’m just wondering how that discussion goes.

Well let me go--that’s a number of questions so let me make sure I address each one of them.

The first one I think was on the RFP activity.

Right.

We’re seeing a lot of activity.

At this point we have not seen a lot movement.

So there’s a lot of people looking and talking about looking and we have not to date seen an awful lot of shifting of accounts in the market.

Okay, on the commission rates you have a number of factors there.

With a softening market we do negotiate at the underwriting desk for more commission on a placement of a sale renewal and you know how that works.

Last year we talked about this account to get it done I did it at 5%.

You’ve got to help me out, I know you’re taking this thing down, but I need 11% to make this thing work for me, and we get that 11%.

In terms of taking commissions up on a contractual basis with our underwriting companies at the CEO and management level, that’s all going to have to wait to shake out to see where all the regulations go.

Ultimately we believe the transparency is going to be the big issue and we’re preparing very diligently for the time when you have to say to a client, by the way I’m getting 11%.

Now in my own little study in meeting clients and the simple fact is our average commission across our entire book probably runs somewhere in the order of 8% to 10%.

You know when you sit across the desk of a client who knows that, I mean you say to him, what do you think I make?

I’ll bet you make 10%.

You’re right on.

So does that bother you?

No, it doesn’t bother me.

Okay, now does it also bother you that for years I’ve had a relationship with insurance companies that if I’m successful at bringing them companies into their fold that produce an underwriting profit and I grow with them, I might get as much as another point or half of point of commission.

No, it doesn’t bother them.

So it’s very interesting, there is zero uptake on this issue on the middle market.

Sounds good and then last quick question.

In terms of your discussions with the carriers, do you expect some portion, large or small, will want to move to a net basis so you’ll have to be going to a fee basis with some more of your middle market accounts?

No, in fact the insurance carriers themselves are resistant to that.

Okay, great, Tom.

Thanks.

Okay Jeff.

Okay, I think that’s all our questions.

I just have a few quick comments and we’ll close the call.

I think we had a strong 2004.

I’m very proud of the year.

Another record year, as I mentioned earlier.

We’ve got a very strong team.

We do recognize that the environment will work and is changing.

But remember, this management has been together for the better part of 25 years.

I think its is pretty much unprecedented stability in our industry.

We know how to navigate these waters.

All of us in this company at the management level hold a substantial amount of our personal network in Gallagher stock.

So you’re not going to find anybody more than us committed to growing the value of this company now and well into the future.

We have a very strong sales and marketing culture.

Our acquisition pipeline is full and our hiring opportunities are outstanding.

Remember we came public in 1984.

Almost 21 years ago we ended the year with a market cap of $59m.

At the end of 2004 with market cap of $3b.

We’ve increased revenue by approximately a half a billion dollars in the last two years.

Our earnings are up.

Our free cash flow is up.

We have no operational debt.

Our ball team is together.

Our culture is very strong and I continue to believe that all of us here can say we’re just getting started.

So thank you so much for joining us today.

We look forwards to a record ’05.

Thank you for your participation in ladies and gentlemen.

This does conclude today’s teleconference.

You may disconnect your lines at the tone and have a wonderful day.

Thank you.