Arthur J. Gallagher & Co. (AJG) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Arthur J. Gallagher and Company First Quarter 2005 Earnings Conference Call.

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

The call will be open for questions following the presentation.

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

Is now my pleasure to hand the floor over to your host, J. Patrick Gallagher, President and CEO of Arthur J. Gallagher and company.

Welcome, everyone to our first quarter conference call.

Thank you for joining us this morning.

This morning I am joined by Doug Howell our Chief Financial Officer, John Rosengren, our General Counsel, Jim Gault, the President of our Retail Brokerage Operation, and Dave McGurn, the Head of Specialty Marketing, which is our international re-insurance and wholesaling operation.

I will make a few comments, Doug will then talk about the numbers and our financial services operations, we'll move to questions and then I will have some wrap-up comments.

Clearly, the first quarter has a lot of moving parts.

We've been challenged in many ways but we are pleased that we kept the company moving it forward.

As is our custom I am not sit here and read the press release, but I do want to make a few comments.

First, I am extremely pleased with the revenue growth in the quarter.

When you look at Gallagher, we look at ourselves as a company that helps clients manage risk.

We view our Company on a combined brokerage and risk management services basis.

We had topline growth in the quarter of 12%, 4% of that was organic in spite of a soft property-casualty market.

I believe this shows the strength of our business model.

On a brokerage only basis revenue was up 11%, 1% of that organic Risk management up 13%, 12% increase in fees, all of which is organic.

We're trying very hard to have our sales and marketing people stay focused on their goals, while the lawyers and a few of us at home office deal with our challenges, and believe me, we have some challenges that we face.

During the quarter we've made some good progress in dealing with many of these, but consider the following.

First, we have 22 inquiries and subpoena's from various State AGs and insurance departments.

We're trying our best to cooperate fully with everyone of these investigations.

We have 12 class action suits filed in different venues and one shareholder derivative suit against our Board of Directors.

In the quarter we reserved $35 million to try to resolve as much of this as we can.

Unfortunately, in the end, I really don't know what it's going to cost or when these matters to be resolved.

Secondly, we resolved out sinfield litigation with Headwaters in Utah.

Thirdly, we sold our Florida land development operation.

And fourth, we sold two employee benefits claims management organizations, we made a conscious decision to exit those businesses.

As I said, with all this going on we're trying to be sure our people stay focused on selling new clients and servicing our existing business.

Even in the face of these challenges we continue to invest in the company.

Our brokerage segment competition ratio jumped from 60% in '04 to 63% in the first quarter of '05.

This is comprised of 1.43% increase for new hires and 1.2% increase in the cost for stock option expenses, employee medical benefits and pension costs.

In the quarter we announced amendments were various employee benefit plans.

Essentially, this is a freeze of are defined benefit retirement plan with some enhancements to our 41K program.

We've added people at our London operation and already received a number of significant orders that will pay in 2005, we expect a nice improvement in our London figures in '05.

We announce the formalization in the quarter of Gallagher RE, again, we've added people, a worldwide team has met, and opportunities are really flowing.

And we continue to see opportunities to hire talent here in the U.S. for production roles.

We're being very cautious about as those hires but indeed we have great opportunities.

I have to comment on Gallagher Bassett.

What a terrific quarter of GB at this first quarter.

Top line up 13%, new business remains very strong.

Pretax profit up 39% for the quarter.

All of this is organic.

Our [INAUDIBLE] dot com system is now receiving 18 million customer hits during the month.

This business has a very big barrier to entry.

This is not an easy business to get into, it's not an easy business frankly to manage, and yet I continue to believe that we prove day and on the street, that Gallagher Bassett is the best provider of claims and Risk Management Services in the marketplace.

New business for '05 is shaping up extremely well for the first quarter.

Now I'll let Doug touch on a few points with regard to numbers.

Thanks Pat and good morning, everyone.

Today I have a couple housekeeping items and then I'll comment on the numbers.

The housekeeping matters relate to our financial statement presentation, in this earnings release in our 17 quarter view that we post on our website and then what you see in our 10-Q.

Most of you have probably seen his by now, but I will go over them.

First as you can see, we now have a discontinued operations line in our income statement.

The line represents an netting of revenues and expenses related to the two medical claim operations that we sold the first quarter and announced a few weeks ago.

All the historical financial statements have been restated to remove the revenues and expenses related to these operations and we now present those net in one line item.

My second housekeeping item relates to how we present sub-broker expenses in the brokerage segment income statement.

If you recall, two years ago, we surveyed the industry and we determined that our peer group was classifying sub-broker payment as reductions of revenues, but we have been classifying these as operating expenses.

Beginning with the first quarter of 2003, when we adopted our segment based reporting and disclosures, we reclassified these sub-broker payment of expense and into our revenue section as a separate line item between gross revenues and net revenues.

Beginning this quarter we tightened up our presentation and have just netted it against commission revenues, so in effect the last couple of years have been a transition period for us to get on a consistent basis with what our peers are disclosing.

In the end of know most of you are already showing these items net because the commission number and computing the ratios based on the net revenues by I just wanted ports this out so as you're working on your models to can see the changes that we've made.

Let me make seven short comments with respect to our numbers this quarter.

First, Your this all the time and sometimes I sound like a broken record but I just want to remind everyone that there seasonality in our numbers and the first quarter historically been our smallest quarter.

Second, let's go back to the litigation charges for just a minute.

With respect to Head Waters, we took $131 million pretax charge which is comprised of the $50 million settlement, the $70 million one-time royalty payment, 5 million for the first quarter 2005 portion of the annual royalty payment and 6 million of litigation and bond costs that we had in the quarter.

With respect to our insurance regulatory matters, as Pat said we took a $35 million provision which covers our current best estimate for settling the matter with the state and we base this based on similar settlements that we've seen thus far in the industry, plus an estimate of our legal costs.

Third, some of my standard comments related to cash, we used 13 million to pay dividends, 5 million for capital expenditures and 5 million in acquisition during the quarter.

We did not buy back any stock during this quarter.

Also I would like to remind everybody that we have a $250 million line of credit and we have no debt that is for general corporate purposes.

Fourth, you could see that we closed two acquisitions during the quarter.

Those acquisitions had revenue of about -- annual revenues of about $5 million.

One thing just to comment on the acquisition pipeline.

We're seeing it some sellers are moving a little more slowly to the industry turmoil, but our pipeline is extremely full at this time.

My fifth comment relates to the financial services segment.

Obviously putting the Headwaters matter behind us results considerable uncertainty.

But while this might be the headliner, I could not be more pleased that the key team continues to divest our non-core assets.

Assets under management are down substantially in the last two years and equally important, the off balance sheet letters of credit guarantees and commitments are practically gone.

Further, we sold our Florida real-estate last week and all of the debt that was on our balance sheet that was recourse is now gone, because that was associated with that property.

Our team continues to work on divesting the other assets and we're hopeful that we can report more activity during the year.

Given all the activity in this segment, we typically provide some guidance during our conference calls.

I put that in the earnings release this quarter will fall that will provide you a little more detail as you're putting together your projections for the year.

My sixth comment relates to our tax rate.

I am sure that you see in our earnings release the numbers, but that might be a little confusing.

Here's some help for you.

If you apply a 23% effective tax rate to the pretax numbers before the litigation and state regulatory matter charge, and then apply a 35% rate to the Headwaters litigation matter and a 40 percent rate to the state regulatory matter, that should get you to our tax benefit was up for the quarter.

As my final comment, it's really more of a wrap-up comment.

You can read the earnings release and you've heard past comments regarding one-time costs and the investments were making in new producers.

But when you take the time to sort to these costs you see that our core operations are and should performing quite well.

Further, the operating expense savings that is so clearly in the Risk Management segment are starting to kick in.

As I told you in previous calls, it takes a little longer for these improvements to show up in our brokerage segment.

So early savings in the brokerage segment were somewhat masked by a couple of unusual items.

In the end despite all the noise, I think there is an important message here.

We continue to be very focused on building a high quality organization that is much more efficient and effective in our daily operation.

We expect these actions to find a way into our results in the coming quarters.

Those are my comments.

Back to you, Pat.

Thanks, Doug.

Holly, I think we'll go to questions and answers now.

The floor is now open for questions. (OPERATOR INSTRUCTIONS).

Our first question is coming from Bob Vasegal of [Langen MacElaney].

Good morning.

I guess I have some questions on sort of the brokerage margin in the first quarter.

I think when I hear you saying is don't get disturbed by the sharp decline in margins, it's a thin quarter, we're investing for growth.

And we have a defined benefit freeze that will help margins prospectively.

Is that a fair assessment, and any sort of color on how we should think about margins year over year over the balance of the year would be helpful.

I think the way you phrased it is probably better than the way I did.

I think it's a very fair assessment.

We don't give specific guidance in terms of what are margin will be as we talk about the year, but every year as Doug said, our first quarter is typically our thinnest, and the results tend to improve as we go to the year in terms of ratios.

I'm not going to sit here and tell you what the margin will be by year end but I think you'll see in depending on what we are doing with regard to are investing in people.

And I want to be clear on that.

In '01 and '02, and in 2000, we were coming into a hardening market.

We made substantial new hires.

Part of the soft market playbook is to be very, very cautious every hire we make in our brokerage arrangement operations right now are strategic hires with great opportunities to move the business ahead.

When do the contingents finally wind and doubt, is the key three?

We typically have contingents that actually will hit to some degree of to the year.

But he stopped collecting them as of what, Q3, and serve for.

We collected contentious in this quarter out.

At I'm sorry.

Stopped billing for them.

We stopped entering into contracts based on volume or profitability as a retail broker on 1/1/05.

So we should continue whenever the profitability of the book and the volume of the book, you should continue sort of an unfettered in the 05?

With respect to the 2004 contract.

Remember, we're pretty close to a cash basis we quarter of contingent commission.

We have always been that way.

Very rare that we have never accrue a contingent commission, so as those amount it settled with carriers, you see a lion's share of them collected in the first quarter but it's streamed out throughout the entire year.

And of course are wholesaling and are not retail activities have contingent commissions that are paid from time to time throughout the year but.

Thank you very much.

Our next question is coming from Adam Paul Culver of Crocker and Caronia.

Good morning.

Just a follow-up on continued commissions.

Is there any way that's you can recover that revenue through other means and in 2006?

I think it's fair to say that there's an awful lot of discussion among the insurers and the larger brokers about what the right compensation levels are.

It's also fair to say that none of that has been sorted out at this point.

I also think it's fair to say that as brokers we do an awful lot of work for insurers as a distribution source, so in some fashion or another, we are asking for support from insurers, more on the up front commission basis.

But it's got to take a while to sort that out and I wouldn't give you guidance on it.

I wouldn't be able to sit here today and say oh, we get a point here in a point there it's just not that easy right now.

As far as Gallagher Bassett, it was obviously a great quarter.

Was there anything unusual on the revenue side in the quarter, and can we expect -- and I know you don't like to provide margin guidance but can we expect a higher margin this year compared to last year in that business?

I would hope so based on how they did it in the first quarter.

And is also no unusual revenue items in there, Adam.

Okay.

That's important.

Okay.

And finally, more of a technical question, on I believe page five of your release.

You break out an EBITDA number of approximately $46 million.

When we added up the different segments we came to an EBITDA number of close to 57, 58 million were having trouble figuring out what the difference was?

Adam, let me give you a call after the call here and reconcile that with you.

Okay.

Thank you very much.

[OPERATOR INSTRUCTIONS] Our next question is coming from Nick Fisken, of Stephens Incorporated.

Good morning everybody.

Pat, I know we approach this subject when you guys talked about Headwaters litigation, mid-February.

Can you restate your dividend policy in light of the settlement and then also where's the money going to come from?

I will talk about the dividend and then Doug to talk about where we are getting the cash.

Our dividend policy has been to raise dividends based on earnings performance in the prior year.

That has allowed us on average to increase our dividend of approximately 19% since the year we became public.

This past year was a 12 % increase.

And this individual settlement, I don't believe will impact our Board in deciding our dividend for next year at all.

This is a one time item.

It will come on our balance sheet and our operations will continue to move on.

So we shouldn't expect it to go down?

Absolutely not.

Okay.

In terms of the cash obviously, the 120 million that is to be paid between now and the end of January, you tax the [INAUDIBLE] that there's about $75 million after-tax that needs to go out with respect to this.

We have a substantial amount of cash right now and our earnings going forward and as you know and like I've said more importantly, we've been successful in liquidating some of our other Financial Services assets and we will continue to do that.

We also sit with a $250 million line of credit.

So between those three things I should have sufficient cash in order to pay them.

We're trying not to go into the line, but on the other hand I don't want to fire sale in assets either in order to get paid.

So we're patients on it and we're talking about only -- 75 or $80 million in cash and our operations offers substantial amount of cash.

Is the royalty expectation that you provided, is it in that guidance for the financial services segment?

Yes, it is.

And then the operating expenses at GB were very low.

Is that sustainable level or is there something one time in there.

There are no things in there that I consider to be one-time items of a favorable benefit in there.

Is it sustainable?

We're working very hard on all of our sourcing initiative to keep those numbers down and to seek savings and I'm hopeful that they are sustainable.

Some of the other brokers and have it reported have said they've seen meaningful drop in pricing in in January and in Q1 specifically.

Did you guys see that and can you comment on pricing trends?

Yes, I will be glad to talk about that.

Received a dramatic drop in pricing, in particular the lives of business that we make with our money in.

If you get to the esoteric things like brokers E&O and medical malpractice, you're not see the decreases, but you did take just the standard Commercial Auto, business interruption, or commercial property, construction, DNO, General Liability umbrella workers' compensation, all of those are down in most instances at least 10 if not more than 10%.

And then are you seeing people buy up coverage?

Yes, people are increasing the covers they're raising their umbrella limits the coming back into the market buying some of the things that they dropped.

We are getting some increase in commissions because those commissions in many instances were cut during hard market, so those are all part of the soft market tactics and a template to try to keep things moving forward.

But we're clearly running up a down escalator.

I'm going to as a question you probably won't answer, but in terms of the outlook on internal growth and recruiting and the pricing of people buying up coverage to think there is your internal growth ever gross?

Are our organic growth in the fourth quarter last year if I'm not mistaken was 1% negative.

We had some one time issues there.

Kind of an oxymoron in terms of growth.

But let me just put it this way.

We never ever plan at Arthur J. Gallagher and Company for no growth.

Growth is what we do and every operation knows that that's our compensation programs work.

So much of our compensation is stock based.

We find a way to grow this business.

Let me remind you, 2002, just a little over two years ago we finished the year and a billion dollars in revenue. 2004 we finished at a billion five.

Good point.

Thank you.

Our next question is coming from Dan Johnson of Citadel.

Good morning and thanks for taking the call.

A lot of mine have been answered, but what is go with two if you would.

Your best estimate of four contingents for the full year and I mean it excluding the ones related to your MGA and the stuff that we I guess would normally would expect would not go away.

I think you're better off taking a look at last year's number.

I'm really not in a position to forecast what we think.

We knew we picked up 20 million in the first quarter.

You can see what we earned last year on a quarterly basis.

I think for me to speculate on that would be unfair.

I agree.

But I guess could be assuming don't you know what you are owed from last year?

You don't always know where you are owed.

In doing some of the commercial first dollar stopped the roles of the first quarter you can get that number pretty quickly, but when you've got some other deals that are not just straight forward Agency contract deals you don't know what your owed.

But we would be expecting a bit more.

Yes.

So that was one.

And the other was most of the stuff has been covered on the risk management side, but the -- I see now that we've at the restated financials, would you expect the revenue growth that had been mid teens are even a little better through most of '03 and '04, and it kicked down just a little bit and I don't think that has anything do with the carve out of the two entities, but would you expect that what we've seen this quarter is more indicative of the full year, or is there anything at kind of in a that would prevent us from going back to kind of the growth rates of the last six or eight quarters?

Domestically, Dan, we had a little bit better growth than were shown in these results because our international operations had a bit of a slowdown in the U.K. and in Australia, which I hope -- in particular Austria, will pick up for us in the future.

Remember, this is a 13% growth on top of to believably record years and GB does business with primarily large self-insured clients so can be, but sometimes by the pipeline is very, very good.

We know that January and February on the international side was fine.

March had a little bit of a slip that we attributed to the bumpiness.

But anytime you get around to 50% growth rate in this segment, you've got to be happy with that, because this is a business that like to tell everybody you just don't want to grow it too fast because you can outrun your supply lines on it.

Much of your business is outside the U.S., roughly?

About 10%.

Lastly, the financial-services segment, I think he said the report here it shows about a 2% loss which versus prior guidance think it was supposed to be down as much as 8%.

What happened during the quarter, what was a better than you had originally been planning for?

First of all I think you're saying 2% and 8% was for the $0.2 and $0.8.

The primarily has to do with pushing our coal production back.

So we did will be looked at it we found a way for us in order to push coal production of the first quarter and repression and the second and third and fourth quarter and we actually had some fairly positive results on our other coal plants that we produce for pretax gain.

So in other words the plant that we have a pretax gain on, the production was a little better than anticipated and the plants that we used in order to generate the tax credit, that produced some pretax losses, we pushed some of that into this --

Thank you very much.

Okay.

Our next question is coming from Matthew Roswell of Legg Mason.

Good morning and a couple questions.

Good morning, Matt.

First to beat a dead horse on the contingent side.

We're kind of looking putting together some of your answers to the other ones, contingents in the first quarter were flat to up a little relative to a year ago.

Should we anticipate that we're going to be on a similar sort of run rate to last year going forward and then if so, how does that square with having stopped contingents as of January 1st?

Let us be sure we're clear.

We've said all along with the effect of 1/1/05, we notified of the shares that we do business with, remember one point we actually did a Disclosure, we have 590 some odd agreements with over 200 sharing entities with over 100 over branch locations, that's a complicated this thing is.

It's not like to sit down and its five companies to come to think about.

Those deals range from volume deals to profit deals.

They range by branch to region.

They can be all kinds of different arrangements.

We've notified all the insurers that we would no longer enter into these agreements, that were base at all on revenue growth or profitability and as a retail broker.

So I'm not sitting here today able to tell you that the run rate is going to be exactly what it was.

What we set all along is that the '04 contracts, we expected to collect on.

So we are collecting those contingency see in the first quarter.

I would hope that the rest of the year would say similar to last year but I have no guarantee.

For everyone just to answer this question, just to remind you of what we booked in 2004 and then you can make decisions about whether or not it's flat, up, or down net, we booked 20 million in the first quarter of '04, and I'm giving you round numbers here, 8.5 million in the second quarter of '04, 2.6 million in the third quarter of '04 and about 8 million in the fourth quarter of '04.

So those are the last year's numbers, and obviously we reported that we got about $20 million in the first quarter this year, compared to the same number last year.

Up, down, sideways, those of the numbers from last year.

We will work hard.

If it's a 2004 contract were going to collect it where we can.

There are some insurers that aren't paying, but very few of those, so we will see where the numbers come out here over the next couple quarters.

We had insurers say to us that they've got the money, it's set aside in escrow, until the dust clear the are not sending us a check.

Thanks for clarity on the contingent.

The benefit changes, is that slowly in brokerage or is that all the units plus headquarters?

That's all that units plus headquarters, including Bermuda, excluding the U.K. and Australia.

And the guidance for GFS, does that include the real estate gain for the second quarter?

Yes, it does.

And the final question, I just want to reconfirm you all are already expensing options, correct?

You started that last year, year before?

That's correct.

Thank you very much.

Our next question is coming from Nick Pirsos of Sandler O'Neill.

First, clarification on acquisition.

I think, Doug, you said it was two for 5 million does that mean was total revenues of 10 million or if the two combined were for 5.

The two combined were 5 million.

They were nice strategic acquisitions that the revenues are only 5 million between the two.

A great.

Again, just a clarification.

On the $35 million payment on the investigative front, I guess I just want to confirm, that's for both the class action lawsuits and the Attorney General investigations?

The way that number was estimated, was we looked at [Marsh, Ann and Willis'] settlement, and it looks like an there was a number there that approximated about one times their U.S. contingent Commission, that the were going to set up enough and refund the policyholders, and we added a provision for our legal costs associated with settling that piece.

If we can get the civil litigation set up to that number, that would be great but truthfully we have no way of estimating what the civil litigation costs might be.

And just from a timing standpoint given that the other three have now settled, you think you guys would be kind of close to selling as well?

I would have to be very careful in answering that question because we have 22 investigations and inquiries going on, and those are at varying stages of discussions, and clearly, if we can find a way to put this behind us we will do so.

Fair enough.

And just lastly on headwaters from more of a strategic question at this point maybe Doug I will follow up with some numbers which you later, but my historical understanding was that the amount of benefit that was generated from Headwaters was kind of considerably less than the actual lawsuit judgment and now payments.

I guess kind of re-up with them at this point given that the price of oil is considerably higher so that the potential for the trigger occurring in the benefit could go away even before the vesting seven, I guess, why re-up now?

In terms of re-upping, we agreed to split profits going forward.

So if we don't burn, since we're equal partners in this, then the money -- neither one of us benefits at that.

So in terms of going forward, there's a splitting of the profits, in terms of how much we've paid in the past, yes, we ended up paying more than we've ever earned.

Great.

I will follow up with you later.

Thanks, Nick.

Our next question is coming from Brad Burning of Hunt Point Financial.

Two questions for you quick.

Can you just clarify what you think the tax rate is going forward and secondly, can you talk about the reinsurance initiative that you have, where you're at in the process of hiring, and then also what have you seen from a revenue contribution yet from that effort?

When this is Pat and I'll take a reinsurance question first.

If you'd step back from about a year ago and looked at our reinsurance operations there were fragmented.

We had some reinsurance operations in New York City, Jersey City, we had an operation in Singapore, Australia and operations in Bermuda and London.

And we simply had not pulled that all together to formalize an approach to this market across the globe.

We're doing approximately 80 to $100 million in total reinsurance brokering revenues, so we're a significant player, not one of the large two or three, but it's a meaningful income to us and we feel there's tremendous opportunities.

So in '03, and 04, we actually hired some people in different places around the globe made some small strategic acquisitions here in the United States and then pulled the group together into a very similar to what we've done the retail brokerage side in terms of looking at ourselves as niches which again, our retail side over 70, 75% of our revenue now comes to a 23, 24 very well defined niche marketing areas.

We took the same approach to reinsurance and said "Look, we've got to work together, with to bring people of this team together and we've got to approach opportunities, not as the downtown Manhattan office or the Jersey City office, but as Gallagher RE."

I'm extremely pleased, and I want to complement our team on this because it's not easy when you pull a group together like that.

There's past operational experiences, etcetera.

We've pulled the leadership team together, we've got a global leadership approach to this now and we're seeing great opportunities.

We had an opportunity, I won't mention the name of the carrier, but literally we were asked to present, a week before the presentation was due, and the presentation was due in Singapore. we had a representative from London, a representative from New York, our Singapore representative, and someone from Australia, all singing off the same page using the same response to the RFP and picked up a very, very nice order.

The complement to us with a, you really put this thing globally together in a week, that's good work.

We're excited about it.

We think it's another one of the things we do well and I think as a company is take small operations and grow them.

We were not wholesaler some seven years ago, today we got hundred, 150 billion in revenue as a wholesaler and we see reinsurance in the future as just a great opportunity.

In the near term issues of a lot of reinsurance keeping more net, has that been a challenge in the near term from a margin standpoint?

Yes, absolutely.

And we've lost placements where the client didn't place it someplace else, they just didn't place it at all.

Yes, but the biggest competition right now is more to do with insurance to be net and this is the competitive market?

Yes.

Thank it for as much.

Tax rate was we provided some insight to that in the first -- in the January call of 23%.

We're still fairly comfortable with that tax rate for the rest of your on our core operation.

Thank you.

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

Most of my questions have been answered, but I didn't hear you say, and just kind curious which are seen in the alternative markets given the changes in pricing that are going on?

Alice, that is a good question.

This is Pat.

The alternative market stuff typically slows down at this point in this cycle.

We've had a nice continuation of our captive growth in '04.

Captive growth in '05 is a little bit more challenging, but their pipeline for opportunities, especially in our group captives continue to be strong.

You will, at these times see some people to about of captive and the back to the straight primary first dollar market.

So I would say what you've got right now is kind of a flattish to slight growth curve.

I don't think I've ever heard you say, but do you give some kind of measure for us and what percentage of your

We really haven't broken that out.

I didn't think so.

And just to reiterate what he said earlier in the competition now you're seeing or what you're seeing with your revenues in the brokerage side is, obviously you're seen price declines but you are also seeing possibly be some accounts start to increase their coverages, given --

Yes, it's a classic playbook for a soft market.

What to do is to go back to the clients who dropped coverage, we helped choose what coverage to drop, and they choose to repurchase those coverages.

You sit across the desk from your underwriting people and say look, it took some of this commission down in the heart market.

I need to get more commission to keep my company going forward and we're having some success with that.

And then you hit the street hard.

And what about, I don't think I heard you say, still the fallout from their brokerage competitors, has that quieted down as some?

No.

Are you seeing its still in terms of people and new hires as well as accounts, are you picking up accounts?

Yes.

Okay.

Great.

Thank you.

Thanks Alison.

(OPERATOR INSTRUCTIONS) Our next question is from Jeff Thompson of KBW, Incorporated.

Morning, Jeff.

Morning, Pat.

Couple questions, following up on Allison's.

You had 1% organic growth and it sounds like it could fall into three buckets and maybe it is hard to talk about but I guess some would be negative for the rate declines, some would be positive for buying up in coverage and some would be for new clients.

Can a break into three buckets for us, or is that impossible?

That's impossible, there's so many moving parts.

I mean, you lose an account and you pick up another account, you maybe get a line of coverage on a client you didn't have the year before.

As a roiling, boiling pot of oil.

Okay.

Is it easy to just categorize it for the rate decreases or no?

Yes.

I think rate decreases are easier to categorize.

I would say, just looking across -- across all those line that I mentioned before, work comp, umbrellas, property, GL, you're looking at 10% to 15% reductions.

And you'll hear horror stories.

We have umbrellas that have dropped in half, we still have property schedules that are being cut 30%.

Okay.

On the tax rate, you said still 23%.

Is the price of oil changing your view?

You said we hope 23%, how do you think about that?

With respect to oil obviously we watch that every day and for every day that the oil prices are below the beginning of the phase-off here, and we get a day where it can go over.

And right now our estimates right now through, I think March 31st, would say oil would have to be in the mid '60s somewhere of the reported basis and the new favors first begin to have a phase out.

So we're making headway throughout the year and we just continue to watch this, but right now we don't think that risk of being phased out completely, and we think there's enough buffer there to keep us down below the beginning of the phase out period on the timing.

We just watch it every day, and that's a decision with to make if we think it's going to go over which I have to shut down.

The compensation expense increase for new hires, did you mention how many new hires if it made in the last six months?

No, I didn't give that number.

And you're not going to give it?

I don't have it right off the top of my head, Jeff.

Okay, and do they come with non-competes or are they able to hit the ground running.

Both.

We have some that come with no non-competes and some that come with non-competes.

Given the marketplace and the dislocation, can we expect more of that in future quarters as far as new hires?

We're going tobe real careful, Jeff.

We had this opportunity last time the bulked up knowing we're going into a tightening environment and I think that bulk up worked out pretty well.

I don't believe you'll see anything on the order of the last magnitude as we did last time.

These are strategic hires.

We have lots of people that would be interested in coming to work a Gallagher and were being very cautious about who we put on the team.

No one can hire anybody in the Company if Jim Gault, Dave McGurn, Rich McKenna, Jim Durkin, myself, or Doug Howell doesn't sign off, they just don't get on the payroll.

Okay.

Thanks.

And our next question comes from Mark Dwelle of Ferris, Baker Watts.

I thought I disconnected from the queue.

All my questions have been answered.

Good.

Have a great day.

Our next question is coming from Haini Savaugh of Viking Global.

Just one final question on the contingents and know you're not willing to give guidance with regards to the rest of the year.

You said you stopped going into new contracts.

As far as '06 which we expect for contingents?

You've got to cut them dramatically.

I think as we get toward the end of the year will give you guidance on that.

Once we get these in hand and we know exactly which one came from arrangements that were volume and profit based, we'll be to tell you what to take out.

The non-retail brokerage contingent commissions been around seven to 8 million bucks in 2004 end, you know, if those continue to be acceptable, that number will be somewhere around $8 million.

Okay.

There's your guidance.

Thank you.

Any further questions?

No, thanks.

Our next question is a follow-up coming from Bob Vasegal of Langen MacElaney.

You guys are to be congratulated with five competing insurance conference calls to get this many questions and from the audience this quarter.

We had a lot moving parts this quarter, Bob.

That was a good quote on your part it.

I read it in yours as well.

Question on acquisitions, on stock buy back.

Should we be thinking that needs to be dialed down a hair, in light of the payment, or can you -- should shares not go up at the same rate?

We have to be judicious about what we do with our cash this year.

And stock buybacks are one of those levers that we can pull.

But so as cash.

In acquisitions we have several sources -- maybe we'll use a little less cash in acquisitions and use more cash for stock buyback.

But we'll see how the year develops.

Why do you think in terms of buyback versus acquisitions at this point, as the stock is backed off when it assumed a buyback becomes a stronger option relative to to acquisitions.

Stock buybacks are always -- you know we always believe that our stock has great value, so of you look at it from that standpoint it would never do another acquisition, we'd always be buying stock back..

But there are many times when you do an acquisition where it get you more solid in a niche, it gets you into a geographic area where you are to be.

So we always have to balance bringing in more good mergers partners are do we contract the number of shares outstanding in order to create EPS growth, and for us, we want to continue to grow the franchise.

I think it's very important to mention, too, and this has been our mantra forever.

Even with the stock price down, that's one of our selling points in acquisitions.

What a great time to join us and take some of the proceeds, if not the lion's share of the proceeds in our stock.

And you'd say "well, geez, that's giving away your diamonds at a cheap price," but, you've got to believe that we're going to take this thing and double it and double it,if you want to be part of the team, and that's our belief and we want to use stock to get those people to really refocus the same way everybody else in the company is.

I can see the dilemma of arguing either side.

That's a helpful response.

[OPERATOR INSTRUCTIONS] Our final question is a follow-up coming from Nick Fisken of Stephens, Incorporated.

I'm going to ask Jeff's question again on the ,can you at least give us a number, it is a ten recruited or 50 or over a hundred or over 200?

Is probably in the '20s.

Okay, great.

Thank you.

That's a good.

That is all the questions, so I would like to conclude with just a few quick comments and we will move off the call.

Obviously, this is not been a real easy quarter.

The market is softening, regulators are questioning the receipt of contingent commissions, and possible conflict of interest that those contingence pose.

Civil litigation is at a level that we've ever seen before in our history.

When I think about the Company and how we're positioned the stability of our management team, and convince the continue to of the strategies of place to grow the Company and I think that's what's got to be really important our shareholders.

At the close of the fourth quarter conference call I laid out my expectations for another good 2005 and I felt that we would stay focused of basically five areas.

Number one, our culture continues to be our strategic strength.

It is strong, our team is together, our niche sales are working extremely well we are growing faster in our niches than we are in our general book of business.

We're dealing with a soft market, we know how to do that, this management team has been to to of those before, our merger and acquisition pipeline is strong.

We're focused on organic growth, although it's tough on the brokerage side, we've got a tremendous opportunity Gallagher Basset and we are really out hustling for that.

We definitely focused on new sales and client retention.

Our retention rates are improving and lastly, we have hiring opportunities they're taking advantage of to continue to build the Company, and I think those strategies will allow us to have a good 2005 and I'm glad the first quarter is behind us and I'm looking forward to the rest of the year.

So thank you all for joining us and we appreciate your being here this morning.

This concludes today's teleconference.

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

Thank you