Arthur J. Gallagher & Co. (AJG) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Arthur J. Gallagher & Co. second quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] 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 & Co. today may constitute forward-looking statements within the meaning of the security laws and are subject to certain factors and risks described in its filing with the Securities and Exchange Commission which may cause actual results to say differ materially.

It is now my pleasure hand the floor over to your host, J. Patrick Gallagher, Jr.

President and CEO of Arthur J. Gallagher & Co. Sir, the floor is years.

Thank you, Denise.

Welcome everyone to our second quarter conference call.

We appreciate you being here this morning.

I'm joined this morning by Doug Howell, our Chief Financial Officer;

John Rosengren, our General Counsel;

Jim Gault, the President of our Brokerage Services retail operation;

Dave McGurn, President of Specialty Marketing, which is our international wholesale and re-insurance operations; as well as Rich McKenna, the President of Gallagher Bassett Services.

As is our custom, I'm not going to sit and read from our press release.

I will make some comments and then turn it over to Doug Howell for some comments on the financials.

Before I address the quarter, though, I would like to bring people up-to-date on what I call industry issues.

May 18th was a very important date for our company.

We were very pleased to reach a national agreement -- what we hope was a national agreement -- with our home states regularities.

We agreed to return approximately $27 million of contingent income to our clients as well as to make changes to our business practices.

We are well on our way to complying with that agreement, yet you have to understand we still do have 18 other agencies from various states with inquiries and subpoenas that we're answering.

We are cooperating fully with each agency.

In addition, we're managing 13 lawsuits.

This is costly in dollar terms, but I have to emphasize it is also very distracting to our people.

Consider just one example of that.

On June 1st we called our leadership team from the brokerage side of our business into Itasca, Illinois. 150 people came to the meeting.

We made it clear throughout the organization as to what we have to do and how and when we have to do it.

Obviously, this took 150 of our leaders offline for more than the day they were here in the meeting.

That's June 1st, which is a precursor to July 1st, which is our busiest renewal date of the year.

We are continuing to work hard to implement the process changes called for in the agreement.

Training in this regard will be rolled out this fall for all of our people to participate in.

It's never easy to change how a business is conducted virtually overnight, nonetheless our clients are going to see this change in our business model by year end.

Let me be clear about something, and this is as much for our people as for the investment community.

I want to be very clear.

While this is tough to implement these changes at the beginning, we really do embrace the changes and think they will be better for our clients, better for the industry and ultimately better for Gallagher.

Why would I say that?

In any transparent competition, I'm convinced that our ball team, with all the resources we've got, will fare extremely well.

Change is always tough, but change and adopting the change is a hallmark of the Gallagher culture.

Now let me turn to some comments on our second quarter.

Given the circumstances that we're in, I'm extremely pleased with the second quarter results.

We continue to make progress on many fronts, and I'd like to touch on seven specific items.

Number one, the property casualty market continues to soften rapidly across most lines in most states.

Insurers are posting outstanding results which we believe will lead to further softening.

So our topline growth of 11% with organic growth of 1% in the Brokerage segment is a good result.

New business is strong and our retention figures are actually improving.

Also, our Benefits team had an outstanding first half of the year.

We get great help from being both a PC and Benefits broker.

Our clients like the ability to use one source for their PC and Benefits needs and cross-selling is a strong part of our sales culture.

I do want to spend a few moments addressing our Brokerage segment margin.

We gave you the specifics in the press release, which I am not going to read, in our press release.

But let me add a little flavor to those specifics.

If you take out what I call the noise -- new hires, foreign exchange, additional pension costs, one-time commission return -- and the existing operation margins are specially flat to last year.

Having said that, there are more infrastructure costs in the company now than there were one year ago.

One-time costs associated with compliance will reduce over time but they are up from prior year.

In essence we have overcome increased cost to maintain a flat margin in our existing branches.

Now realize, having a flat margin to last year is not our goal.

The team is actively working on ways to expand that margin.

Number two, key growth strategy for the Company is acquisition.

Our acquisition pipeline remains strong.

The industry turmoil I commented on has slowed some deals down.

Nonetheless, we completed five acquisitions in the quarter, seven year to date, with annualized revenue of about $17 million.

Our position on contingent commissions may be viewed by some as an impediment.

We feel, however, that all contingents will eventually be done away with -- we support that model -- and we believe we offer a great opportunity to grow the seller's business while also replacing contingent commission with a more stable revenue flow.

Let me comment on that in item number 3.

We are making progress with insurance carriers in negotiating increases in non-contingent commissions.

These increases will allow us to recapture some of our lost income but not all of it.

These increases reflect the value we bring to the placement process.

Number four, our recruiting efforts have been fruitful.

We're taking our time and being very cautious, but we're always looking for good production talent.

In the first six months, we've added approximately 30 producers to our U.S. retail operations who are validating as we speak.

In addition, we added about 20 people to our London re-insurance team and a marine team in London of about 15 people which is actually already validated.

They're one thing about the marketplace I want to make sure before I go on.

There's this perception out there that there's widespread movement of large act accounts.

Although we have done well on a number of opportunities, we have not seen widespread movement.

It will take a number of years for the situation on the large account market to sort itself out.

We view this as a marathon, not a sprint, and we know we will get our fair share as the opportunities develop.

Number five, a real highlight for us.

Our internship is a real high point.

The summer program we have is now winding down.

This year we had 140 young adults come to learn about our industry.

This is our biggest group ever.

It's not only our largest summer intern group; it's by far our most selective group.

We're extremely selective and particular about those positions.

Our program has a lot of visibility on college campuses around the country.

We are committed to growing our own talent pool, and we believe we've developed the best model for college recruiting in the business.

Number six.

Our worldwide wholesale revenues are up nicely in spite of a soft market.

Our Specialty Marketing operation -- again that is wholesale, re-insurance, and international -- is doing very well.

In the first quarter, we began an effort to re-energize and re-brand our re-insurance efforts as Gallagher Re.

During the second quarter, our strategic plan has been finalized and we are beginning to get real traction.

We believe there's a great opportunity in the marketplace to grow and expand as a global treaty and facultative re-insurance broker.

Let me switch now to the Risk Management segment and talk a little bit about Gallagher Bassett, which is number 7.

Our press release gave you the details on Gallagher Bassett's revenue growth, but let me again add some flavor to that.

GB's domestic claims management revenues are up 10% for the first six months of 2005.

However, our U.K. claim counts are down 30%.

Why is that?

Number one, a number of years ago the U.K. public sectors accounts saw an explosion of claim activities when contingent payments to lawyers were introduced.

That activity, number two, has returned to a more normalized level.

In the United States we're helping clients identify opportunities to reduce claims and we're having success with that.

If you think about it, that's really the essence of risk management.

Many of our clients are in fact realizing a reduction in claims frequency.

This has slowed claim count growth.

Nonetheless, new business has been solid for the first six months and our retention at Gallagher Bassett is still outstanding.

Also, I point you to our 18 quarter spread at our website and you'll note that Gallagher Bassett's topline does fluctuate from time to time.

Remember also that all of Gallagher Bassett's growth is organic.

Gallagher Bassett is a unique franchise.

We're recognized as the largest independent PPA.

I believe we're also recognized as the highest quality provider and clearly the profit margin leader in that business.

But I want to comment on that margin.

If you remove a lot of the onetime things in the quarter, GB's operating margin was really about 18% and in the future we don't intend to run the business at a higher margin than that, so don't be loading in 21% going forward.

We continue to be extremely bullish on GB's growth opportunities.

We believe we continue to offer investors a unique blend of brokerage and risk management operations which have great growth opportunities in the future.

So finally, we continue to watch our costs, but we're also investing in our future.

We believe that supported by a very unique culture, we will continue to make good new hires, train our own new people and merge with strong entrepreneurial firms.

Doug.

Thanks, Pat, and good morning everyone.

Today I have seven comments on the numbers.

As a reminder we have an 18-quarter spread on our website and will file our 10-Q tomorrow sometime.

First, you can see we have another line on the discontinued operations section of our quarterly income statement.

This line represents the sale of our Florida real estate investment, which was previously a consolidated entity classified within our financial services segment.

So when you combine this line with the financial services segment line, you get a gain of $0.04, which is very close to what we forecasted in our first quarter conference call.

Second, the financial services team made excellent progress this quarter.

We sold our Florida real estate development; we sold our interest in one bio-gas project, and last week we sold our small interest in Allied World Assurance.

As a result of these transactions, we generated over $40 million of cash and removed nearly $65 million in debt from our balance sheet.

My third comment relates to oil prices and how such correlate to a phaseout of our synthetic coal tax credits.

Many of you have asked for help in converting the trigger prices detailed in the 10-Q to a trigger price that can be found in the popular financial press.

We've provided special disclosure in this earnings release, but I must caution you.

Converting these prices requires us to use historical correlation and our estimated numbers could be slightly different than the actual trigger prices that get published by the IRS in the spring of 2006.

Fourth, as you can see throughout our earnings release, we made changes in several of our retirement plans.

Net-to-net, these amendments will reduce our compensation costs in the future.

We believe this was a necessary action, given the country's movement away from defined benefit plans in favor of 401(k)-like plans.

In addition, please note that we have dramatically reduced our underfunding.

At December 31, 2004, we were underfunded by nearly $50 million.

As a result of these amendments, we expect that our plan will approach a fully-funded status by the end of the third quarter.

We're extremely pleased to have this significant legacy cost behind us.

Let me draw into the quarterly numbers related to the retirement plan amendments a little bit more.

In our press release, we tell you that in the quarter there was a gain that was partially offset by pension inflation.

In the brokerage segment, the gain was $6.8 million partially offset by pension inflation of approximately $1.8 million.

So when you net the two, you get about 5 million of income, which is just a little over a million more that what we expect to save on a quarterly run rate this year.

In the risk management segment, the gain was $3.2 million and the pension inflation was approximately $500,000.

Again, about a million more than we would expect to save on a quarterly run rate for the remainder of 2005..

For my fifth comment I want to again highlight that our brokerage segment has significant seasonality in its quarterly profits.

Historically this segment has reported more profits in the second half of the year because our client renewal dates are skewed that way.

Now that we have ceased taking contingent commissions as a retail broker, our seasonalities will become more pronounced.

Our earnings release includes a detailed analysis of retail-contingent commission income by quarter for both 2004 and thus far 2005.

As you build your quarterly models for 2006 and later, please be sure to consider this information.

Again, our results are seasonal and shifting from contingent commissions to a higher commission schedule will only make the seasonality more pronounced.

Six, some comments related to our cash.

During the quarter, we used $26 million to pay dividend, $6 million for capital expenditures and $8 million in acquisitions and earn-outs.

We did not buy back a meaningful amount of stock during the quarter.

Also, please recall we have no [inaudible] corporate purposes and we maintain a $250 million line of credit.

My seventh comment relates to our procurement and sourcing efforts we first discussed in our October 2004 conference call.

In that call we told you that we would first see meaningful savings in the Risk Management segment and later this year in the Brokerage Segment.

Well, here we are in the middle part of 2005 and we couldn't be more pleased with the team as you can really see the improvement in the Risk Management segment as a result of these efforts.

As for the brokerage segment, we believe we should be through their expense categories by the end of 2005 as planned.

So maybe as a final comment, which is more of a wrap-up comment, I think everybody needs to know that the Gallagher team is diligent in our efforts to build a great brokerage and risk management company.

We are hard at work at divesting of our non-core investments, reducing our investment-related debt, modernizing our pension plan, and eliminating the legacy costs, buying goods and services more effectively, inducting more production talent, all the while adapting to a change in the brokerage landscape.

Okay, those are my comments.

Back to you, Pat.

Thanks, Doug.

Denise, I think we can go to questions and answers now.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Charles Gates of CSFB.

Hey, good morning.

Good morning.

Question.

Could you elaborate on trends in pricing that you see in the marketplace now?

Sure.

I'd be glad to do that.

On balance, prices are coming down 10 to 20% across almost every line.

Some lines that vary from that would be the more difficult lines, Brokers E and O, Medical Malpractice are not seeing that, but when you get beyond that, you are seeing minimum decreases of 10% and in many instances 20% on renewal books.

On the Chubb conference call last night they said on their basic commercial insurance unit that they saw renewal pricing off 1%.

How do you reconcile that?

I don't.

I live on the street.

Thank you.

Thank you.

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

Good morning.

Following up on Charles's line of questioning, on Berkeley's call yesterday, Bill Berkeley said that the middle-sized brokers have been -- had an incentive to talk up the amount of price competition in the marketplace in order to get some of the larger accounts maybe to be willing to show up risks.

They said you have to discount what they're saying.

I wondered if you had a reaction to that view?

Say that again, Bob.

I missed that question.

Bill Berkeley said be careful listening to how competitive the middle-sized brokers are describing the marketplace, because they've had an incentive to talk up the level of price competition in order to get more of the insureds to be willing to shove.

Let me comment on that.

I think the best resource, if you want to see an open and honest review of this, is the CIAB does a great job quarterly of publishing numbers of responses they get from their members.

That's the Council of Insurance Agents and Brokers.

Their last survey they received 131 responses.

I think that's a pretty good response rate across the United States.

Literally at least half the small accounts are seeing decreases of anywhere from 10 to 20%.

The accounts from 25,000 to 100,000, literally, 80% are seeing decreases of anywhere from 10 to 20%.

I believe those figures, Bob.

When I talk to our people on the street, upper, middle market accounts, large accounts and small accounts are all seeing decreases.

Let's face it, we're all seeing the results that are being published this week by our insurance companies, and they're doing extremely well.

It makes sense.

They're making a very good profit.

Just another line of questions on risk management.

You highlighted the six-month revenue comparisons rather than the second quarter.

Was that a suggestion that that may be a better statement for what the run rate is going into the second half, or should we think in terms of this 4% number being sort of a real number for growth expectations going forward?

Bob, I've always been hesitant to give much guidance because frankly every time I do that sort of thing I get it wrong.

I think the 4% is low and the 10% is possibly a little touch high.

Okay.

Thank you very much.

You bet.

Thank you.

Our next question is coming from Nik Fisken of Stephens Incorporated.

Good morning, everybody.

Can you give us some further details on updating as to your ability to replace contingents with a higher payout?

Yes, I can.

These discussions are in their early stages.

We have a number of companies.

It's a small number that we have actually got agreement with.

In essence, what we're -- and it's interesting -- the insurance companies that we've done most of our business with are not looking at just saying "Oh, good, we're not going to pay any contingents, we'll just drop it to our bottom line."

They are recognizing the value that we bring in the placement process and are looking for ways to compensate us for that that would be in concert with our assurance and our consent stipulation here in Illinois.

In essence, what we've got is an agreement with a number of companies to increase our up-front commissions by a few percentage points to allow us to have that commission be non-contingent.

It's not contingent on volume growth, it's not contingent on profitability.

It will strictly be an increase to basically the commissions that we have in our contract with them

So in those agreements, if you lost a dollar of contingents, how much are you getting back?

That's going to be a tough one for this quarter, Nik.

Give me that question next quarter.

I promise you that I'll have a little bit more progress and I might be able to answer that.

Right now I don't have it nailed down.

Even on the ones you've already signed up?

Yeah, because the ones I've signed up I have an idea, but I want to get more signed up before I start commenting on percentages.

Can you put any goal posts around it -- 20-50% or 50-80%?

Nik, I don't want to do that this quarter.

Okay.

Can you give us some details behind this commission audit?

Yes, I can give you some details on that.

As you know, we're constantly auditing our operations around the country all the time.

We audit them on professional standards, financial, what have you.

Look at this as basically a one-producer problem that's an E&O settlement.

Okay.

Then on this pricing theme the last two questions about, would you say the most competitive pricers are coming from the mutuals and the small, private localized underwriters.

I'd say the regionals are clearly the most competitive right now.

I wouldn't say locals or smalls.

Some of the regionals are pretty good-sized.

But, yes, the regionals are extremely competitive, and then the multi-line nationals are also defending their book of business.

Great.

Thank you.

Thank you.

Our next question is coming from Dan Johnson of Citadel.

Good morning, Dan.

Good morning, Pat.

Couple if you would, please.

The International component of GB, we talked about that a bit in the first quarter conference call.

Doug had indicated that I think you said January and February on the International side were just fine, and that March has been a little bit of a slip.

Sounds like that slip kind of continued into the second quarter.

Can you go into maybe just another layer of detail as to what's going on and what sort of visibility you have there for seeing a return to, I guess, whatever we want to consider the historic growth rate to be?

Yeah.

I'll give you my best shot at that, Dan.

What you have is the largest portion of our renewal book in the UK comes up April 1st.

So you're renewing your accounts really for the most part 100% of their business practically renews April 1st.

You have lower claim costs going into those renewals, which reduce those renewals significantly.

And January and February were fine coming off of the previous year's numbers, but when you look at the full year going forward and what we're going to bill on a monthly basis, there were significant reductions.

Now, a return to normal, I think that -- I think what we've got in the U.K. now is really more -- is normalized.

I will comment on one other thing too.

We've had some success -- you might remember our U.K. book of business is almost 100% comprised of public entity risks that we've written in conjunction with our marketing arm, Risk Management Partners, over the last ten years.

We've made some real progress in the last quarter in diversifying that book and picking up an order or two from commercial accounts that we hope over time will add some more stability and growth similar to what we had in the United States

So the historical growth of mid-teens or better over the last years, a good chunk of that was fueled by really strong growth internationally and now we're seeing a reversion to the mean going on there?

Dan, I wouldn't give all the growth to the International side by any means.

But you have to remember that Gallagher Bassett is, number one, it's all organic growth, and number two, it's oftentimes very large accounts.

So we had an unbelievable 2003 for new business.

We had an outstanding 2004, and our new business in 2005 is looking good.

But it's not the same level as it was in 2003.

We commented on that in the press release.

So when you look at what is normalized, I'd send you to our 18-quarter spread.

You'll see that we have quarters in that spread that are single-digit.

We have some nice high double-digit.

I don't want to blame that all on International.

It's across the board.

Okay.

And then on the sale of the AWAC piece, had you received other dividends before the one we got back in the second quarter?

No.

I mean, it would look like, then, we got a 10% return on our $20 million investment over a three-year time period.

Why didn't -- I was thinking we'd generate a little more cash out of that sale than what happened.

Can you put some color on that?

Yeah, sure, Dan.

It's real easy.

When we did the AWAC investment, we did it literally to be able to look at our clients in the face of a very tight market and explain to them we were intending to bring some capital to market.

Our larger competitors made some very big investments in risk taking and capital providers at the time of the hard market.

This was our opportunity to say we're doing our part, albeit a smaller part, in the same vein.

Never once did we ever think of that as a conflict of interest.

Given the new world that we're living in, there are regulars and others that view that as a conflict of interest, so we decided it was probably best for both appearances and otherwise to exit that investment.

Without a gain?

Well, we got basically our money out.

That is right

Great.

Thank you very much.

Thank you.

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

Good morning, everyone.

Good morning, Matt.

Three questions.

If we could go back to the Gallagher Bassett in terms of new business, in the press release you talked about reduced levels of new business in the latter of '04 and early '05?

Reduced from a really record 2003.

That's right.

Has that accelerated or are we still at that reduced level?

I think we're about the same level we were to a little bit higher than last year.

Okay.

I was just a little unclear on that.

Housekeeping question.

On the financial services guidance in the press release, is there any one-time thing such as the Florida real estate that was in the second quarter?

Is there anything in that going forward?

No.

There's no significant gains or losses assumptions in the financial services guidance.

With those sort of assumptions tax rate running at about 23% going forward?

Yeah, I think we can hold at 23.

If anything, it will tick up a point, but I think it would be in that range.

Final question is on the retail contingents.

Should we expect to see retail contingents in the third and fourth quarter?

There may be some retail contingents in the third and fourth quarter, but they're lighter than they are in the first half

When you acquire a company, how soon before they stop paying contingents, meaning if you acquired a company now that had a contract to pay contingents through this year?

You can actually take their contingents into 2005.

Our assurance and our consent stipulation allow us to bring our acquisitions into conformance one year after the acquisition.

And in that first year after our acquisition they can't accept the contractual contingents that they have coming to them.

When you acquire a company, do you put a multiple on those contingents or just assume they are going to go away?

It's interesting.

We're competing in a competitive environment for acquisitions obviously, and we have some competitors that believe that contingents based on volume and profitability will never go away.

We look at the seller and say, "You know, we've always discounted the contingent commissions much greater than the revenue flow from your operations anyway, and we believe if you join us, together we can recoup some of those contingents through our increase in commissions."

So we have to look at it very carefully in the pro forma, balance that with the competition for the property, and make sure we don't overpay.

Okay.

Thank you very much.

Thank you.

Our next call is coming from Adam Klauber of Cochran Caronia.

Good morning, Adam.

Good morning.

Thank you.

On the surface it looks like your expense growth is running around 15% and I know there are a lot of moving items back and forth.

What do you think in the Brokerage unit you could get it down to in 2006?

Adam, this is Doug.

I think the answer here is, I think, instead of growth -- because there's so much activity in there with acquisitions.

Another way of saying is what do we think is going to happen with our expense margin.

We've maintained flat from last year, and there's -- like Pat said in his comments they're significant costs that are happening here in the third and fourth quarter complying with the new assurance, additional legal fees, additional professional fees as we work through the sourcing.

We're trying to keep our margins flat at this point with looking towards improvement, you know, in 2006.

So I don't know if I can answer you in terms of how much do I expect expenses to grow considering our acquisition activity.

Also, Adam, this is Pat.

We've been loathe to give real projections and guidance, and I think we've been well-served by that

Right.

I totally agree with that, Pat.

Doug, you mentioned you do have some more infrastructure costs in the third and fourth quarter.

Do you think you you can keep the expense gap flat there, or is that going to worsen a little before it gets better in 2006?

Here's the thing.

We have to comply with the assurance, we have to comply with the subpoenas, we have to comply with requests that we get.

We're going to do whatever it takes.

I'll just give you one anecdotal illustration.

We had a request on one subpoena that, had we not been able to convince the regulator to adjust the request, it would have cost us $3 million in photocopy cost.

Just photocopies?

Just photocopies.

This one regulator suggested that we comply more quickly and was asking for 100 boxes of information every Friday afternoon.

We're spending over a million dollars a month on lawyers.

So in answer to your question, in our core operations we're doing a great job of controlling our expenses.

The team is looking at these hard, but overall there's a lot of costs going out the door.

We're not going to put ourselves in a situation where we save a dime and then violate the compliance agreement that we have.

That's just not something we're going to do.

On the acquisition front I think you mentioned that you had -- you've done roughly 17 million of acquisitions in the first six months.

What does that compare to for the first six months of 2004?

Actually, Adam the number is 17 million for acquisitions that occurred in the second quarter, and it's 22 million or thereabouts for the first half of the year.

If memory serves -- we'll look for that answer and come back to you on it.

I think we were somewhere around 30, 35 million for the first half of last year.

Okay.

Are you hoping that will accelerate in the back half of this year?

You know what?

We've talked about that many times.

We don't have a specific goal for a dollar amount of acquisitions we want to do.

We really are trying to maintain our discipline in looking for good properties, and so we don't target to do 30 deals at $100 million or something like that, and what I'm hoping is that the turmoil in the industry doesn't slow us down.

There is some slowdown of some deals because people are, number one, asking the contingent question.

Number two, they're looking at this going, "Well, all right, how difficult is it going to be for me to come into compliance in a year?"

So there's some of that.

Nonetheless, we're finding really solid people and great entrepreneurs that do want to join with us.

I hope the second half continues to be consistent with our past.

Adam, I've got the number -- it's 26 million in the first half of last year.

Okay.

And finally, excluding the gas prices, assuming gas prices stay below the trigger prices, are you still comfortable with the 23% tax rate for 2006?

For 2006 I think that was the question for 2006, yeah, we think it would be someplace between 23 and 25%.

Okay.

Thank you very much.

Okay, Adam.

Thank you. [OPERATOR INSTRUCTIONS] Our next question is coming from Nick Pirsos of Sandler O'Neill.

First a clarification.

On the contingent commission table that is in the press release, just to make sure the 16 point -- let me check that number again -- the 16.7 million figure for the first quarter of '05 in the first quarter press release there was a figure for 20.7.

So is that 4 million difference the non-retailed commissions that you would typically continue to expect to earn?

Exactly.

Okay.

Great.

Then second, I think, Doug, you said in your opening comment that you did approximately $40 million worth of kind of non-core asset sales in the quarter.

What is that remaining bucket look like?

Well, of the unsold investments?

Is that your question?

Exactly.

What's on your list?

I think probably the best way to do it in interest of time on the call.

If you go to page 7 of our earnings release, we have a table in there that details all the remaining assets that are on the books.

That might be the best place to look, Nick.

It's on our website.

But would all of those on page 7 be eligible for sale or some of those you would still rather keep?

Here's the caution.

We've said that we're interested in monetizing our investments in our asset management company called Asset Alliance Corporation.

The low-income housing, you know, these assets are nice earnings assets for us.

There's been 13,000 properties that have been certified as low-income housing since 1987 and I think three of them or eight of them have defaulted.

So none of those are ours, so that's a nice earning asset.

I'm not in a hurry to get rid of that.

The coal will run it's natural course.

The alternative energy investments will be done by the end of 2007.

Then our real estate and venture capital, the only real meaningful asset we have left there is our home office building.

That's something we always look at opportunities with respect to that.

Okay.

Great.

Thank you

Thank you.

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

I was wondering if you could reconcile the 1% organic growth, which is pretty good in the quarter, versus your commentary on rakes.

I guess if you could you break it down in general terms with net new business, client buying habits in terms of volumes, exposure increases, things of that nature.

That's a lot to break down, John, but let me give you the kind of gut reaction.

I think if you look at us as a new business machine, we expect of ourselves -- and we're making this -- we'll write 14 to 15% new business year in and year out.

We're hitting the street hard, and we'll generate that kind of new activity.

Included in some of that will be both new lines to existing clients, and in some instances, increased commissions we were able to negotiate at the underwriting desks on those renewal accounts.

We'll lose on the order of 8 to 10% depending on the year of the business that we have on the books.

Sometimes that will be greater than that, depending on how many -one-time item's we've got.

Surety is an example of something that pops up one time.

The next year in a construction boom can be more robust, but if construction falls off at various locations that can drop.

Then you have to take into effect the net account of the rate reductions, and we're constantly fighting those.

Remember, our producers for the most part still get paid based on what their book of business does.

So when they see reductions in premium, they do negotiate hard at the underwriting desk to improve the commission income that they receive on those accounts.

So, all in, you see up-down moving parts, 1% organic growth.

It's not -- that's not motherhood and apple pie.

I'm not thrilled with that, but I do understand it and I applaud the team out there for being able to stay essentially flat to up slightly based on what's going on in the market.

Sounds good.

Thank you very much.

[OPERATOR INSTRUCTIONS] Our next question is a follow-up question coming from Dan Johnson of Citadel.

Asked and answered.

Thanks.

Thanks, Dan.

Sir, I see that there are no further questions at this time.

Great, Denise.

Then what I'd like to do everybody is make one quick closing comment and thank you you for being here today.

It's clear that 2005 is a very tough year for Arthur J. Gallagher & Co., but as I look back over 31 years of being part of this great company, I can find many, many examples of where we've had to deal with tough issues and in every instance we always come out better and stronger.

Remember that we continue to play the game for the long term.

We are investing in our business.

We believe it's a great business going forward.

We know that if we focus on new business, hold onto our valued clients, make good acquisitions and organic hires, and try to run our business every day, we'll continue to build a great future.

Thanks very much everyone for being with us this morning.

We appreciate it.

Thank you for your participation.

Ladies and gentlemen, this does conclude told's teleconference.