Arthur J. Gallagher & Co. (AJG) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Arthur J. Gallagher & Co. fourth-quarter 2005 earnings conference call.

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

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

It is important to note that some of the comments made by Arthur J. Gallagher & Co. today may constitute forward-looking statements within the meaning of the securities laws and are subject to certain factors and risks described in the 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 Jr., President and CEO of Arthur J. Gallagher & Co. Sir, the floor is yours.

Thank you very much, Toni.

Welcome, everyone, to our fourth-quarter conference call.

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

John Rosengren, our General Counsel; and the heads of our four operating divisions, Rich McKenna, Jim Durkin, Dave McGurn and Jim Gault.

As we typically do, we won't sit here this morning and take turns reading a press release to you.

Hopefully, you do appreciate the level of detail we are trying to give you in each of these press releases.

While our press release has an awful lot of information in it, if you boil it all down, what you are going to find is that for the quarter, we were behind last year from an operating perspective by about $0.07.

After adjusting for contingents, we're about $0.07 behind the prior year.

But if you consider the impact of our tax rate increase and the dilution of extra shares outstanding, from an operating basis, we missed by about $0.04 the year prior.

There were essentially three reasons for this difference.

Number one, our London to brokerage operation struggled -- it really struggled in 2005.

Secondly, our continuing investment in our reinsurance operations, Gallagher Re, were a drag on the year and the quarter.

And thirdly, Gallagher Bassett's international operations were down year over year.

Without the $0.07 drag and without the loss of contingents, in the quarter, we would have been just about flat with prior year.

So how would I address the three items?

Number one, in our London brokerage office, we have made significant management changes and we have cut operating costs considerably.

We expect much better results in 2006.

Secondly, our reinsurance investments are gaining some real traction.

We are excited about our reinsurance opportunities.

Gallagher Re had some very nice new orders placed at the first of the year.

We are very, very convinced, more convinced than ever, that this is going to be a great business for us.

Thirdly, as you know, we announced in the fourth quarter that we received a very large order for service in Australia in Gallagher Bassett, and so we believe our international operations will begin to show better results in 2006 in our Risk Management Segment.

So let me take you through our other operations, and you will see I think a different look at '05, and hopefully you will see why we are excited about the prospects for the future.

Aside from these three specific areas, the franchise did relatively well.

I know that is hard to see when you look at the numbers, but let me explain.

Let me start with Gallagher Bassett, our Risk Management Segment.

All in all, GB had a great year in 2005.

When you peel back the information, you'll see that domestic revenue was up 10% for the year -- that is on top of a very strong 2004.

Our 18% operating margin is clearly the best margin in this business.

Year-over-year pretax profit growth at Gallagher Bassett was 18% in spite of the slowdown internationally.

We believe that Gallagher Bassett is clearly the leader in their business in every measurable way and had an outstanding 2005.

Let me move to our Brokerage Segment.

We had revenue growth in the segment, adjusted for contingents, of about 10% topline.

Our benefits arm, Gallagher Benefit Services, which is part of this segment, had an outstanding year and grew pretax substantially.

The segment's growth comes in spite of a property casualty market that was experiencing rate declines of approximately 10% through the first three quarters that did moderate in the fourth quarter to more like a 5% decline.

So growing revenue in that environment I think was good news for us.

The Brokerage Segment also faced a host of regulatory and litigation issues, as well as a complete change in our business practices.

Just consider the following.

We started the year and went through the year with 22 regulatory investigations, 13 class-action suits, subpoenas from each that our operating people had to answer.

We trained 4700 brokerage employees to live in a transparent world -- a total change in the business model, especially in the middle market.

We are now working on it and have actually proposed February, March and even some April renewals.

And you know what?

What's really exciting to me is that our clients are renewing.

We're not having a problem with transparency.

And new business is strong.

Our people, and more importantly, our clients, really do understand our value proposition.

So when you come through a year like 2005, you have to sit back, I think, and look at the components of our business -- I mean, namely, our clients.

Are we serving them well?

Our team -- are they in the game?

Are we producing?

Are we maintaining our sales and marketing drive?

And lastly, our culture.

Is it holding together?

Is the team together?

So let me comment briefly on each of these.

We at Gallagher have always said we put our clients first.

Our client retention actually improved in 2005.

We are now telling our clients exactly what we are making and reaffirming to them that we represent them in the marketplace.

Secondly, in difficult times, good teams find a way to pull together; bad teams tend to split apart.

I am amazed at how the Gallagher team, all of our colleagues, pulled together through the year, learned a new operating model and have adapted extremely well.

Thirdly, our culture remains extremely strong.

We recently ran our second-ever employee survey. 77% of the eligible employees responded.

The results were surprisingly strong and virtually identical to the survey that we ran two years ago, which was of course before all the disruption.

Lastly, our acquisition activity is picking up. 2005 was, as you know, a little slower than we would like.

But prospects I think are feeling more comfortable that some of these issues are being put behind us.

And they, too, are recognizing our value proposition.

So, 2005 is over and we can all be happy about that.

Our balance sheet is very strong.

We have plenty of cash for operations and for our dividend.

Our franchise is strong and getting stronger every month.

We look forward to focusing on building our business and we are very excited about our prospects.

Doug, do you want to talk about the numbers a bit?

Sure, Pat.

Good morning, everyone.

I, too, am looking forward to 2006 and having 2005 behind us.

Today, I have got seven comments.

And as a reminder, we have a 20-quarter spread on our website and will file our 10-K midpart of next week.

First, I have been saying it for the last year, so let me repeat it again -- the seasonality historically seen in our Brokerage Segment will become even more pronounced in 2006 as we stop taking contingent commissions as a retail broker.

To help you understand the impact as you build your 2006 models, our earnings release includes a detailed analysis of retail contingent commission income by quarter for both 2004 and 2005.

Second, some standard comments related to our cash.

During the quarter, we used about 27 million to pay dividends, about 8 million for capital expenditures and about 9 million in acquisitions and earnouts.

Our stock buybacks were de minimus during the quarter.

Also, please recall that we have no debt for general corporate purposes and we increased our unsecured line of credit to $450 million last fall.

My third comment relates to the two fourth-quarter charges we took in the Brokerage Segment.

The first charge relates to the contingent commission matter.

This charge reflects our current best estimate of future costs to be incurred to settle the remaining state and civil matters that we have described in detail in our third-quarter 10-Q.

The second charge relates to claims run off administrative services provided to former reinsurance clients.

As background, in certain circumstances, reinsurance brokers provide administrative services to settle claims for the life of the reinsurance contract, even if the contract relates to a former client.

In certain circumstances, the obligations to provide these administrative services can be transferred back to the former client.

However, recent legal interpretations and new accounting guidance in the UK make it more clear that there is a more definitive obligation on the part of the reinsurance broker.

Accordingly, as other global brokers have been doing, we relooked at our estimates for this obligation and recorded a one-time noncash charge for both our domestic and international reinsurance contracts.

My fourth comment relates to our efforts to rationalize our leased office location.

Recall that in our third-quarter conference call, I explained that we have over 250 leased office properties, and throughout 2006 and into early 2007, we would be rationalizing approximately 20 to 25 of these locations.

We completed one lease in the fourth quarter, which resulted in a one-time charge of about $2 million, but will save us nearly $600,000 per year over the next seven years.

For those of you that are doing the math, that's about a 23% ROI.

For the foreseeable future, I would expect us to complete a couple lease rationalization projects each quarter.

My fifth comment relates to our Financial Services Segment and our coal production.

As you can see from our earnings release that we have effectively repeated the guidance we provided in the third quarter.

I think we were all hopeful that we could give you more definitive guidance today, but there are just too many external variables that are still developing.

That said, rather than repeating verbatim from the earnings release, let me provide you with some additional background information so that you can get a feel for our situation.

First, recall that we have five synthetic coal plants.

Three of the plants generate pretax income for Gallagher, but very few tax credits.

The other two plants generate pretax expenses, yet produced a substantial amount of cash credits.

Like we said in our earnings release, the financial success of these five plants is highly dependent on oil prices.

In general, the higher the oil prices, the less financially successful.

Second, there was legislation afoot prior to Congress adjourning last year that would help minimize the adverse financial impact of higher oil prices.

We're hopeful that Congress picks up where it left off and considers this legislation again when it reconvenes in a few weeks.

Third, we are in the process of evaluating both operational and financial hedging alternatives.

Meanwhile, we have idled the two plants that generate tax credits.

However, please note -- if we restart these plants in the second quarter, we estimate that we can still generate enough tax credits to produce about a 25% effective tax rate for the entire year.

With respect to the three plants that generate pretax income for Gallagher, all three plants are still operating and we are working with our partners on some go/no-go scenarios.

Okay, that is a lot of information, so let me recap what I said in another way.

Gallagher is currently waiting for oil prices to drop dramatically or to see if there will be legislative relief in this matter.

If no relief is provided, we will then evaluate hedging solutions.

Meanwhile, we have idled the two plants that produced tax credits, and for the other three plants, we're working with our partners on some go/no-go alternatives.

Sixth, the Financial Services Segment remains committed to divesting our noncore investments.

We continue to market our investment in our home office building and hope to consummate a deal before the third quarter.

We expect that this sale will generate cash and remove about 75 million of debt from our balance sheet.

However, don't forget that any financial statement gain would be deferred and amortized through 2011.

As a final comment and more of a wrap-up comment, I have to say it is quite reassuring that Gallagher can take a year like 2005, yet still be in great condition to capitalize on opportunities in 2006 and beyond.

Just listen to this list.

We have an excellent balance sheet.

We have a solid unsecured and unused line of credit.

We've resolved significant legacy issues.

We sold off unprofitable operations.

We have reduced our investment debt.

We have frozen our pension plan.

We reserved for open litigation.

We've substantially reduced our noncore investments and we have confidence in our cash flows.

More importantly, please rest assured that there are many valuable operating projects underway here at Gallagher.

All are directed at building a great brokerage and risk management company that will help us adapt and win in a changing brokerage and risk management world.

Back to you, Pat.

Thanks, Doug.

Toni, I think we're ready to go to questions.

(OPERATOR INSTRUCTIONS).

Sacket Cook, Menemcha.

A couple questions.

Just in terms of trying to get to the bottom of how much of the acquisition numbers that I find inside these results, I guess if I lift out the questions -- what is the dollar number of acquired revenue that I should be think -- has been recognized in '05?

And also, what is the dollar number that I should associate with the 10 acquisitions you closed?

And then is there -- maybe we can talk about -- is 50 million or 70 million, some type of number like that, a good number to focus in on as far as what you want to achieve in '06?

That is my first question.

This is Pat.

Let me talk about the '06 and I will let Doug address the actual numbers and the results.

We have never given any specific targeted guidance in terms of what we will do in a given year.

And frankly, we don't set a numerical goal for the year because each one of these deals is totally different.

I think historically, if you look at our historical numbers, you can do some interpolating if you want and project it out into the future.

Clearly, 2005 was a slower acquisition year.

However, we were recognizing in '05 some nice revenue gains from acquisitions done in '04.

So Doug, why don't you talk about the numbers a little bit.

There were two separate questions there.

Let me answer the last first.

We acquired approximately 33 to $34 million worth of revenue in 2005.

The prior year, the number had been around $80 million of acquired revenue.

In terms of what was recognized during 2005 with respect to acquisitions that had happened in the previous year, if you think about a laddering effect coming in, the number is about $70 million of what was recognized.

But there was a drop-off in the fourth quarter because we didn't do as many acquisitions in the early part of the year.

If you want to look at it this way, we did about $20 million a quarter in each quarter for the first three quarters and about 9 million in the fourth quarter.

I think that should answer your question.

What kind of dollar figure could I put next to the 33 to 34 million of acquired revenues?

In terms of --

How much you actually -- those are revenues -- those that you gave me, is that the -- 33 to 34, you said, was what was acquired in '05.

That was the revenue, so what was the cost of that?

What was the cost in terms of --

Did you pay 50 million to get 33 to 34 million in revenues?

That's -- I'm trying to --

Here's a general rule of thumb.

I don't have that number right in front of me.

We can work on it and I can get back to you.

But generally, what we are doing is we are paying seven to eight times pretax revenue.

So if these were generating about 25% pretax revenue, that would end up to a 1.8 to 2 times revenue-type number.

That is fine.

The second question was just to try to get some more meat on the stride you have made in reinsurance, which sounds pretty good.

And I guess the question is, number one, is what is the size of the reinsurance revenue base at the end of this year?

And what was the cost to recruit all these people or put that team in place?

I don't have the cost numbers right up at the top of my -- I don't have those numbers with me here today, Sacket.

But we have about -- we're approaching 80 to $100 million in reinsurance revenues in Gallagher Re.

We can tell you, though, that the reinsurance unit this year earned about $10 million less than what it earned in the prior year.

So when you're looking at the Brokerage Segment performance, there was about a $10 million year-over-year decline.

And that relates to the expense side, obviously?

Yes.

And just on the 80 to 100 million, what should that grow to?

I'm just trying to get a feel for what was at Gallagher before and what's new to Gallagher, so to speak, with these hires on the revenue line.

I don't think I want to give you a number on that, Sacket.

Jason Busell, KBW.

Organic growth of 4% -- nice improvement from the run rate of the prior quarters.

How much of that do you estimate was from some early rate movement and how much was just better production?

I think it was a nice combination of both.

We had some very good production results in the second half and in the fourth quarter, but we did, as I mentioned in my comments, see a moderation in the decline of the rates.

And the rates had been going down 10 to 12% through the third quarter pretty religiously.

And by the fourth quarter, that had moderated to more like 4 or 5.

Down 4 to 5%?

Right.

The reinsurance or the expenses, the charge to handle the plant [handling] for some runoff reinsurance clients -- I presume that size puts most, if any, future cost of doing that out of the picture?

What that relates to is all the former clients and contracts that we have today, an estimate of what it is going to take to run those off over sometimes as much as 25 years.

And I think I heard you mention that the two plants are idle.

Does that insinuate a 30 to 41% tax rates for the first quarter?

If we don't restart those plants or if we don't do a hedging strategy, or if we don't get legislative relief, yes, you would get into a high 30s effective tax rates.

For the quarter?

Okay.

For the quarter.

But again, I have to emphasize because the capacity of those plants -- there are some scenarios that we look at that we could restart these as late as June 1 and still end up having an effective tax rate for the entire year of 25%.

So what that means -- think about it this way -- we could sit idle through the end of the first quarter.

Our [book to] records would show a 35 to 40% tax rate.

Restart the plants after the quarter is done and you could even get into a situation where you would have a zero effective tax rate in a couple quarters, but the year levels out to be a 25% effective tax rate.

Meyer Shields, Stifel Nicolaus.

Quick questions in terms of your reinsurance book.

Can you break that down between property and casualty and sort of update us on what is happening outside of property reinsurance in terms of rates?

Yes, it is predominately property and casualty.

There is some A&H business in there, but predominately 95% of this is P&C.

The P&C market on the reinsurance side looks about like this -- if you are CAT-exposed, if you've got Gulf property exposure, and not just Gulf property -- if you've got quake, if you are even on the [Newmagis] Fault, you are seeing substantial rate increases, especially if you had a loss.

Aside from Gulf CAT-exposed, the property market is seeing increases, but not to the same level.

If you're CAT-exposed and you've had a bad loss, you're looking at 100%-plus if you are getting the reinsurance.

If you are not in those areas, you are still seeing increases on the order of 10 to 30%.

The casualty market, on the other hand, is flat to down.

One more question on reinsurance, if I can.

Is the growth that you're seeing from clients that are now buying reinsurance that had not been in the past, or is this new clients that you are attracting through this initiative?

Actually, it is primarily new clients.

And one last question, if I can.

If you look at the brokerage revenues, the split between commissions and fees seems to be swerving towards fees.

Can you sort of give us some insight into what is going on?

Yes.

You could look at that and say, is this some fashion of trying to replace contingent commissions or something like that?

That is not it at all.

What we are seeing is a gravitation to more fee accounts based on the fact that we are now operating in a transparent world.

Just to add on to that, Meyer, if you go back to the 20-quarter spread you see on the website, there has been a steady -- if you go back to the first quarter of 2001, for instance, we did $11 million in fees and have $55 million in fees -- so there's been a nice steady increase in our fee growth for five years now.

Dan Johnson, Citadel.

A couple, and thanks for answering the fee question.

The contingent reporting that was almost zero for the quarter -- how will we report that in 2006, presuming that the new acquisitions do have contingents, and if I recall, you can keep them -- I think, Doug, correct me if it is 12 months -- is that going to be reported in the way you spike it out?

Or will that be just reported up in I think just the standard commission line?

That will be -- any retail contingent commission that we receive for the foreseeable future will be shown as a separate line item in our earnings release and in the 20-quarter spread, and obviously in the SEC filings.

And the reason why is because you have to look at that as one-time revenue in that quarter, even though it is from an acquisition, you are right -- a year later, we won't be able to take those contingent commissions.

So we're going to break those out separately going forward.

Pat, any hope to bring this sort of bifurcated contingent commission market back to just a single market?

Well, that's a great question, Dan, and if I had a crystal ball I'd be able to answer it.

What we are seeing now is that the regulatory environment seems to be turning to other things.

And a year ago, I would have felt may be a little stronger about the fact that all contingent commissions would be changed in one fashion or another.

I think that the individual states have had a chance to digest this.

They have looked at it.

As you all know, contingent commissions have been around forever.

The insurance companies filing their annual filings with the insurance departments across the states have always broken these out and shown them what their contingent commissions are.

Many of us have been disclosing to clients for well over five years that they exist.

And I think what's happening is that most insurance departments and AGs are saying we really don't have that big a problem with them.

So I think we're for the foreseeable future going to live in a bifurcated market, and that is bifurcated from a regulatory standpoint, which I can't think of another industry that has to live with this, where there are a certain set of rules for the Big Four and a certain set of rules for the others.

And we'll just have to see if that changes over time or not.

Fair answer.

Thanks.

Doug, assuming we end up with one of the scenarios you lay out for the tax situation, assuming we end up somewhere in the middle, can we simply take a look at the pretax losses from the Financial Services estimate and kind of draw a midpoint in between those numbers?

So if you end up with a partial tax credit, just kind of splitting the difference on the tax rates between high and low, could we also do that on the operating losses, or is it not quite so easy?

Well, it is not quite so easy.

But linear wouldn't be too far -- some sort of interpolation between the two wouldn't be a bad way of doing it, Dan.

Also, if you believe, though, that there is going to be a hedged solution, then what you would do is you would interpolate between the two and then dropping what you think the cost of the hedge would be.

And then last, just two numbers questions -- the share count, although it's my perception that the acquisition environment has slowed down, the diluted share growth has accelerated.

I'm sure I'm missing something here.

Why is that?

And what are we thinking about share count growth into the next year or two?

This is Pat.

Remember, when we do acquisitions, we typically have the right to pay for the acquisition with cash and/or stock.

And we always want the acquired party to take a significant chunk of the purchase price in our stock.

You will recall that before the accounting change, we did all our acquisitions on a pooling of interest basis.

The reason for that is we want people all on the same page.

If you look at our 10-K, you'll see that we have a tremendous amount of stock-based compensation in this Company.

We want everybody in tune with growing to stock price.

We want everyone marching in the same direction.

So in this past, year as we were doing acquisitions and putting out stock, we were at the same time, for the first time in quite awhile, not buying stock back.

And that is where you get the drift in share count.

But Doug, do you want to talk about the numbers?

Yes, specifically, Dan, when you see the 10-K next week, I think you'll see about 900,000 shares that were issued in the part of acquisitions in 2005.

And in addition, as the stock price increases at the year end, the dilution calculation, using the treasury stock method, produces a little bit more dilution because the higher the price, the more dilution it produces.

So those two things, combined with the fact that we didn't do any share repurchases, is what is causing it to creep up.

Final question on the Australian new business opportunity that will kick in I guess this first quarter, the proposed margins on that business, how would they compare to sort of the aggregate GB margins?

I think they will be right in line with that.

I think they'll be right at the 18% level.

And this is a government contract?

Yes, the government controls the market for workers' compensation in Australia.

And this is an allocation of a certain percentage of the market for claim handling for workers' compensation in the Sydney area.

(OPERATOR INSTRUCTIONS).

Nik Fisken, Stephens, Inc.

Doug, on this syn fuel, can you kind of lay us out a schedule on what events are going to transpire or what you think will happen over the next couple of months, and when we should expect a decision?

Good question, Nik.

Like I said in my opening comment, what we're doing right now is, like I said, we have idled the two that are producing tax credits.

Right?

So those are just sitting there and it costs us very little to idle those plants.

Second of all, we are waiting to see whether we get Congressional relief for this phaseout issue.

We know that it passed the Senate prior to the them adjourning.

It had not been considered by the House yet.

And so now it will have to be reconsidered by both.

But we'll see where they get here in February.

So it is going to take us probably 30 days for Congress to get back and start working again and making some meaningful progress on this.

You heard in the State of the Union address last night that obviously clean energy was high on President Bush's agenda, so we will see if this -- since our clients produce environmental benefication, maybe there will be some legislative relief there.

At the same time, we are looking at hedging, both financially and operationally.

Hedge prices are not helped by increased oil prices.

So if we could get a drop in oil prices here a little bit, we might trigger a hedge and put it in.

But basically, you've got about 30 days of wait-and-see.

And we will see where we are.

I was hopeful to be done by now, but without any definitive Congressional action before the end of year -- it ultimately comes down to this -- I don't want to spend the money on a hedge if we are going to get it for free from the government.

So that's what we are waiting for.

So best-case tax rate, 25% for '06?

Best case, right.

And then for our three partners, Headwaters had three of their partners say stop production.

Are your three partners wavering at all?

There is lots of dialogue with our partners right now.

And then on the $0.10 charge in the UK, is that it, or are there some ongoing expenses related to this?

Nik, first of all, that's not just a UK charge.

We took a charge for our global reinsurance operations.

Application of this accounting principal just in the UK doesn't make sense to me.

And we have legal interpretations both here in the U.S. and in the UK, so we put the obligation up for our global reinsurance network.

Yes, I hope that is it.

And then on the operating expenses, if I just total it up, it was $88 million.

Just so I am crystal-clear on this, because it sounds like some of these can be viewed as one-time and some can be viewed as ongoing, like these leasing issues.

How much should that go down because of the one-time issues, if I just want to get rid of some of the one-time stuff in there?

First and foremost, there's two types of one-timers, just so everybody understands.

We incur a lot of one-time costs that are trying to build a better franchise, and then there are some one-time costs that they're just dealing with legacy issues.

I think it's probably a good guess, but if you went 50/50, you would probably be there.

And the other 50 that for good things that are going forward, we will look at that carefully as we put projects into the queue for the year and try to regulate that amount, too, a little bit.

And then Pat, on the 4%, going back to that, what was the key reason behind the strength?

Was there some specific line, recruiting, taking share from the bigger guys?

Anything you can point to?

We just had a -- we've had a very good -- you know, Nik, that the one of the things we talk about here all the time is nothing happens until somebody sells something.

And we are constantly pushing ourselves for new sales.

We just had a very strong new business quarter to finish the year.

And we were helped by the fact that the rates were not going down as fast in the fourth quarter.

Maybe to pile on to what Pat said there, too, Nik, our team out there in the field has been through a lot this year.

They have been trying to digest this [ABC].

They've been trying to digest the soft market.

And I think that as these things get behind them, they're getting out and doing what they do best, and that is selling business.

And so I have a lot of respect for the field, to be able to pull it up by the bootstraps and get back out there here in the fourth quarter, and they've done a great job at it.

Also, Nik, it is evidence that the people that we've hired over the last 18 months are performing well.

And those people are -- we're really watching every single one of them -- they were accretive to pretax in the quarter and in the year 2005 while they were dilutive to margin.

Paul Newsome, A.G. Edwards.

My questions were asked an answered, thank you very much.

Jon Balkind, Fox-Pitt.

Just a quick question on the expense side, and I guess this is for both of you.

I know, Doug, that you had been working hard on a number of initiatives, from real estate to purchasing to taking out costs in other ways.

Could you give us -- and I may have missed this in the beginning of the call, so I apologize -- but can you give us an update outside of the leasing commentary that you mentioned, where you're at in this process and what we can expect through '06?

Good question.

Like I said, when you look at the GB operations, you can see the sourcing efforts and cost containment exercises that we've been doing are pretty well rolled out in GB.

So you can see kind of the decrease in the operating margins -- operating expenses there.

And the Brokerage Segment is still being rolled out.

But there's lots of good project still underway.

There's still more to happen.

But I would guess by midpart of this quarter, it will be pretty well rolled out into the operations.

So 2006 will be the first year that you get the substantial benefit.

Remember, we have been spending a lot of money getting to that point, too.

So I am hopeful that you will start to see all of that starting to fall to the bottom line here in 2006.

And then one corollary.

I know legal and consulting costs have been running higher throughout '05.

Will this charge that you took related to legal matters encompass some of the stuff you were expensing on an ongoing basis through '05?

And how should we think about that?

No, it does not encompass it.

This is Pat.

The charge does not include the individual state efforts that are continuing to go on.

[Hani Sava], Viking Global.

Just a question on the contingents.

You have about 30 million of contingents in '05 that I guess will disappear fully in '06.

Now that I guess we are in '06 and you've started speaking to all the carriers, how much do you estimate you'll be actually getting back from the contingents, from the carriers?

That is a very good question.

I'm glad you brought it up.

I should have mentioned it.

We have very strong efforts underway to discuss and negotiate with our primary players, the insurance companies, an increase of upfront disclosed commission income.

We have about nine markets that we would have typically received contingent commissions from.

About five of those we have concluded our negotiations and we will be receiving additional upfront commissions.

The problem in telling you how much that will replace is that what's going into upfront commissions, which are still negotiable at the underwriting desk by each of our individual producers.

And so it's going to beat difficult to identify and it will be difficult to tell you a dollar amount that we're going to replace.

So I don't have a dollar amount for you.

I can tell you that five out of nine we have signed an agreement.

We have approximately 1 to 1.5 percentage points more on the subject lines of coverage.

Now remember, contingent commissions do not cover all lines of coverage that you place with a carrier.

Typically, risk management accounts and surety and the like are excluded.

So the subject lines of coverage, we're hoping to pick up about a point.

And we're still in that process.

So it's way too early to give you any kind of a replacement number.

And the 30 million is pretty much pretax profit in '05.

Is that correct?

Yes.

I just want to make sure that everybody understands what the -- in the financial statements, when you're looking at contingent commissions and the number that you're seeing, those are all the retail contingent commissions that we have.

Wholesaling and international contingent commissions that we're still taking are not in that number.

So what you're seeing in the financial statement of 28.8 million is retail contingent commissions, and so that is what you are seeing there.

Second of all, I want to make also a clarification on an earlier comment.

There was a comment with respect to the costs going on in the litigation.

Realize that we have set up in the litigation accrual an estimate of what it will take for external costs to settle the state and civil matters.

It does not include a provision for the time distraction and the people efforts and the internal people, their time, because when Pat answered that question, it does not include any charge for the ongoing salaries of branch managers or field people working with settling with the state.

One final question, if I may, just following on from Jon's question earlier.

The charge for the services, I guess for mostly the UK, but you're saying not only the UK, the 15 million or so -- would that have had any ongoing costs to the Company in the financial statements that would disappear in the future?

Or was that independent from the -- so I guess what I'm saying, will the current charge capitalize the future costs that you would have had?

Well, theoretically, if you'd never had a -- if you never lost another reinsurance client, that $15 million would be amortized off over a 20-year period or a 25-year period because there would be people working to settle those claims that would be charged against that reserve.

And so that would reduce our future costs because either way, it's at accrual.

But it would be over like a 20-year, 25-year period.

I would now like to turn the floor back over to Mr. Gallagher for any further or closing remarks.

Thanks, Toni.

Yes, I'd like to just make a very brief wrap-up remarks.

First of all, thanks again, everyone, for listening in this morning.

You know, sometimes it is the unforeseen things that can come out of the blue that really test your mettle.

In the past, whenever I was asked what kept me up at night, I had a laundry list of items, but never, ever did I think we would face the regulatory and litigation risks that we faced in 2005.

I am glad to say that I think we are successfully dealing with all those issues.

And hopefully, we should conclude most of them in 2006.

Clearly, our future is going to hold additional challenges.

None of us around this table can predict what they'll be.

But what I can say with certainty is that the Gallagher team, all of us, will have the fortitude to deal with them, to stay focused on building the best business in the insurance industry and delivering results to our shareholder.

Thanks very much for being with us this morning.

Toni, that is it.

Thank you for your participation, ladies and gentlemen.

This does conclude today's teleconference.

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