Arthur J. Gallagher & Co. (AJG) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Arthur J.

Gallagher & Co.

third quarter 2007 earnings conference call.

The call will be open for your questions following 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 its filings with its Securities and Exchange Commission which may cause actual results to differ materially from those expected.

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

Patrick Gallagher, Jr., Chairman, President, and CEO of Arthur J.

Gallagher & Co.

Sir, the floor is yours.

Thank you and good morning, everyone.

We appreciate your being with us this morning.

This morning I am joined by Doug Howell, who is our Chief Financial Officer; Walt Bay who is our general counsel, as well as the leaders of our business units.

As is our custom, I'll add some color to the quarter, turn it over to Doug for some comments, we will move quickly to questions and answers, and I will have a brief remark as a wrap up after questions and answers.

It's clear that the third quarter really illustrates how difficult our market is.

We continue to see just softening P.C.

rates throughout all coverages and all locations on a worldwide basis.

Make no mistake about it, however, I do think we can do better.

0% organic growth on the brokerage side is not what we expect from ourselves.

Results in the quarter were mixed in various operations, and so what I thought I'd do is just give five specific operations a little color on them.

First, our reinsurance brokerage business cost us just over a point of margin in the quarter.

This business has been subject to clients buying less insurance, in many instances not buying reinsurance at all, and to price declines on the reinsurance we have sold and renewed.

However, we look at this business as an investment.

We believe we are good at growing companies and we believe we have an opportunity to create a growing, contributing, competitive company in the reinsurance brokerage space.

We expect positive returns on the investment, and remain committed to building out this operation.

Secondly, our worldwide wholesale business is flat due completely to the soft market.

We really like the wholesaling business, it is highly profitable, but with no direct client contact, and with ENS placements moving back to the standard market, it is very difficult to post any organic growth.

This is a business that is going to float with the market.

However, I want to point out that in our London Lloyd's broking operation, we continue to see growth.

In fact, over the last six years we've been the fasting growing Lloyd's brokerage and as the Lloyd's market continues to expand we believe will see even greater opportunities there on the wholesale and the retail side.

Number three, our domestic property casualty retail business is really challenged by the soft market.

This environment just continues to get softer and softer month by month.

The counsel of insurance agents and brokers put out its third quarter market report this week and it reported that accounts over $100,000 in revenue were off, in many instances to over 20%.

We've had a lot of -- several meetings with insurance company managements over the last few weeks.

It is interesting because they realize the new business that they're writing is coming to them at terms significantly below expiring, yet if you look at the P.C.

underwriting business, they continue to post very, very strong results.

We all know that as surplus grows, so will the pressure on rates.

During the quarter, we did take a $2.5 million charge for severance.

This is related to about 100 positions in the P.C.

branch network that were eliminated.

In a soft market, you just have to be sure that each of your operations are sized correctly.

We know that we have to match our expenses to our revenues, and this is an ongoing part of our soft market play book.

Fourthly, Gallagher Bassett Services had a good quarter this service management segment.

If you normalize the operation for the one-time bonus we received in '06, revenue is up 9% and and all of that is organic, and pretax is just short of our 15% margin target.

I want to repeat that we've been telling you now for a number of years that that 15% margin is our target.

Gallagher Bassett is having a very good new business year and their retention of accounts remains nicely in the 90's.

Remember though, the claims business is very labor intensive.

The volumes are very high and our clients in this segment are demanding, large clients.

Our retention is good because our clients know we are providing a high level of quality.

You'll remember that this business has had an issue for the last few years on claim volume.

Our claim volumes on recurring accounts were actually going down.

Well, volumes look to be stabilizing and through nine months are up approximately 6%.

If volume continues to grow, this business is going to do well.

Remember, the volume is driven by new business as well as existing customer claim growth.

GB's international operations in Australia and the UK continue to show very good growth.

Remember, throughout the world, GB's efforts hit at the heart of the cost of risk for our clients.

In other words, their claims.

Fifth and finally, our benefits operation had an outstanding quarter.

For nine months, revenue is up substantially and pretax is up substantially.

Growth in our benefits operation is both organic and from a very good set of mergers and acquisitions done over the last year.

I want to congratulate our benefits team.

They've had just a strong nine months and I know that '07 is going be a great year for this team.

However, benefits only represent about 20% of the brokerage segment, so there is no way that they could offset the P.C.

market declines.

On the merger and acquisition side, we saw nice opportunities through the nine months and in the quarter.

In the quarter we did two deals, bringing in just short of $5 million of revenue.

Year to date, we've done 13 deals for about $55 million in revenue, and we expect to close a number of deals in the fourth quarter.

We're succeeding in finding partners in all three areas of our brokerage segment, retail P.C., employee benefits, and our wholesaling MGA operation.

The opportunities to attract good teams to the company have literally never been better.

Now, also, let me remind you, I also think our acquisition program is a little different.

These are nice, what we call, tuck-in deals.

It is as close to an organic hiring strategy as you can get.

Many of these deals are under $5 million in revenue.

Nonetheless, they bring solid insurance professionals to our team.

They strengthen our niches and help us expand geographically.

As an example, if you think of North Carolina as one example, we have done two deals in the mid Atlantic and we have many opportunities to spread there, a geographic location that we really had'nt been stong in in the past.

When we discuss with these firms why they joined Gallagher after they completed the deal, we are repeatedly told it is our culture and our people that make Gallagher attractive.

I want to welcome our new partners.

We're very, very proud that these firms joined us.

All of them had choices and they chose to join Gallagher.

Our pipeline is very strong.

2007 could be a record year, in terms of deals done and revenues joining.

We think 2008 will also be a very strong merger and acquisition year.

As you all know, we raised $400 million of debt in the quarter.

I want to single out our treasury team and bankers for a job well done and you should all know that we'll use this money to buy brokers and buy back our stock.

You'll remember in my second quarter comments that I told you that we had a good second quarter, but it was going be a tough six months ahead.

The market is soft, competition is fierce.

We look at the fourth quarter and we do have a number of opportunities for growth and we do expect to do better than 0% organic growth.

Doug?

Thanks, Pat and good morning, everyone.

Today, I have five comments.

First, some additional flavor on our organic growth.

Okay.

I assume that you remember in our second quarter conference call we told you there were some clients that slid their renewal date into the second quarter from the third quarter.

Well, as a result of that slide, that effectively reduced our third quarter growth by about a percentage point.

In addition, you should note that our reinsurance operations went backwards in the quarter for the reasons that Pat discussed and that also reduced our brokerage segments growth by another percentage point.

So, those two items alone cost us two points of growth and you can chalk the rest up to the soft market.

Second, oil prices increased during the quarter, which reduces the amount of tax credits and pretax revenues that we get from our Syn/Coal operations.

The press release has our fourth quarter guidance and I am sure that everyone knows that the fourth quarter will be our last quarter of our Section 29 tax advantage investment as the law expires December 31, 2007.

For my third point, let's go back to the risk management segment.

I want to remind everyone that we received a non-recurring service and quality bonus last year, and that makes a difficult comparison year-over-year.

We told you that the client restructured their incentive program and raised the bar.

It's not like our quality has diminished, they just simply raised the bar substantially.

So we told you then that the bonus would not be as lucrative this year.

As for overall margins, the team is working hard to right size our staffing model and claim counts from existing clients are stabilizing.

In the end, we made head way on improving our margins and year-to-day we are at 14.2%.

Recall, like Pat said, that our target margin is 15% for this segment.

For my fourth comment, in April, during our first quarter conference call, I told you all that we're investing about a full margin point on operation improvement initiatives.

Those initiatives will not begin to deliver productivity and efficiency gains until late 2007 or 2008.

Since then, some of you have asked for an update on our efforts so, here it goes.

First, our new financial system, such as a new general ledger, a new human resource management system, a new centralized accounts payable system, a new automated travel and entertainment expense system, and a comprehensive budget and planning tool are mostly up and running now domestically.

International will follow early in 2008.

Leveraging these new systems and harvesting our investment will take a good portion of 2008.

Second, our new document management system is up and running in a handful of brokerage locations and we remain optimistic about rolling this out over the next 15 to 18 months.

Third, we are well into rolling out our middle office and back office functions that can be done in centralized and lower cost labor locations.

Our centers are up and running and in production; however, the cost to run these centers is still redundant and will continue to be until we have a more widespread rollout later this year and into 2008.

Our rollouts continue to go well and our domestic retail brokerage operations are migrating as anticipated.

For my fifth comment, I want to provide some background on how we price acquisitions.

First and foremost, when we look at a deal, we spend a lot of time making sure there is a cultural match with our merger partners.

If we do not get that right, it ends up being a bad marriage and it really does not matter if we do a good job pricing it or not.

A bad match means a bad deal.

Fortunately, we've had very few of those.

Second, we price the deal using a standard capital asset pricing model using a discount rate that is higher than our cost of capital.

We run our models to meet our expected returns if we use cash, and it would not be dilutive if we use stock.

Third, it is important to note that we run our models effectively using proforma historical cash earnings, Let me re-emphasize this point.

We buy off of proforma cash earnings, not revenues.

Revenues are generally irrelevant when we price.

It is all about expected cash earnings and how those earnings will grow.

Our models remove non-recurring amounts from the target's historical results and include amounts in the future that the target will incur when it is a part of Gallagher.

For example, we exclude access owners compensation from the historical amounts and we include Gallagher's medical and benefit loads.

Fourth, then we debate over the growth rate assumptions.

Of course, sellers believe they'll grow more than we're willing to believe, so we neutralize the importance of that debate because nearly all of our deals have earnout provisions.

In the end, we want them to hit their earnout and we are happy when they grow like a weed and do hit their earnouts.

Fifth are other technical considerations, such as taxes and tax deducibility of good will, but to keep it short, I will not get into all of that right now.

In the end, when you boil all of this down, when you look at the last 60 deals we've done, this methodology results in us paying somewhere between six and eight times pretax earnings.

Okay, Pat, those are my comments.

Back to you.

I think we're ready for questions now.

Thank you.

The floor is now open for questions.

(OPERATORS INSTRUCTIONS) Our first question is coming from Keith Walsh of Citigroup.

Please go ahead.

Good morning, everyone.

First, for Pat, if you could just talk about brokerage organic revenue growth.

I think last quarter you talked about the impact of people shifting renewal dates was a positive impact.

Was that bigger than originally expected maybe in the second quarter?

And then I have a followup for Doug.

No.

I think it was probably about what we expected.

As Doug said in his comments, we figured it was about one percentage point.

Okay.

And then for Doug.

Just looking at the pace of share repurchase, what are you guys thinking about this going forward?

Are you going to be more opportunistic or is there a base case amount your're looking at every quarter?

No.

There is no base case amount that we look at every quarter.

With the remaining cash from our debt offering and the excess cash that's produced from operations, we'll be in the market buying stock and buying brokers as opportunities arise.

OK.

Thank you.

Thank you.

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

Please go ahead.

Good morning.

Pat, you've been through three cycles, I think you said, and I recall in some of the other cycles I've been through that as rates go down, there becomes a point where demand starts to pick up and commission rates start to go up and you hit a cross-over point where the pain sort of is offset by some benefits.

Are we anywhere near that point in your mind?

Bob, I will try to make sure I answer your question.

I think what you're asking is does there seem to be more demand from our clients to buy more insurance, number one, and the answer to that is yes.

As the rates come off like they are now, umbrella limits go up, you add marine coverages, the coverages that kind of came out in the hard market do tend to get sold.

I think the second part of your question is do underwriters at the same time begin optimizing their commission rates and the answer to that is also yes.

Yes, we are at that point now.

Our people know when they sit down at the underwriting desk that when they start talking about premiums, those premiums are coming down.

The nice thing about having your sales force paid basically on the commissions that their book of business is our interests are completely tied together.

They have the opportunity to negotiate with that underwriter account by account on commissions and they do the best they can to optimize the commission on each account.

Now, remember, we are in a new environment in this cycle that we've never faced before and that is we're transparent.

So, you're not going see commissions be ludicrously high.

You're not going to be able to go to a client and explain that you just figured out a way to get 33% commission.

That's not going to happen.

I'm not suggesting that is what happened last time.

All I am saying is that there is a natural balance now as clients take a look at basically signing off on our revenue account by account.

OK.

And lay offs, I don't remember you guys doing it to this extent.

I always thought you were sort of a pretty tightly managed company from an expense structure.

Do I misremember that?

Is this something to tap into other cycles to this extent?

Bob, we have many, many times right-sized individual operations.

It is not counter cultural for us to look at a situation and say we have to reduce head count.

I would say that in terms of collectively taking about 100 heads out all at one time, this is one of the first times we've done that.

OK.

Thank you very much.

Thank you.

Thank you.

Our next question is coming from Brian [Durubio] of U.S.

Trust.

Please go ahead

Good morning, guys.

First question is for you, Doug.

Does the company recognize any supplemental commissions in the P&L this year?

Yes.

We recognize supplemental commissions as we receive them, whether they are received locally or whether we receive them nationally.

We do not accrue for them.

Okay.

So you basically recognize them on a cash basis?

That is right.

OK.

Second question is for you, Pat, and I want to talk about Gallagher for a bit.

You've been telling us for the last two or three years that there is a calling or a need for another choice on the reinsurance brokerage side and insurance companies want this.

Let's be honest.

Actions speak louder than words and you haven't been getting the revenues to make that business and, in this case this year, break even.

So, how much longer are you willing to invest in this business if the insurance companies quite frankly are just not giving you the business you need?

Brian, that's a very, very fair question.

I am sure you can imagine that is a question that we discuss very actively with the board.

I have to tell you that we just really believe that there is an opportunity there and part of it is that the dialogue that we are having with senior insurance company management continues to tell us that there is a hunger for another choice.

Your comments are well taken.

Remember though, this is also a business that the deals are very large and so if we can a little bit more traction -- and part of the problem here is we've had some very, very nice accounts that when they looked -- when the insurance companies looked at their on results, decided to take it all net, and when they stopped buying the insurance, it is not a vote of no confidence for our reinsurance team, it is a capital management position by that company.

Theoretically, as rates start to come down you would expect demand for reinsurance to go up.

As these people begin to recognize that the book of business they're writing is not likely to have as much profitability as it had when they went net, we would expect again to see demand for reinsurance come up.

You don't need a lot of deals to make this thing break even and break into the black, which is a nice thing.

At this point in time, we're committed to seeing if we can't build this thing out.

These things can take time, and we recognize that we have been at it for a couple of years and we are not thrilled with the results.

OK.

I guess, just finally, Doug, back to you.

What do you think is just the appropriate level of cash that you guys should be holding longer term?

You have $351 million on the balance sheet.

Your're going to get the benefit of the DTA next year, so as I'm thinking about cash deployment over the next year or two, is the -- Pat you can talk about this, too, is the pipeline for acquisitions that large that you can see spending between dividends, buy backs and acquisitions somewhere in the $300 million range over the next 12 months?

Working backwards on your question, Brian, the answer to the last piece is, sure.

We could spend that money easily on that.

Second of all, how much cash do I feel like we need to have in the banks?

Not much.

We have a $450 million line of credit that is fully there.

We can pull it down any time.

I think we can run it fairly close to the bone on that and not have -- we don't need a lot of cash in the banks to run the operation.

We're a low CapEx company.

There are not major initiatives out there that consume a substantial amount of cash, and there are great opportunities to buy brokers right now and so we will do that.

Okay.

Great.

Thanks, guys.

Thanks, Brian.

Thank you.

Our next question is coming from Meyer Shields of Stifel Nicolaus.

Please go ahead.

Thanks.

Good morning everybody.

Doug, can you give us some guidance in terms of how long you think it will take to ammoritize a deferred tax asset?

Half of it will amoritize over four years.

Another -- we'll always probably have a deferred tax asset just because of the nature of our operations, somewhere in the $125 to $150 million range, something like that, probably closer to $125.

So, there is $200 million there that we will ammoritize over four to five years.

Thanks.

Pat, can you update us on your thoughts, in terms of international expansion or international M&A?

Yes.

I'll be glad to.

First of all, a lot of people don't realize we have about 11% of employees and about 11 or 12% of our revenue that is international right now.

We are located in the UK, Bermuda, Canada, Australia, and Singapore.

We are seeing some real opportunities, in terms of being able to expand that, from a number of situations.

Number one, as I mentioned in my comments, we've done a good job of building out and growing our Lloyd's broking operation.

The Lloyd's market has really come back to life.

I don't know how many applications there are now at the franchise level, but there are a lot of people that want to open additional Lloyd's syndicates.

So, the opportunity to grow in the UK looks like it's going to be very, very strong in the future.

Gallagher Bassett Services we started in the UK serving the public sector.

About half our revenue now in the UK comes from the public sector and the other half comes from commercial.

Our operations in Australia are outstanding.

As you know, we trade with various independent agencies throughout the world.

And as we predicted, what we're beginning to see there are opportunities to take up pieces of equity or buy whole firms in countries where we have had people representing us for many, many years, and we're going to go cautiously there.

We recognize as we go outside the United States and we build partnerships and buy equity and buy firms that it is not the United States, it's not the UK, it's not necessarily Canada, we have to be cautious, but we do see some great opportunity to expand our international footprint.

OK.

Thank you very much.

That's helpful.

Thank you.

Our next question is coming from Mark Dwelle of Ferris, Baker Watts.

Please go ahead.

Yes.

Good morning.

You commented in the press release related to the Syn fuel assets that you will complete your ammoritization of these by the end of the fourth quarter.

Is there any potential for recovery of those assets beyond that?

What do you do, just hand over the keys to somebody at the end of the fourth quarter?

The answer to that is yes.

We basically sell them back to our partners for diminimus amounts.

Most of these -- just remember most of these assets that have been ammoritized are intangibles associated with setting up the assets.

The actual hard equipment is not that -- was not that much of the original expenditure.

It was mostly insurance, professional fees, origination costs that go along with it.

So, at the end of the day, you basically have got a small little boxcar-sized plant and a slab and maybe some heavy equipment that moves the coal, a conveyer belt, and that's generally stuff that the utility will use or scrap for us.

So, our utility partners in that will take that equipment over.

Is there any ongoing environmental liability or similar such long tail out liabilities that you could remain on the hood for beyond that time period?

There is always somebody that could assert that, but we don't believe we have that exposure.

OK.

The second question is just a numbers question.

You bought back a substantial amount of stock in the quarter.

How much remains on your current authorizations?

Five million.

Five million?

OK.

That is all my questions.

Thank you.

Thank you.

Our next question is coming from David [Billick] of Sound Shore.

Please go ahead.

Good morning.

I was just wondering if you could you talk a little about your confidence going into the fourth quarter?

It seems that you feel that you should be able to get organic growth going positive again?

Is there anything in particular that you're doing or is it something within the market?

What areas would you expect to perform better in Q4 versus Q3?

Well, David, let me just make a general comment.

We never expect 0% organic growth.

This is a sales and marketing team.

Everyone around my table right here came up through the sales and marketing part of our company.

It is very tough out there.

Don't let me understate how difficult it is.

We have a number of good things that are going on.

We had decent organic growth in the second quarter.

The third quarter is a large quarter for us.

We did not have the organic growth we were hoping for.

The market really did present quite a head wind.

My comments aren't because I see specific orders on the horizon, its just that I believe the team can perform better than this and that's what we hold ourselves accountable to.

Do you feel that you lost share in the quarter or is it simply an industry-wide issue?

I think it is an industry-wide issue.

OK.

Thanks.

Thank you.

Our next question is coming from Chris Robertson of Cardinal Capital.

Please go ahead.

Please go ahead.

You there, Chris?

Hi.

I had a couple questions for you.

Financial services division, is that something that the entire segment will go away once we hit the end of the fourth quarter, or are there any operations there that will be continuing on?

And, specifically to that division, you might have addressed this with the previous caller, but are there any other assets that you have on the balance sheet that could result in any one-time gains that we would see from a cash flow perspective?

I think what I would do is a couple of things.

First of all, the financial services segment will basically morph into a corporate segment.

We will have some remaining assets that still are the remnants of the financial services segment.

Those assets are shown in the press release on the investment exhibit, so you can see that.

So, basically, our investment and asset alliance, we have an energy pipeline that we own 25% of and a couple small investments in third party money managers that have been around for quite a while.

By and large, anything to do with Section 29 credits will be gone on that.

If you see that in the press release, those will be gone.

What will really remain are the investment gains and losses that might arise from our investments in asset alliance.

From the pipeline, some of the smaller fund managers.

The interest on the debt and there will be an amount of corporate overhead that is in the corporate segment.

That is really what will remain.

There are other assets that are in our portfolio that if they were to show value or recovering value, even though there are some zero value investments in there, those amounts will go through the corporate segment.

I think that those other assets as of the second quarter Q were around 42 million for current and 27 million for noncurrent?

Does that sound about -- ?

Actually, If you go page 8 of the press release, asset alliance our carrying value on that is 18 million of which 8 million will be repaid to us in January of 2008.

That will be $10 million worth of carrying value.

The equity interest in a biomass project and pipeline is about 9 million.

That will be there.

And then the real estate venture capital and other investments, that's about 8 million, will be there, too.

I am picking the numbers off of page 8 of the press release.

That will be what is remaining in the corporate segment of the carry over financial services assets.

Now realize, we also have other assets that have a diminmus value carried in the balance sheet that may develop into value at some point, but they have little carrying value on the books right now.

Got it.

And when do you expect to put out a Q with the -- I didn't see cash flow statement anywhere?

Q will be filed later today or tomorrow.

Probably tomorrow morning.

Okay.

Thank you very much.

All right.

Thanks, Chris.

Thank you.

Thank you.

Our next question is coming from David Small with Bear Stearns.

Please go ahead.

Hi.

Good morning.

I am just trying to understand as we move forward here and the cycle continues to soften, do you have initiatives in place so that you could actually expand margins if organic growth remains in the kind of the 0 to 1% range?

I think the answer to that question is sure, there are always ways that we can become more efficient.

And I think that we have opportunities.

I said in the call, we are investing a substantial amount of money right now in becoming more standardized to use centralized systems, to use some lower cost labor locations, so there is opportunities to improve margin in a flat organic growth environment.

It's tougher, certainly, if you don't have any organic growth, but certainly over time, as we do acquisitions, the franchise becomes larger, economy scale can be brought to those acquisitions.

And just our own internal operations can be made more efficient.

I will say that Gallagher as an organization is not top heavy with respect to a significant amount of corporate expenses.

In my experience, we just don't have that big of a corporate staff and our back office functions are pretty lean.

It sounds like near term it would be hard for you, if organic growth is low, we would not expect to see margin expansion until perhaps '08/'09?

Those are things you could work on.

There are things that we're working on hard.

Let me remind you, we are in a time right now where inflation and things like gasoline prices, airplane tickets, hotel rooms, our own people, it is still a fight for talent out there.

When you've got a top flight account assistant in a branch or something like that that leaves and goes someplace else and we have to hire someone to fill in that desk that I might call being on fire, sometimes you're going to pay more.

So, it is difficult in a 0 organic growth environment to be improving margins.

Two other just numbers questions.

Just so when we think about the share count for next quarter, how many shares are set to enter the share base in association with acquisitions or earn outs in Q4?

Very small number.

OK.

And then on the work force side, and I miss ed the very beginning of the call, so I'm sorry if you've covered this, how many people were hired throw acquisitions and how many were let go during the quarter so we can just kind of get the flow there?

I mentioned in my comments that we let about -- we took about 100 positions out of our P.C.

retail operation in the quarter.

In terms of how many people we brought aboard through the acquisitions, I don't have that number in front of me.

Okay.

Great.

We might have it by the end of the call.

Let's see if we can find it.

Thank you.

Our next question comes from Chris Neczypor with Goldman Sachs.

Please go ahead.

Hi.

Good morning.

I actually just have a head count question as well.

The number that's in the supplement XL supplement 9165, do you have that split between the brokerage and the risk management section?

You are talking about numbers that when we give head count numbers?

Right, right.

Or, easier asked, what is the work force number specific to brokerage?

Let me grab the number for you.

I can give it to you this way.

In our risk management segment we have about 3800 people and the balance would all be in the brokerage segment.

Okay.

All right.

Thanks.

That's helpful.

Pat, we are hearing some commentary lately about terms and conditions and certain parts of the market getting pretty lose and I know you characterize the market etting softer and softer.

I was hoping you would pine on what you are seeing from a terms and conditions perspective.

Do you have any examples that you could share that might help us understand where the market is going at this point?

Terms and conditions are clearly loosening.

The underwriting community is trying to hold on to premium.

They are willing to reduce deductibles including in places where you've got wind exposed -- catastrophe-exposed property.

Reduced deductibles to try to maintain premium.

Expand casualty covers, if that is requested to try to hold on to premium.

In terms of terms and conditions, the stories are anecdotal so please don't run a model off them.

They can be all over the board.

We had a very nice prospect just here in the Chicagoland area, a very solid upper middle market prospect.

This past week we thought we were going write it.

I was down talking to our P.C.

guys this week.

We were pretty confident in this account and felt we had really gotten an underwriting company to understand they could reduce the price.

The incumbent, who is our competitors incumbent, halved their premium.

They cut the premium in half.

We missed the target on the account by almost $100,000.

You look at that and go holy smokes.

And at the same time maintained and expanded coverages.

That is a one-off anecdotal story so you can't be applying a 50% discount across the market, but it shows you the kind of flexibility available at the underwriting desk when someone puts his foot down and says I'm not losing this account.

It's a great account.

I'm keeping it.

If I got to slash it, I am slashing it.

That's just going on throughout the market.

OK.

Thanks.

And then a question I've asked in the past, are you seeing (inaudible) actively competing or making new entrance into the places you've typically -- in the middle market where with given their new initiatives and given where your historical strength is?

It is interesting.

They have never been out of the middle market.

They have announced initiatives to expand their middle market.

It's fair to say that we've competed against them in the middle markets for years and years and years.

We're feeling no impact from their newly announced initiatives, if that's the substance of your question.

Yes.

OK.

Thank you.

That is helpful.

(OPERATORS INSTRUCTIONS) Our next question is coming from Meyer Shields of Stifel Nicolaus.

Please go ahead.

Thanks.

If I can follow up on Chris' question, can you compare the interbroker competition, specially from (inaudible) that we're seeing now and compare to that the way things were during the last soft market?

Specifically, Meyer, you want me to comment on [Martian Aons] intercompetition among themselves?

No.

The impact that the competitive forces that those companies are having on the brokerage world.

They are two very sizable competitors that are two very substantial competitors.

These are well run companies that have very, very good brokers and, as I said earlier, they have never been out of the middle market.

We have competed with [Marsion Aon] and their predecessor companies, J&H, Sedgwick, Alexander, and Alexander Frank B.

Hall throughout my 34-year career.

What I would just do is what I said before, I don't see any of the new initiatives causing us any more pain.

It is a competitive market.

We compete very heavily with the regional brokers, local brokers as well as [Marsion Aon].

Let me ask it from a slightly different perspective.

Is it any more difficult now than a year or two ago for Gallagher to penetrate the large corporate accounts?

What we've said many, many times in the past, Meyer, is we are a very good risk management company.

Let's not forget, it is self-insurance and large accounts that, in essence, put this company on the map.

We got into self-insurance I like to say before self-insurance was cool.

I look at this and go, we've always done a very, very good job in the risk management community.

By item count, we don't have nearly the market share that [Marsion Aon] has.

Yet, when we compete with them on a risk management account, we show very, very well.

Again, by item count, if you look at retail P.C.

operation, and a large part of this is because, remember, we're doing so many acquisitions.

By item count, we're an upper middle market broker.

That's where most of our business is.

OK.

And one last question, if I can.

If you compare commission growth to fee growth, specifically within the brokerage, fees are holding up better.

Is that because the rates -- revenues are less tied to rate levels or are you trying to shift clients to fees?

There is a little bit of both.

The fees that have been agreed -- remember as a company, we have always been very comfortable working as a broker on a fee.

If a customer prefers that, we have never had a problem with that.

And, yes, those fees are clearly more stable.

And then there is also some shifting from straight commissions to fees because they are more stable.

That would be a Gallagher generated initiative?

We can have them go either way.

Yes, our production force will oftentimes generate that discussion now.

OK.

Thank you very much.

At this time, I would like to turn floor back over to management for any further or closing remarks.

Yes.

I have a quick wrap up.

Thank you for your questions.

I am -- I am very proud of the sales culture of this company.

Everyone on the team is expected to be a part of the sales effort.

We are out every single day working hard for new business and doing everything we can to hold on to clients.

Make no mistake about it.

Our people are working very, very hard.

The market environment is presenting a real challenge to organic growth.

Nonetheless, we believe we can do better and we expect to do better than 0% organic growth quarter in and quarter out.

We also, as you know, are focused on acquired growth.

Our opportunities in the merge and acquisition arena are as good as they have ever been.

So, we're working hard, the team is focused, and I do hope to finish with a stronger fourth quarter.

Thank you very much for being with us.

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.