Arthur J. Gallagher & Co. (AJG) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

And welcome to the Arthur J.

Gallagher & Co.

fourth quarter 2007 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 meanings of the securities laws and are subject to certain factors and risks described in its filings with the 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 you host J.

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

Gallagher and Co.

Sir, the floor is yours.

Thank you Melissa.

Welcome everybody and thanks for being here this morning.

We appreciate your being on the call.

I'm joined this morning by Doug Howell, who will have some comments as well, as well as our general counsel and the division heads of our operating businesses.

This morning I will make a few comments on the fourth quarter and I'll comment on the year as a whole.

Doug will add some highlights, we'll more to questions and answers and after that I'll have a wrapup.

So, let me get started with some comments and color on the fourth quarter.

I am sure by now that many of you have seen the CIAB thats the Council Insurance Agents and Brokers, fourth quarter report on rates.

77% of the respondents to their survey, said that they were seeing decreases from 1% to 20% on accounts that were revenue sized from 25 to 100,000 in revenue.

And that really is right in our sweet spot.

We would concur with that.

We are seeing just -- rates softening across all geographics locations and in every line of coverage.

Its our belief that today's environment -- rate environment is every bit as difficult as what we saw in the late 90's.

If you think about it, we're now facing going into 2008, our fourth year of softening rates.

In spite of that environment, our retail brokerage business has posted good results in the quarter.

Our wholesale operations had a tough quarter with some businesses moving out of the excess and surplus market.

Our large property schedules were renewing at greater than 10% decreases in rates and we were burdened by some costs of new hires who have yet to have a positive impact.

This caused the brokerage segment to be slightly down in the quarter from 2006.

Our risk management segment had a terrific quarter.

Our new business was strong, retention remained well above 90%, claim counts grew year-over-year.

It was just a really strong year for Gallagher Bassett.

We also made a lot of progress in other areas of the company in the fourth quarter, and I will touch on four of those.

First, our financial services is almost completely wound down and Doug will add additional highlights in that in a moment.

Secondly, as you saw in our press release, we made the tough decision to sell our reinsurance operation.

It just became apparent to us, that in that quickly changing market we simply weren't going to be able to build the necessary scale to compete at the level that we really targeted competing.

We have parties who are interested in buying our reinsurance business, of course that's going to take time and will be subject to due diligence and closing.

As I said earlier, this was a tough decision but now it will allow us to focus our efforts on our ongoing core businesses where we believe we have a strong competitive advantage.

Thirdly we made eight acquisitions in the quarter.

And fourth, and finally, we recruited a new director in the fourth quarter and we are pleased that Dr.

Norm Rosenthal has joined our board as of last week.

Let me turn my comments to the full year results and these comments will relate to continuing operations.

Again, the brokerage business and our risk management business are working in a incredibly tough rate environment.

But on a combined basis, risk management and brokerage, which I have said to you many times is how we view the company, for the full year we posted 11% gain in revenue, 5% of which was organic, 8% pretax growth and a 14% growth in earnings per share.

Which is not bad, especially if you think about today's market.

I'd also point out something that I think is important.

Pretax profits for our company in our continuing operations, approached a $0.25 billion in 2007.

Our retail property, casualty and benefits operations grew nicely in the year.

Our benefits team had just an outstanding year.

We had 11.5% revenue growth, 3% of which was organic 13.6% pretax growth and a 1% EBITDA margin improvement, which is a solid result in 2007.

As we said in the release, these results were offset by some declines in our wholesale brokerage.

We believe our wholesale business is poised for a much better 2008.

During 2007, we closed a couple of offices and we hired some new people who have yet to validate.

However, you do have to remember that the wholesale business floats more directly with the rate environment.

The business has historically produced good margins for us, but growth can be tough when rates are falling and primary carriers are becoming more competitive.

We do have good scale in that business and we like being one of the bigger players in the business and as I said we expect better results in 2008.

Our risk management segment finished strong and had a great year.

Claim counts grew 5.4% year over year, we paid out more than $4 billion of our clients funds and claims.

Account retention was 95% for the year and our international revenue grew 25%.

The risk management segment on its own is quickly approaching a $0.5 billion in revenue.

So, if you step back to about 20,000 feet what you see is that three of our four operations, PC Retail, benefits retail and risk management had solid results in 2007.

Let me touch on two more items for 2007 and going in to 2008.

First, mergers and acquisitions.

2007 as you saw was a very good year for mergers and acquisitions.

We did 21 deals and brought in about $100 million in revenue which is a record for our company.

I always want to make sure that I welcome our new partners to the company and thank them for joining us.

All of the people that joined Arthur J.

Gallagher, had choices.

It's a competitive market for mergers and acquisitions..

The fact that they decided to fill their future with Gallagher, I think is a real testament to our strong and unique culture and for many of you who this is your first conference call, welcome.

I believe we are coming into an incredible merger environment, let me just have you consider a few facts.

Our belief is that there's something on the order of 25,000 agents and brokerages across the United States alone.

Thats firms not people.

Most of these firms are owned by baby boomers, people who are my age or a little older.

I'll be 56 next month -- and people into their 60's, they have to do something.

They have to capitalize their life's work.

It is tough to grow these businesses on their own when the market's as soft as it is.

In addition to all of our branch managers and regional managers we have six people who are dedicated full-time to identifying and bringing prospective partners to the table.

We have good relationships with the intermediaries in this space.

Over the next ten years, there could literally be thousands of transactions.

At Gallagher, we've built a core competence in acquiring these smaller firms.

We provide them with an excellent base to build their business.

Our niche marketing efforts, give them additional resources they can use to build their businesses.

These are people who want access to our capabilities, our markets and our global reach and our collaborate culture where team work is a reality -- helps them sell and that's really what we're all about, selling and servicing our clients.

Everybody at Gallagher understands that nothing happens until someone rings the cash register.

Second, and finally, we do believe we can operate our business more efficiently.

We are going to be very, very careful on any replacement hires and we are going to manage our operating expenses as tightly as we possibly can.

I believe that if we focus on our core businesses, continue our merger and acquisition activity and manage our costs we will be able to have a good growth year in 2008.

Doug?

Thanks, Pat and good morning, everyone.

I have five comments today.

First let me give four separate comments about financial services.

Number one, the fourth quarter was the last quarter we were eligible to generate tax credits from our section 29 synthetic coal operations.

Unfortunately, oil prices were at the peak for most of the fourth quarter which reduced the amount of tax credits and pretax revenues we get from these operations.

But in the end on a GAAP basis we earned enough from running the plants and hedging our costs to bring financial services in slightly above break even for year.

Further, on a cash basis we also covered the remaining depreciation and amortization of our projects and generated additional deferred tax credits that can be used over the coming years.

Number two, all of our section 29 projects have been wound down.

Between now and May, 2008, we'll wrap up some final housekeeping matters, make final cash settlements and begin dissolving the partnerships.

We do not expect these wrapup matters to have any significant financial impact.

Number three, at December 31, 2007, we have deferred tax assets related to our section 29 tax credits, totaling approximately $218 million.

This asset will be realized by paying less cash taxes in the future.

So, when you do your future cash flow models compute what you think we will pay in taxes then reduce your estimate by about $30 to $40 million for each of the next five to six years.

That way your models will reflect a reasonable estimate of the affective monetization of our deferred tax asset.

Also remember that the monetization of a deferred tax asset does not impact our effective tax rate.

Accordingly, like we say in the press release, expect our company wide tax rates to be in the 39% to 41% range in 2008 and later years.

Number four, many of you have asked what's left of financial services.

Over the coming year, the financial services segment will effectively evolve into a corporate segment.

Within the corporate segment we will continue to manage down the handful of remaining investments.

It will have about $26 million of interest expense related to debt and it will absorb about four to $4 to $6 million of direct administrative cost to manage down the investments and corporate overhead allocations.

Okay with my financial services comments done, let's move on to my second comment.

Like Pat said we had an exciting year in our acquisitions and the environment looks terrific in 2008, as sellers try to beat a possible increase in the capital gains tax rate that might happen after the November elections.

In 2007 we closed 21 deals and the profile of our merger partners is right in our sweet spot.

On average, each shop is about 5 million in revenues and each brings a nice group of successful insurance professionals that fit well into our culture.

These deals are about as close to organic growth as you can get.

In other words, not much difference between these tuck-in deals and hiring a team of producers or even investing substantial up front costs in growing our own.

I like our position as one of the few companies that have demonstrated a 20 year history of consistently doing deals.

We have the cash, we have the stock currency.

And we have the teams that have proven they can get it down and most importantly we have the culture that can hold it all together.

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

Like Pat said, the segment had a great quarter.

New business for the year was strong.

Lost business was at historical norms and most importantly our rising claim counts from existing customers seem to be stabilizing.

Further fueling the fourth quarter performance, was the receipt of a non-contractual May coal payment, that compensated us for under utilized staffing.

This helped us post a 14.4% margin for the year which is an improvement over 2006 and is progress towards reaching 15% margin target.

We believe the team is committed to further tune the operation to reduce costs, yet continue to deliver the best in class service and quality that Gallagher Bassett is known for.

Fourth, a few comments on our wholesaling operations.

There were several items in the fourth quarter that adversely impacted the financial performance of our entire brokage segment.

Most of these items came from our London wholesaler, that is experiencing the impact of a soft market, as London business is lost due to competitive domestic pricing.

In addition, our international wholesale offices did some re-tooling and hiring that resulted in about 2.3 million of additional costs in the fourth quarter.

For the year, margins in our wholesaling operations fell 4.6%.

Mostly as a result of the soft market, the devaluation of the dollar and the fourth quarter re-tooling costs I just mentioned.

For my fifth and last comment a few thoughts on our announced expense reductions.

We believer, it is highly disruptive to implement across the board layoffs.

In our decentralized model, it's much more manageable to let natural attrition reduce our head count.

Over the next few quarters, as attrition occurs, we will shift much of that work to our service centers and better utilize new technologies that have been under construction for the last couple of years.

In addition we have implemented other actions that should reduce the associated costs of our work force, including wage controls.

This action applies to our back office and doesn't impact our producer layer.

These actions however will not be easy as we honor our commitment to deliver high quality service expected by our customers.

Accordingly, it's too early at this time, for me to provide you with any meaningful estimates of expected cost savings related to these actions..

But I will say one thing.

Like Pat said, the market is unbelievably soft.

Accordingly, much of our hard work to reduce costs could be lost to the rapidly declining pricing environment.

I guess I do have one last comment.

Please don't forget that we have dramatic quarterly seasonality in our first quarter.

Please use the quarterly spread sheet we have at our investor relations website to help your build your 2008 quarterly estimates.

Okay Pat, those are my comments.

Back to you.

Thanks Doug.

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

Thank you, the floor is now open for questions.

(OPERATOR INSTRUCTIONS) Your first question is coming from Dan Farrell with FPK, please go ahead.

Hello, good morning.

Good morning.

Just, a couple of questions.

Firstly, on the M & A environment, can you talk a little bit about the prices that you're seeing deals getting done at?

Are they higher or lower than what you've seen over the past year?

No, I think pricing is pretty consistent.

We're spending typically somewhere on the order of 6 to 7.5 times EBITDA.

Okay.

And then just a quick question on the small wholesale business that you're selling.

How big is that relative to your total wholesale business?

It's less than a peanut.

It's very small.

Okay.

Okay, great, thanks guys.

Thanks Dan.

Thank you.

Your next question is coming from Alison Jacobowitz with Merrill Lynch.

Please state your question.

Hello.

Thanks.

In the brokerage segment it looked like the depreciation and amortization, if I saw it right, was spiked up a little bit this quarter versus the third quarter.

I just wanted to see if there's anything unusual in there or if that is the new run rate.

I'll let the guys dig for a number for you, Alison.

The amortization, of course, is going to increase as we do more deals.

Yes, on the depreciation side Alison, what you are seeing there is the amortization of some of our new I.T.

systems that we put in.

When I talked about the new general (ledger) the new HR system, the new expense and budgeting system, the new T & E system, so those are software costs -- development costs that we're amortizing.

But it is up a little bit, but it's not dramatically up.

Okay, thank you.

Thanks, Allison.

Thank you.

Your next question is coming from David Small of Bear Stearns, please state your question.

Yes, hello this is (Salsema) on behalf of David.

Hello (Salsema), how are you?

Not too bad, how is everything?

Good, thanks.

I just wanted to ask.

Can you please provide the -- I know you said you wouldn't be able to provide any -- the revenues intact (losses) from the reinsurance division.

I am sorry -- are you able to provide the revenues in pretax losses that the reinsurance division was seeing?

Yes, as a matter of fact in the press release on page three, we give you the last five years history of what our total discontinued operations look like.

There's a table in there on page three of the earnings release.

And that breaks out reinsurance specifically?

Yeah, sure there's some of the small Irish wholesale operations in there but I wouldn't worry about it.

Oh, okay.

Figure almost all is reinsurance.

Okay, great, thank you.

And we've been seeing in the news some information about office deflections and producer deflections.

Are you able to provide any additional color on that?

Let me give you a little bit of color on it.

In early December we had a number of employees leave our office in Pleasant in California -- San Ramon in California actually which is in the the San Francisco Bay area.

They left us to go to work for a smaller startup brokerage.

We believe that the manner in which these people left us was wrongful.

And so we have filed a lawsuit in federal court.

Now, many of you on this call know me and know that I would like to be a little bit more effusive in my comments here, I have some strong feelings about this situation.

But, in light of the fact that there's ongoing litigation, I'm not going to be able to give you much more information at this point.

I do think that it's important to note, that from a cultural standpoint, this is a highly unusual development at Gallagher.

I don't think this is something that you're going to see as a systemic risk at all.

We have have a very stong culture, we have incredible team work and this is very, very unusual in our company.

Any idea what's driving this?

I better not comment too much more at this point.

Okay, okay.

And my last question is just regarding M & A.

In this environment where organic growth is zero and but, you guys are still active in M & A buying companies.

Are you able to get the benefits of scales from these new acquisitions?

Well, yes we get some benefit but understand we are not doing acquisitions to synergize out a lot of costs.

These are professional firms that come to us on average about $5 million in revenue, there are some cost saves, but really what we're looking at is the opportunity to invest and to build these businesses together.

And what we bring to the table and what they bring to the table, when we're doing our due diligence, which is virtually all about culture, because numbers are easy to do due diligence on.

It's can the teams together make one plus one equal five?

Okay.

Great.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is coming from Brian De Rubio of U.S.

Trust.

Please state your question.

Good morning, guys.

Good morning, Brian.

I've got a bunch of questions actually.

We could just start off with one of more easier ones.

The acquisition or the (stake) purchase in CGM you bought 38.5%.

How are you guys going to account for that going forward is that going to be equity income?

Yes, Brian, we will pick up the equity in earnings (inaudible) as a single line item.

So, we won't get a revenue boost for it, but we'll get a pretax boost from it.

And was that included in the 21 acquisition number that you provided us or no?

The revenue of that company is not included in that, nor is the count included in that.

The employee count you mean?

No, the acquisition count.

Okay.

How can we get our arms around sort of how big is the company, what do they produce, or are you guys not really talking about that?

I think we can tell you about what they do.

They're basically an open brokerage in the Caribbean.

The one of the largest, not the largest independent broker there.

They have a good trading relationship with our London operation.

And we haven't disclosed the revenue related to that yet.

And we'll see if we disclose that in the 10K coming up in the next week.

But Brian, not a huge deal.

Not a huge deal?

No.

Okay.

Okay, on the employee head count number, the 9,100 that you had at the end of the year, does that include the employees that you are going to separate when you sell the divisions that you are going to exit from?

No.

That's just the continuing operations --

Employee number?

Employee number.

Okay and Doug, I know you said that you don't know what the expected savings would be from the reduction of force but you know, you announced 400 this year for natural attrition.

You had, I believe it was 100 in the third quarter through severance.

Can you just help us get our arms around what the per employee -- what these costs are?

Sure.

I think that if you look at our work force out there, between salary and benefits you have a range of anywhere from 40 to $75,000 a year, kind of an average for, what I refer to be the back office, which is the non-production layer of our work force.

So it's 40 to $75,000 per copy and we'll see where the attrition comes at which layers.

Okay.

And I know you know, I know you give us sort of the margin impact of some of the charges.

But can you give us the dollar amount of the charges this year that you spent on office closings and employee severance?

Yeah, I can do that math for you here.

I think that between the -- the brokerage segment, between litigation charges and office closures, the total amount is about almost 4 million.

Okay.

If you look at -- yes, I think that was the two -- that's the numbers you're looking for I think, isn't it?

Yes, that is.

Thank you.

I have a few, more but I'll go back in queue, let a couple other people ask questions.

Thank you.

Thank you Brian.

Your next question is coming from Chris Neczypor Goldman Sachs.

Please state your question.

Hello, good morning.

Good morning.

Just two questions.

I think your guys mentioned that in terms of hired producers you're not yet seeing the full impact from that yet.

How do you guys think about how, long once you bring someone on board, it typically takes for them to be earnings positive.

Those comments, Chris, were related to our wholesale brokerage operation.

Oh, okay.

And in that operation, we would expect the first 12 months.

that they'll be positive.

Got you, okay.

And then my other question is really from an industry perspective.

I was wondering if you could maybe comment on what you're seeing in the construction business given the -- your successful niche in Gallagher construction services, kind of what you're seeing from a production point of view and maybe also as it relates to the (inaudible) business as well.

Yes, it's a very interesting time for our construction team and we've got, what we think is probably the best construction team in the business.

They've done a terrific job.

Interesting time in that if you look at anything thats related to home builders you're going to have problems.

That's an industry that is really struggling right now.

But any contractors that are into doing infrastructure work have got literally a very long list of projects that they're bidding and opportunities.

So, our larger contracting clients that have sizable infrastructure type jobs are requiring a continuing -- a sizable amount of bonding and are getting a lot of work awarded.

So when you get into some of the smaller artisan contractors and the people that rely on the housing market, that's a different story.

Okay.

Thanks.

Thank you.

Your next question is coming from (Sacha) Cook of Diamond Back.

Please state your question.

Sacha Cook, you line is live.

Sorry about that, I just have a couple of questions.

How are you?

Good.

I am just looking at your supplement and since it is the first time disclosure on this discontinued, I was hoping maybe you could give me some color on what I am looking at here.

And I guess specifically, my question is, you reported losses in all four quarters this year.

Last year it looks like it's flat.

Maybe you can just talk to me about what I'm looking at.

Why don't I have Doug take you through the numbers if that is the question.

Yes, that would be great and --

-- Talk operationally -- I mean let me just make a few comments operationally.

If you look at the chart on page three of our press release, you can kind of get a picture why internal,y with numbers that we weren't necessarily sharing with the street we thought we had a chance to build this business.

You know we made money in 2003, we invested in teams and people and capabilities in terms of analysis and what-have-you, in 2004.

You can see our expense line jump in 2005.

That's from the addition of that staff and for modeling capabilities.

Followed nicely by a revenue jump in 2006 which brought us almost back to break even.

So, if you're standing in my chair -- if you are sitting in my chair at the end of 2006, you double down on this business and say we got some momentum.

But what we realized in 2007, is that the market was changing dramatically.

People were buying less reinsurance.

The reinsurance they were buying was going down dramatically.

The costs to compete on analytics and the like, was rising and we were caught in a position where we really had to take a hard look at this do a hard think and make a decision as to whether we could compete going forward.

Now, I'll let Doug take you into any of the questions you might have on the numbers.

When an operation is considered to be a discontinued operation under the accounting rules, you present it down below the continuing operations portion of your GAAP financial statements and you report the items net.

So, when you referred to the supplement, there is a -- we have this quarterly spread that for the last five years or so, that we post out on the website, in order to find the discontinued operations segment, you would go to the total company section.

Yes, I'm there now.

Okay and you should see that those numbers jive with the page three of the press release.

So, illustratively, if you go to 2005 and come down in there you see earnings and loss from discontinued operations before income taxes of a negative 15.5 million.

That number you can get -- I think I've got the right number -- you get that number from the face of the press release -- excuse me from the page three of the press release.

All right?

Yes.

And those numbers tie in there on the supplement.

So that's how you get -- if you want the gross presentation, you go to page three of the press release.

If you want the net presentation, you go to the supplement.

So, why was that number so large in the fourth quarter?

$8 million plus.

Why does that get jacked up in the fourth quarter?

Well, in 2007, is that what you're referring to?

Yes.

There was -- for the year we had about $8.8 million worth of losses for the year, right?

Yes.

Plus then you have the write off of the unamortized intangible assets associated with our reinsurance businesses and our Irish wholesaler of $9.5 million.

Okay.

So, you get the one time charge there.

Because, what happens is when you look at this, the accounting rules would say that you have an impairment on any of the intangibles if you market for sale.

And you record that impairment.

Now when we go to sell the business, at that time we'll evaluate any good will associated with it, we'll evaluate any cost to wind down leases and those amounts will be offset against any of the gain thats recognized on the sale of the operation.

How much good will do you have on the books for those operations?

I don't have that number.

I'm not giving that number out right now.

Okay and what's the situation as far as, you know, you say you want to sell it.

Presumably you paid people out for their 2007.

So, how do you get people to stay while you're trying to find a buyer?

These are professional people, these are people that trade extremely well in the business and they are people that a buyer is going to want on the team.

But they could be recruited directly by a buyer, you know, right now.

Well, if they're recruited directly, they are contracted with us.

They have non competes and there's problems with that.

Okay.

I was just wondering why the sale wasn't kind of announced today -- or what could you say about that?

Well I mean we've got a fourth quarter issue here, don't we?

We've made the determination we are going to sell it, we have to account for it in the proper way and we have to make the public announcements that we have to make.

Right, understood, understood, there's lots of rumors and stuff.

Thanks for taking my questions.

Sure.

Thank you.

Your next question is coming from Dan Farrell of FPK.

Please state your question.

Thanks again, just one other thing.

Can you talk a little bit about your current capital structure within the context of the M & A and share repurchase that you think you're going to be doing next year.

I mean, so, you've added the 400 million of debt.

Do you think we are going to see some debt pick up some more again in 2008 and how do you see all that playing out?

Here's the way it's going to play out.

Is -- we have lots of opportunities right now for -- to use our cash.

We think that our acquisition pipeline is -- you've heard us say it's just a terrific pipeline right now.

We're going to favor acquisitions to do that with our free cash.

We do have the ability to buy back stock in the market up to 10 million shares.

At -- time to time that we consider to be appropriate.

And we think that we've got good cash flows from our operation, we've have a good revolving line of credit that will allow us to borrow another $450 million if we see opportunities arise on that.

So, right now, we're comfortable with the debt that we have in (structure), we are comfortable with our revolver, we like the opportunities and acquisitions and we like the opportunities in our stock buybacks.

So, we'll just have to see how 2008 plays out.

Do you think you are going to be more opportunistic with your share repurchase or are you going try and put through some consistently each quarter?

Probably more opportunistic.

Okay.

Alright, thanks guys.

Thanks Dan.

Thank you, your next question is coming from Brian De Rubio of US Trust.

Please state your question.

Pat, I want to hit you up with another boarder question.

Gallagher Bassett sees a lot of the economy.

And, what are you hearing from those companies in terms of the economic outlook?

Are they concerned?

Are they not concerned?

Are you willing to commented on that?

I'l comment Brian, but you're asking me for an opinion and I'll also throw the ball to Rich (McKenna) if he has anything he wants to add -- who runs the division.

I think at this point in time our clients have had pretty much of a robust 2007.

But I think it's fair to say that all of them -- and remember the industries that are large industries for Gallagher Bassett -- transportation, hotel and hospital, you know, I think you see in all the airline business that we do.

So, between trucking, airlines, and hospitality, you have a very big chunk of Gallagher Bassett's business.

I will remind you that after -- in 2001, in 9/11 -- when 9/11 hit and people just hunkered down and didn't go to Las Vegas and didn't fly on airplanes and airlines were letting 20% of their operating staff go, GB took a real dip that took a couple of quarters to come back from.

So, your question is a good one, you know.

Are the clients worried about a recession?

The clients I'm talking to are worried about a recession.

Okay.

Thanks.

And just on the whole cost savings measure, who in the organization is going to be responsible for these cost savings measures?

Who at the end of the day is responsible for getting this through?

You know two years ago at the Merrill conference, you talked about hitting 20% margins and we haven't gotten there.

Not even close.

So, who's going to start taking responsibility to make sure these things get implemented and you start seeing the cost savings that you laid out today?

Well I mean, ultimately Brian, I'm responsible, but the operating team that I have sitting around this table right now have their assignments and their responsibilities, and you know, I'd like to see business just go up 15% every quarter and have a nice straight line in our earnings like that, but it doesn't happen that way.

And so we're looking at this every week, every day, what are we doing?

Where can we not replace a person?

And we're going just have to see what the business demands are.

Now, I'm am saying that I am going to be stingy on replacements.

If I've got an office out there running 35% margins, and they lose somebody we're going to replace them.

If I've got a Gallagher Bassett desk that we call a hot desk we're you've got tons of claims coming in, we are going to replace quickly.

So, it's -- it's really going to something that has to happen as back office personnel decide to leave, which by the way in a soft market our turnover actually tends to go down.

People tend to hunker down.

So, we're just going to see what we can do week in and week out.

You know -- and the last question that I have, related to cap structure but I mean, we're looking at a stock price today that's sub 25 it's the same stock price it was since September 2000.

What is the board's thoughts about what's going on with the stock price and how are you guys going to start creating value for shareholders.

It's been a long time since shareholders have participated in anything with the company.

Brian, I think that, you know, we take a look at the last five years, you've got a lot of issues there and the board is very well aware of those issues.

First of all, we lost our contingent commissions.

Today that would probably be giving us something on the order of $40 to $50 million of pretax profits that some of our competitors have not lost.

Stock based compensation is something that we've had to run through our veins over this past years.

If you go back to 2001, after 9/11, I think we have talked about this before, our price earnings multiple ran to 28 times earnings.

And it was unfounded exuberance in the stock at that point.

Everybody thought that the insurance market place was going to stay hard forever and ever and ever.

So, I guess the best thing I can do is tell you that, and I think most of you on the call know this, I don't have any other assets that are important to me.

This is it, this is what my family lives and dies on.

And, you know, having the stock go up is what everybody gets up and comes to work everyday to see happen.

So, we're not any more happy about five years of flat stock than you are.

Okay, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is coming from Mark Dwelle of Ferris Baker Watts.

Please state your question.

Good morning.

Just a couple of questions that haven't already been hit upon.

The mix of -- you provided the revenues with respect to the Gallagher Bassett business.

Is most of that fee or commission business?

All fee.

All fee, thank you.

And the second question really -- and I'm not sure how easily you'll be able to comment but I'd just like some sense of the thinking.

I mean obviously it was a big decision, I know you have put a lot of effort into trying to resuscitate and improve Gallagher Bassett over the last two or three years.

From a customer service standpoint what implications does that have for your regular brokerage business?

Mark, I don't mean to cut you off.

But, no, we have not been trying to revive and resuscitate Gallagher Bassett.

If you look at our risk management segment that's Gallagher Bassett.

I'm sorry.

I misspoke.

I meant Gallagher Re.

Yes, Gallagher Re, you're absolutely right.

So, again what was the question revolving around Gallagher Re?

I apologize.

From a customer service standpoint what implications does that have on your brokerage, your regular way brokerage business, the loss of Gallagher Re?

None.

Okay.

I guess I had always understood that part of the reason for improving and growing that business was to expand your possibilities on the regular brokerage side.

Well, no, I mean, what I always used to comment on is that the fact that the two work together, we would have a good opportunity to deepen our relationship with the insurance companies that we do retail business with.

I think that's probably what you're referring to.

But, now that we are not going to be doing that business, it really will not have any impact on our retail clients at all.

Okay.

That will be all my questions then.

Great.

Thank you.

At this time I would like to turn the floor back over to Mr.

Gallagher for any closing remarks.

Thanks everybody, again, for being here.

Brian had asked a question not too long ago about our results and its interesting to me.

When I look at 2007, it's the first time since 2004 that our operating results are actually greater in the year.

And you'll remember in 2004, that included retail commissions.

So, the contingent controversy of three years ago -- has taken us three years to grow out of.

And frankly, I believe we're back on a growth track.

Now, it's tough in this market, there's no doubt about it, it's a tough environment.

But if we stay very focused on doing the things we know we do well which is selling retail insurance, handling our clients risk management needs, focusing on the profitability of our wholesale operations and watching our expenses, we believe 2008 will be another record year for our brokerage and risk management operations.

So, thank you all for being here.

Thank you for your questions, we appreciate your time this morning.

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.