Arthur J. Gallagher & Co. (AJG) 2009 Q2 法說會逐字稿

Good morning.

And welcome to the Arthur J.

Gallagher & Company 2009 second quarter earnings conference call.

(Operator Instructions)

Some of the comments made during this conference call, include answers given in response to questions may constitute forward-looking statements within the meaning of the Securities laws.

These forward-looking statements are subject to certain risks and uncertainties described in the Company's report filed with the Securities and Exchange Commission.

Actual results may differ materially from those discussed today.

It is now my pleasure to introduce J.

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

Gallagher & Company.

Mr.

Gallagher, you may begin.

Thank you Rob, and good morning, everyone.

Thank you for being with us this morning.

We appreciate it.

Welcome to our second quarter conference call.

I'm joined this morning by Doug Howell, as well as the operating heads of our operating divisions.

I'll make a few comments.

Doug has some comments, and we'll move pretty quickly to questions and answers.

I have a number of areas -- pardon me -- that I would like to add color to our press release.

Six specific areas I want to touch on.

The first is the quarter.

Secondly, mergers and acquisitions.

Thirdly, contingent commissions.

Fourth, the property casualty market.

Fifth, Washington and healthcare reform.

And then lastly, just a comment on our internship.

So let me start with number one, I'm pleased, very pleased with the results in the quarter.

We overcame some pretty strong headwinds to post a 6% growth in revenue, and a 10% growth in EBITDA.

For six months, we have fought through declining rates, tough economy and the loss of investment income on the funds we hold, and yet revenues are up 7%, EPS is up 15%, EBITDA is up 24%, and we have actually expanded our margins 2.9%.

Much of these gains have come because we have strong expense controls in place, and our people have responded to the need to cut back.

I appreciate all of my colleagues efforts to help us reduce our costs.

This is a very tough time, and I am proud of how our people are handling all these cost containment efforts.

Secondly, mergers and acquisitions.

The Liberty Wausau deal, which is the largest deal we've done is really about tucking in about new 250 employees into 42 separate locations.

Our -- teammates are now aboard.

They are doing a very good job of managing their accounts, and are very active in seeking new business opportunities.

And we can now really comment that these people have been a great cultural fit.

As I always do I want to welcome our new merger partners.

The new merger partners always have choice when they are about to merge, and we are happy that they've chosen Arthur J.

Gallagher & Company.

So welcome and thank you.

While merger and acquisition activity has slowed down somewhat given the economy and the rate environment, we closed nine deals this year.

And we continue to see opportunities to do acquisitions, in particular the tuck-in acquisitions that we like.

Our pipeline remains very, very full.

Our acquisitions strategy has been an integral part of our growth, and we will continue to pursue firms that have a strong cultural fit with Gallagher.

Thirdly, on page two of our press release we announced that our agreements with Illinois authorities has been amended.

This amendment will allow us to once again to accept contingent commission.

I am very happy to be back on a more level playing field with the majority of our industry.

This agreement will obviously help us with our merger and acquisition strategy going forward.

We remain committed to full transparency.

I've said that I believe in transparency, and as long as our clients and Arthur J.

Gallagher discuss openly and agree on our method of compensation, I don't care if care if it's fee, commission, or combination of both, that resolves any conflict.

The majority our competitors have not embraced transparency.

But we believe that an open, professional relationship fosters trust with our clients.

In fact, we've seen that in the years that we've been transparent.

On an annualized basis with a full years of agreements, we believe this amendment would mean approximately an additional $10 million of EBITDA for Gallagher.

Fourthly, the property casualty market remains very soft.

The Council of Insurance Agent and Brokers survey that just came out in the last couple of weeks noted that rates were off again in the quarter an average of 4.9%.

And when you couple this with the economic recession, it is really tough to show growth.

Our team remains very focused on new business.

Every day we are out taking care of clients and pursuing new ones.

Our sales culture is strong.

And after all, this is what we are all about.

I consider myself, and everyone at Gallagher as part of our sales effort.

Fifthly, let me just spend a brief moment on health care and the initiatives in Washington, DC.

As a Company, we do support expanding coverage to those who truly don't have access.

However, we are not in favor of a public plan, that we think will ultimately lead to one governmental plan.

We are watching this closely.

We are involved in Washington, yet it is too early to judge and it's too early to report to you what the impact of this legislation could have on Gallagher.

Sixth and last, our internship is winding down.

This is always a sign that summer is coming to an end.

Even in these tough times, we continue to invest in our future.

This summer we had 150 interns spent their summer learning about the world of insurance, and about Arthur J.

Gallagher & Company.

I was very, very impressed with this year's class, they are bright.

They are full of energy, and I am hopeful that many of them will some day be full-time colleagues.

Doug, your comments?

Thanks, Pat, and good morning everyone.

Today I have four comments.

First, a housing keeping comment.

We intend on filing our 10-Q later this week, and don't forget to use the quarterly spread on our website that shows trends and seasonalities as you build your models.

Second, a three part comment related to acquisitions.

Part one, but that said we closed Liberty Wausau deal on February 27, 2009.

Our teammates are doing great, and we now anticipate that we can see $4 million to $6 million in EBITDA contribution from the deal here in 2009.

And we still feel comfortable estimating that the deal will generate $25 million to $30 million of EBITDA in 2010.

Part two, while we closed another six deals in the second quarter for $11 million of annualized revenues, you can see that we are favoring smaller, tuck-in like deals.

We don't anticipate as big an M&A year in 2009, as we had in 2008.

We'll continue to use a mix of 25% cash and 75% stock in the near future.

Part three.

If you look carefully on page four of our press release, in the brokerage segment P&L, you'll see a new line called change in estimated acquisition earn out payables.

That number arises because of the new accounting for acquisitions pursuant to Financial Accounting Standard 141R.

Under 141R, we now booked a present value of the estimated future earn out obligation as a liability in our balance sheet, and any changes in that estimated liability will run through the P&L.

There are two types of changes that will run through the P&L.

The first one is effectively interest accretion, and the other is any change in our estimate of the ultimate earn out payable.

Quarter-to-quarter, the accretion should be fairly predictable, but unfortunately the changes in the ultimate earn out amounts may be sporadic and may introduce volatility into our earnings.

Please note that in this quarter the number you see as interest accretion, there were no change to our estimated future ultimate earn out payable, and also note that these changes won't impact our EBITDA computations.

Third, you'll see in the corporate and financial services segment, highlights on page three, that we are making some modest investments related to Chem-Mod, which is one of our two remaining clean energy investments.

We've owned Chem-Mod for years and it's technology has consistently reduced harmful emissions, in both laboratory and full-scale tests, but to push Chem-Mod out of the testing stage and into the commercialization stage, it is at the point where it needs to have a permanent facility and full-time production at a commercial facility.

Generally speaking, utilities are motivated two ways to reduce emissions.

One is new and more restricted regulations, and the other is financial incentives.

While emission reduction regulations has been slow to develop.

Last fall congress did favorably modify IRC Section 45, thereby offering financial incentives via tax credits to early adopters.

To capitalize on these tax credits, the facilities must be in production by the end of 2009.

Accordingly, we are working with Chem-Mod, and several possible utility partners to see if we can get one or more facilities in place by the end of the year.

Then after we get them up and running we will look at the economics at that time and we may choose to sell part, or almost all of the facilities.

My fourth point relates to expense savings.

Its clear to see that we are well into the harvest phase of our cost containment initiatives.

And we still anticipate harvesting about $25 million to $30 million in 2009.

As a wrap up, despite of a struggling economy and a soft market, we are pleased with our financial performance.

Our teams are working hard to control expenses, control headcount, and are energized as they look for additional revenue opportunities.

Okay, Pat.

Those are my comments.

Rob, if you will, we'd like to open it for questions and answers.

Thank you.

(Operator Instructions)

Our first question is from the line of Mike Grasher with Piper Jaffray.

Please proceed with your question, sir.

Thank you.

Good morning everyone and congratulations on the quarter.

Thank you, Michael

Especially in this environment.

Just a couple of things.

First of all Pat, I wanted to get your perspective on the economic environment.

Do you sense any change at all in economic activity as it relates not just to -- mostly as it relates to the underwriters, and what you are picking up there?

From an underwriter perspective, I think it's more of the same.

We are hearing that there is a need for additional rate on some of the Cat exposed property stuff in Florida, any of the earthquake stuff.

There's good talk there.

Reinsurance rates seem to be up there, but bottom line, commercial, middle market, property casualty very competitive -- still soft and softening -- and don't really see -- I can't see the horizon on a change there.

And so it's fighting it out, day in and day out, in the trenches with reducing -- reducing rates.

In terms of economic activity, very little in the way of good news there.

We do a lot of construction work with contractors that do infrastructure work.

There's some positive there.

I've been told that some of the transportation risks are actually seeing a potential uptick in volume come around the first of the year, but that has certainly not hit their numbers yet.

By and large, the economy is taking a huge toll on our customers.

Okay, and then just to follow up on that, the claim environment, have we noticed any change in the trend there?

The claim environment is actually, are you talking about Gallagher Basset, our risk management segment?

Exactly.

The claim environment there has been tough.

Claim counts are down about 8% this year.

And that reflects the slow down in economic activity.

If you don't have three shifts working, and only two shifts, and we don't like to see people get hurt, but there are fewer clients.

So claims counts are down 10% basically year-to-date.

We are seeing good strong growth internationally which is a bright sign for Gallagher Basset, and our risk management segment, but in the US, I think it's going to be a number of quarters till we see any kind of recovery.

Final question.

Just with regard to the M&A environment, any change there or what is the sentiment there in terms of the bid ask spread?

As you know, we've taken multiples down.

We have had some deals that have been close to the altar, and sellers have said in this environment I think I'll go it alone for a while.

But I think there are still prudent sellers that are interested in taking the stock and collecting a very good dividend while they wait for a rebound.

But it is a tougher environment right now.

Is there a pushback just in terms,or reluctance in terms of not knowing what their books maybe look like?

Or if they are experiencing full utilization here?

I guess I'm not clear on that question, Michael.

If their books of business have been I guess -- the persistency has gone away, or it's declined to some extent, and maybe they are not achieving the full --

Yes.

Yes.

I think what you are seeing is that the sellers are realizing that their clients -- remember all the insurance is predicated on exposure unit.

So if their client sales are down, the payrolls are down, the full time equivalents are down, that is going to translate into a reduction in revenue to the seller.

And there are many saying I am going to wait until there's a rebound here.

Okay.

Thanks very much for taking my questions.

Thanks, Michael.

Our next question is from the line of Jay Gelb with Barclays Capital.

Please state your question.

Thanks, and good morning.

Hi, Jay.

Can you discuss the change in contingent commission arrangements a bit more first?

The settlement change with the state of Illinois, is that nationwide.

And then, you can talk about how you got to your estimate of $10 million in additional revenues by 2011.

Yes.

First of all, Jay, I, probably of the public CEOs has been the most vocal when it comes to this dual regulation that we lived in for so much time.

We vehemently disagreed that contingent commissions were not in any way illegal, or in any way immoral.

We've said all along, that we are willing to give them up if the rest of the industry was going to follow.

That really was the sentiment and the discussion I had with the AG's office that I had four years ago, almost five years ago.

And I am very, very pleased that our attorney general and our director of insurance, once they recognized that in fact the industry standard of contingent commissions was not going to change, they agreed that it would be unfair to leave us in a situation where we could not collect them.

Now, the reason it's $10 million and you might recall we gave up something in the order of 27 to 30, we have also been very clear that we've been -- we've had efforts afoot to receive supplemental commissions from our trading partners, and those supplemental commissions have made up a good bit of what we lost in contingents.

They are supplemental.

They are not contingent.

They are known upfront, and they are disclosed.

So the main thing I think that we agreed to with the attorney general is that we will continue to operate on a fully transparent basis.

And they do believe that that is really a success in terms of making the industry a clearer industry to our customers.

So, yes, it's nationwide.

You will recall when we settled with Illinois, the Illinois AG made it clear that she was in fact trying to get a universal United States settlement.

And the other attorney generals basically followed suit and said yes, this does it for everybody.

And when we did return contingent commissions, we returned it to clients across the United States.

So this is a nationwide agreement.

Well, is it your view that those contingent commissions will drop all to the bottom line?

Yes.

And you also mentioned that you were getting -- of that $27 million to $30 million initially, I guess that is from back of 2003 --

Correct.

How much of that has been recaptured as up front or supplemental commissions?

We'll probably get two-thirds of that back.

Already?

Well, yes, coming into the P&L in 2009.

But that doesn't have anything to do with the new agreement with Illinois, right?

No.

It doesn't.

In fact, those contingents will be over and above the supplementals that we received from our major trading partners.

Really the opportunity here, is to go back to the smaller trading partners that we have on local and regional basis, that never would agree to move towards supplemental payments.

And now we'll be able to go back to those local markets, the regional carriers, and say we can once again take contingents.

We want to be back on the plan.

Right.

So this $10 million sort of cleans up the rest of what was lost?

Exactly right.

Got it.

Thanks very much.

Also remember Jay, I think the key thing here is we had an agreement with the attorney generals office that after four years, our merger partners would give these up.

And so, now that agreement basically says that they can continue to take them forever.

How much -- is that included in the $10 million?

No.

We disclosed that in our quarterly reports every quarter.

This quarter, it's in the press release.

It's about $12 million.

Annually?

Yes.

And growing as we do acquisitions.

So that's $12 million that you would have lost, and now you can keep?

Exactly right.

Thank you.

Thank you Jay.

Our next question is coming from the line of Keith Walsh with Citigroup.

Please state your question.

Hey.

Good morning, everybody.

Good morning Keith.

Just first for you Pat.

On the contingents, kind of sounds like to me you are earning your presettlement levels with this new agreement that you got in place.

Maybe you can give us color -- on what led up to this.

Because people out there think it's something that just happened overnight, but this has been really been I think evolving over time.

Was the New York state disclosure hearings last year -- a real impetus to move in this direction if you can give us some color there?

I'd be glad to give you color.

I think that everyone in the line that's following the Company for last four year knows that that was a very difficult time for us.

That when the Spitzer investigations hit, we ended up in a fire storm of subpoenas and class action suits and the rest.

The attorney general in the state of Illinois decided to take a hard look at what was going on in the brokerage world.

And quite frankly, I think we kind of got swept up in the fire storm.

And we did agree with her to stop taking contingent commissions.

And at the very time that we met with her, we mentioned, we actually said we'll move in this direction, but if in fact you and your fellow attorney generals can't get this changed, I want to have open dialogue with you to say, look this is meaningful income.

It's not illegal.

It's been disclosed.

We had disclosure.

We have full disclosure of contingent commissions per the New York regs prior to 2004.

We had that in our proposals for five years.

And simply stated if we are going to be the ones to give up, then everybody else should have to as well.

For the -- I've been to the attorney general's office 25 times since 2004, supported by our board.

And one board member in particular Jim Weimer, who is a retired counsel from Lord, Bissel and Brook.

And the topic of conversation all 25 times.

is how do you handle dual regulation in our industry.

How can that be fair?

If you go to the convention statements of the carriers, they are literally billions of dollars a year paid to agents and brokers in a contingent format, and we somehow are precluded from that?

It was an unfair, unlevel playing field.

In fact, Keith you have written about that extensively.

And thank you for that, because I shared your write ups with them.

Well, okay.

Well, I guess next question for Doug.

Just from an M&A point of view, we assume the deals you have been doing, you have a lot of deals in the last couple of years, but you had to convert those contingents to regular commissions.

First of all, are you allowed to sort of retrospectively keep those contingents on deals that were done prior to the October grandfathering of this new regulation, number one.?

And number two, will the economics on future deals automatically increase because of the dollar on contingent is much more than the commissions?

First and foremost, in the last four years we have not really converted any of our M&A partners to supplemental commission.

They were allowed to continue to take their contingent commission for three years.

And then we got that extended to four years.

So we never really converted the past ones because we didn't have to yet.

So first and foremost, that's something that we've been reporting in the retail contingent commission line.

Because we thought that was at risk after four years, and it wasn't.

How we do this in valuation modeling?

We've always discounted contingent commissions at a more riskier discount rate.

Even when I got here six years ago, that earnings line, that revenue line was more at risk, so we applied a discount rate to that.

So we baked that into our model.

So let me ask this in a different way.

If you did not convert contingents, your return on investment capital from these deals automatically is higher than you originally assumed, I would guess, because you were originally assuming you would eventually have to convert those at some point.

Correct.

Great.

Thanks a lot.

Thanks, Keith.

(Operator Instructions)

Our next question is from the line of Dan Farrell with FPK.

Please state your question.

Good morning.

Good morning, Dan.

You look like you are continuing to have success on the expense side.

Can you just comment on where you stand relative to the annual goal this year, the $25 million to $30 million, how much have you taken out?

And is there ability to take out expenses, even beyond that goal as we head into next year?

We are halfway along on our goal of the $25 million to $30 million.

I think that during the second half of the year, I don't see anything today that would cause me to believe that we can't capture the other half the remaining of this year.

Looking into next year, we've squeezed the turnip pretty hard at this point.

I think its going to be tough to hold our -- there's a lot of value getting our folks together, seeing each other face to face, exchanging ideas.

We've cut some of that back, and so some of that may creep again next year.

I still think there's room in the telecom space and in some of our IT spend, and certain vendors.

There's a few more places out there.

The number I give you of $25 million to $30 million is net of natural inflation, and the things like the medical cost for our employee, the pension cost for employees.

So if we still have low interest rate next year, our pension cost could pop up a little bit.

Medical inflation is a problem out there that we are trying to control and we shifted a lot of that cost to our employees.

So if we can hold what we have got this year, and not give too much of it up next year, that would be good effort for the team.

Great.

And then just on the Liberty deal, can you update us on what the revenue flow through has been so far, and how you'd expect that to be ramping up now that you are into it for a few months?

Liberty contributed a little EBITDA in this quarter, maybe a $1 million, a $1.5 million, something like that.

The revenue on that, remember, because we are recognizing revenue when rerenew these, and many of them are on a monthly pay, you get 1/12th of the customers that come on at the renewal, and then they pay us over 12 monthly installments, or maybe seven or eight installments the way it works.

So revenue is ramping up as we expect it.

It's very much a wedge shape for the first year, and then it will be at our full run rate.

I think year-to-date so far we've excluded from organic revenues, maybe around $5 million of top line commission revenue.

Okay.

Great.

Thank you.

Thank you.

Our next question is from the line of [Brian Durupio] with Field Capital.

Please state your question.

Good morning guys.

Good morning Brian.

How are you doing?

I'm doing well.

I want to start off with a question on risk management.

Can you help us compare and contrast what you sort of what you are seeing on the revenue side and the claim side with this recession versus the 200, 2001 recession?

Brian, that is a tough one for me.

Number one, I don't have my 2001 and 2002 numbers in my head.

But also, if you go back, 2001 we had a -- it really came to a slamming halt after 9/11.

We saw claims count at that time just cascading down probably, if I remember correctly, probably 15% to 20% at one point.

Many of our transportation clients, like United Airlines and others, I mean they as you know -- came -- and we have an awful lot of hospitality business as well.

People stopped going to hotels and stopped going on airplanes.

So comparing that to this one, it's a difficult compare.

It is, you are right to be looking at it like that though, because when economic activity drops so much of what Gallagher Basset does in terms of adjusting claims comes from how many trucks are on the road, how many shifts are being worked, how many people are flying, whose going to hotels.

So I would say that this recession, I guess, I'm just trying to come up with the numbers in my head, probably less steep in decline but probably approaching as deep.

Okay.

I think probably after 9/11 we saw something on the order, again I'm doing this from memory, of a 10% to 15% reduction in claim count.

Okay.

So, do you think this could last longer on the risk management side?

I'm just trying to get a sense, it looks like revenue can turn negative for the year.

Yes, Brian, I think -- I think they could.

We are doing great internationally as I've said in my remarks earlier, and that's a real bright spot.

But the US is clearly the bulk of our business, and we are just really hard at work on cost containment because we are seeing a major slowdown.

There's no two ways about it.

Got you.

Second question and I will ask you to compare and contrast, I appreciate the extra color on Chem-Mod, and Pat through our discussions over the years, you knew -- you know I'm not a big fan of these investments.

So again, compare and contrast, give usa little comfort that management won't be distracted with this investment versus the prior investments you've made in the old financial services segment.

Yes, Brian, that's a good question.

Thank you for asking it.

We are not embarking down the road of creating financial services again.

I mean I think that everyone knows that since Doug has been here, he's spent six years helping us wind down from investments that were far afield as golf courses and housing developments and what have you..

But from the time that we've been here, the two that are laid out in our K's and our Qs, we continue to own a chunk of Chem-Mod, and a smaller chunk on a firm called Seaquest.

And those, A, are not distractive to management anyone, because operating management has no involvement in those.

And as Doug said in his comments, this is simply keeping consistent with seeding these things to try to get them to be successful commercially.

But I'm not spending anytime on it.

Jim is not spending anytime on it.

This is just -- it's really is just kind of finalizing what we've had in the books all along.

Brian, also to elaborate on that, this is a small group.

We have two or three people that are working on this, that worked on our section 29 project, that they've incubated this thing, they brought it along.

And we are up against a time line here by the end of the year.

Either we get these plants in place, or we wait another five to eight years until regulations to reduce emissions are widely adopted by the state.

We have $3 million invested into investments when I got here.

We are looking at $4 million now, and maybe another $10 million over the next few months to try to push this one out of the test stage into the commercialization stage.

I think we can get pay back through tax credits on it, but we are not building a business around it.

This is a corporate related investment and tax opportunity, and I just -- I can't with good conscious just throw it away right now without seeing how the end of the show turns out.

The $4 million will get us a long ways.

We'll find out some more information over the next couple of months.

If it works, it works.

If not, you will see another exit out of that business

Okay.

And my final question is actually on taxes and cash flow.

I'm assuming we'll see a slight reduction in the corporate tax rate, overall tax rate if this is a successful startup?

Yes, absolutely.

If we end up taking some tax credits, we will pay less than the government and that reduce our tax rate.

Any sense of what that could be?

It's not going to be as big as the 29 credits.

And it's so early to even speculate on that right now, Brian.

I am trying to get this things off the ground.

I'll have more information in October.

Or if something happens between now and then, we'll update everyone.

But this is a slow as you go idea.

This is not something that you plunge in to take our tax rate to 29%.

Just related on that, does this have any effect on the liquidation of the DTI if everything comes through as you plan, would we see a slow liquidation from the tax deferred asset?

Actually, no.

We will still get the $30 million to $40 million and oddly enough with section 45, if everybody recalls, we really only reduce our tax rate down to the AMT rate which is 20%.

Under section 45, you actually can reduce your current tax rate down to about 9% or 10%.

So these credits if we do get some, and it will let us use our DTA at the current rate we are at now, and then also reduce what we actually pay down a little bit below the 20% number.

That is a beautiful thing.

Yes it is.

Thanks, guys.

Thanks, Brian.

Thanks, Brian.

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

Please state your question.

Good morning everyone.

I have three scattered questions I guess.

First of all, with regard to contingents, those are based on industry profitability and volume, and those come down significantly since 2004, 2005.

Obviously profits more than volume.

Does that factor in at all to the estimated $10 million

Yes.

Absolutely.

Have you had I guess discussions with any of the smaller carriers?

Yes, Meyer.

Here's the deal.

The attorney generals office and the director of insurance and I agreed, they actually agreed to this change probably about -- well we've been talking about this change for weeks.

The deal was signed on like the -- well --the 23rd.

We've had no discussion at this point with any carrier because until the deal was signed and until it was announced, we couldn't be going to carriers asking.

This is very early on and please take that $10 million estimate as exactly that.

We went back to the 2003 numbers, looked at the carriers that do not have supplemental engines and made an estimate to give you some parameters in this press release.

Okay.

That's helpful.

I just didn't get it fully.

Are you seeing any change yet in the carriers appetite for special business that been sort of another burden on the wholesale brokerage?

Would you say it again, Meyer?

I didn't catch that all the way.

Yes.

One of the issues that wholesale brokerage faces during soft markets, is that you have standard carriers kind of cutting out the wholesale brokers.

distributing these products on a retail basis.

And we've always looked as that as an early indicator of either softening and hardening.

No.

There's no doubt about it, the primary multiline carriers appetite expands, and it cuts into the ability for wholesalers to maintain those accounts.

No doubt about that.

There's another interesting phenomena in the market though.

and that is that there are many carriers now that are not going to continue to have contracts with the smaller players.

So the wholesale industry is picking up opportunities to work on somewhat you might consider kind of vanilla accounts from retailers that don't have extensive markets.

Okay.

Are you seeing the standard markets change at all in terms of their appetite for specialty business?

No.

It's pretty broad/

Okay, and last question I guess.

When Liberty deal was announced, I thought of it as exclusive to one company, and now it's available to competitors to look at this as a one time opportunity to really make inroads, does that make sense and does that affect the commission levels at all?

Yes.

We have a number of carriers that have come to us and said now that these are your employees, and that Liberty business is open for competition, we want to compete for the business and some markets have been successful taking some business from Liberty.

There has also been,as you would expect been tremendous competition from the brokerage and agency community on Liberty accounts that were originally sold as direct written piece of business.

So there's been ferocious competition.

I'm very proud of the people that have joined us and our team who really rallied around them, because our retention rate on this business has been pretty darn good.

Okay.

Thank you very much.

Thanks.

(Operator Instructions)

Our next question will be coming from the line of Mark Hughes with SunTrust.

Please state your question,sir.

Thank you very much.

What was the EPS impact of the Liberty Wausau deal in the quarter?

About $0.01

Any dilution?

No.

Accretion.

And on the earn out payable, the $1.4 million, is that the accretion related to just the deals done in Q1, and then part of Q2, and so as you do more deals and this is applicable to those deals, would you see that number move up?

Yes.

I think that what you are going to see -- if you assume that we do the like amount of deals every quarter, and we have a like amount of estimated earn-out, and the like amount of discount rate, each quarter for the next three years, you are going to see this number growing.

And then after three years, because most of our earn-outs are on a three year basis, it will be flat number going forward.

So it's going to grow, the noncash item is going to grow over the next three years, and it's going to level off and be somewhat constant, and only kind of change based on increase in acquisition activity.

How big will it get?

I don't know.

Depends on how many deals we'll do.

Typically we do 25, if you look at most of our earn-outs, we do about 70% down and 30% on an earn out.

The reverse was true at the Liberty acquisition in this --in the first quarter where we put 25% down, and there's 75% on an earn-out.

So that will fuels the number a little bit bigger based on that deal.

So essentially 30% spread over 12 quarters?

It's not 30% that is spread over 12 quarters.

It's the interest discount, so assume that we pay $70 million for a deal on the front end, and $30 million on an earn-out.

We'll put the present value of $30 million three years out on the balance sheet.

And and let's assume we are using a 10% discount rate, that basically is going to be about a $22 million number in our balance sheet over the next 36 months.

We are going to accrete the difference between $30 million and $22 millions as a monthly charge for effective accretion.

They take $8 million and spread it across the 36 months, and that's how much monthly accretion it's going to be.

Right.

And then if you don't decide if you are not going to have to pay off some of that earn out, the full amount flows through in the given quarter.

Oddly enough, the change, if we initially estimated 22, and lets ignore the present time -- and we decide later that we are only going to have to pay 20, out, the $2 million delta there will go to the P&L as income.

Now, tt's a little bit silly if you ask me -- because what you are doing -- even though it makes sense that we are not paying as much out, and so therefore it's earnings, the reason why we are not paying it out is the acquisition didn't perform quite as well as we expected, and so you are picking up earnings in a situation where you are adjusting down your estimate.

So, it to me it doesn't make a lot of sense.

I they should of -- I think the accounting standard board should have pushed that through other comprehensive income if they were predisposed to making sure it was a flow through, but it's going to produce some volatility in our financial statement, and we'll tell you what it is every quarter.

Right.

Okay.

Do you have the cash from Ops in cash paid for acquisitions for the quarter?

Cash paid for acquisition in the quarter?

Let me see if I can get that for you here real quick.

Do you have another question in the meantime.

Or do you want me to give you a ring offline?

Offline or later in the call.

I'm done.

Thank you very much.

Great, Mark.Thanks.

Gentlemen, we have no questions at this time.

Great.

Then let me just make a quick wrap up comment, Rob Thanks very much.

Everyone I think understands that the operating environment is incredibly tough.

This economy has hurt our clients, and its made organic growth very difficult.

On top of that we have the property casualty market which is still soft, and yet in spite of these headwinds our team have delivered growth.

I couldn't be prouder of that.

Our people are working very, very hard.

They are doing great work for our clients.

They are renewing our business, and we are continuing to write a lot new business.

I believe we have the best people in our industry, and I am proud to be associated with them.

Thank you for being here this quarter.

This does conclude today's conference call.

You may disconnect your lines at this time.