Arthur J. Gallagher & Co. (AJG) 2009 Q4 法說會逐字稿

Good morning, and welcome to Arthur J. Gallagher & Company's fourth quarter and year-end 2009 conference call. (Operator Instructions).

Some of the comments made during this conference call, including answers given in response to questions, may constitute forward-looking statements within the meanings of the Securities laws such as any guidance regarding future results. These forward-looking statements are subject to certain risks and uncertainties described in the Company's reports filed with the Securities and Exchange Commission. Actual results may differ materially from those discussed here today.

It is now my pleasure to introduce Mr. J. Patrick Gallagher, Jr., Chairman, President and CEO, Arthur J. Gallagher & Company. Mr. Gallagher, you may begin.

Thank you, Rob. Good morning, everyone, and welcome to our fourth quarter and year-end financial call. Thank you for being with us this morning, we appreciate it. I'm joined this morning by Doug Howell, our Chief Financial Officer, as well as the heads of our operating businesses. I'll add some color to the quarter, give you kind of my perspective, Doug will add some thoughts, and we'll move to questions and answers. But first, I want to publicly welcome Scott Hudson to our team. I think you all know that Scott became the President of Gallagher Basset this month, and we're glad he's aboard. We're looking forward to working together for a number of years ahead.

Given the economic environment in 2009, I have to tell you I feel we had an excellent year. We grew EBITDA over $60 million or 17%. In fact, even if we had a better economy, I'd be happy with 17% EBITDA growth. Coming into 2009, we knew we had incredibly strong head winds. Premiums were dropping, our clients' businesses were being stressed, but we did the things we needed to do to thrive in the toughest environment I think I've seen in my career. So what did we do? Well if you look at page two of the press release, you will see that we reduced our work force, which was tough, but we did it. And at the same time maintained our unique culture. We substantially cut operating costs, by realizing the benefits of a lot of hard previous expense control work. We completed our largest acquisition ever. We brought in 250 new people, all at the same time, and we integrated them into our team. We successfully negotiated with the Attorney General in Illinois to get our contingents back. And we continued to hire production talent, and to sell a lot of insurance.

We never forget that we're a sales and marketing company, and I'm proud of the fact we never took our eye off that ball. We all know at Gallagher that nothing happens, until somebody sells something. Once again, our team found a way to grow. For the quarter, Brokerage Risk Management revenues were up 4%, and EBITDA was up 14%. For the full-year, Brokerage and Risk Management revenues were up 5% and EBITDA was up 17%. I'm also very proud that at the start of 2009, we told our investors that we would cut our expenses and successfully bring on our 2008 acquisitions, and that those two things would contribute approximately $50 million to $60 million of EBITDA growth in the Brokerage and Risk Management segments, and we achieved those objectives.

Let me touch on some of the specific businesses. Our property casualty Brokerage business continues to face strong head winds. Premiums continue to decrease, and the economy will continue to hurt us in 2010. You have to remember, we're a lagging indicator of economic activity. When our clients start to get healthy, it's going to take at least a full-year of growth to really benefit us. As for a hard market, I know many of you have seen the results that have been announced just this quarter by some of our trading partners. I think we're still a long ways off from a hard market. Underwriters are continuing to post very good results, so there's very little pain on the underwriting side. We think premiums will continue to slide.

So our focus for 2010 will be to maintain expense control and drive the top line. Our efforts to drive growth will include focused effort on cross selling. Our PC and benefits teams are very focused on this in 2010. We're also targeting opportunities to utilize our wholesale talent when we need to be in the excess and surplus market. We're putting sales force.com into our retail Brokerage shops, which we hope will help our producers sell more clients. And we're working very closely with our carrier partners to be certain that our remuneration is commensurate with our efforts to grow both of our businesses. Our fourth quarter organic revenue improvement over the third quarter was the result of some outstanding new business wins in the quarter.

Going forward, our wholesale and MGA operations will continue to be impacted by the soft rates. Primary care's writing excess and surplus risks and the lack of new startup businesses hurts these units. This is our most rate sensitive business. Our benefits Brokerage business suffers when our clients reduce employee count. Again, as the economy recovers, it's going to take some time to see improvement in those numbers. Gallagher Bassett, our Risk Management segment, fought through a tough environment in 2009, too. Revenue was down, but diligent expense management allowed us to post 17% EBITDA growth. Claim counts were down in 2009 by 8.2%. Again, as companies lay off workers, there are just fewer claims to manage. We believe 2010 will be another very tough year.

Our international businesses did very well in 2009. On the Brokerage side, we did well in Canada, London and on Australia. Our London office continues to be one of the fastest growing large brokers, 2009 was a great year for London. On the Risk Management side, we did well in the UK and Australia. We're working hard to make 2010 another good growth year for us internationally. But keep in mind less than 15% of our revenue, and 15% of our people are actually outside the United States. So we're very concentrated in the US. The US economy will recover. We always have. As the economy gets healthier, I'm convinced we'll see a return to positive organic growth.

In the meantime, our mergers and acquisitions activity will help us keep growing our top line. Let me touch on the M&A efforts. As I mentioned, Liberty/Wausau was the biggest deal we've ever done. Very proud of our team, and how we did that deal. We did just short of $100 million of mergers in 2009, the lion's share of that being Liberty. These people are on board. They are validating and we expect them to contribute again in 2010. Other than Liberty, our acquisitions slowed in 2009, multiples were down. Our prospects of businesses were suffering, and we in turn were very, very cautious. Nonetheless, our pipeline is strong. We have many firms we are talking to, and we expect activity to ramp up as the year progresses in 2010.

Let me finish by once more just saying how proud I am of the team at AJG Co. We've been tested over the last few years, class action suits going transparent with all of our clients, losing and then regaining contingents, suffering through the worst recession since World War II, and yet the focus and commitment to growth is incredibly strong. The focus and commitment to our culture, and our people is strong. The commitment to expense control is paying off, and I believe we just have an outstanding team that performed very well in 2009 and I'm proud to be part of it. Doug?

Thanks, Pat, and good morning, everyone. You heard Pat's recap on 2009, which was an excellent year, and some thoughts on the environment that we're operating in right now. So rather than reiterating that, I'm going to give you some information to help you build your models. First, I'll help you level set 2009, and second, I'll give you some flavor on 2010. All right. Let's levelize the 2009 noise. This is an important exercise, because it will also help you see the underlying quarterly seasonality in our numbers. First, let's go to page six of the earnings release, and find the Brokerage Segments investment income and other line. Recall that that line contains nonrecurring gains from selling books of business. There are $11.6 million of gains in 2009, so when you remove that noise, it will leave investment income of about $1 million per quarter.

Next go to page three of the earnings release. Now, you will see in the Brokerage revenue reconciliation, a line item called supplemental commission timing. We picked up $5.9 million of revenue in the fourth quarter of 2009, that's a pretax number that we would have normally received in the first quarter of 2010. So you probably should adjust that -- for that item in your first quarter 2010 model, because we got it early. Also on page three, in the Brokerage EBITDA reconciliation, you'll see that we have work force reduction related charges in the compensation line totaling $5.5 million for the year, and of which $4 million came in the fourth quarter. We previously announced that charge would be taken in our third quarter earnings release.

The remainder of those severance costs was split between the second and third quarters. While it's more of a net, you can do the same for the lease-related charges in the operating expense line. For the year we had $1.4 million of charges, of which $900,000 came in the fourth quarter. So when you get done with removing the noise from the 2009 numbers, here's the punch line. You'll see that our Brokerage Segments EBITDA in the first and fourth quarters, are historically much smaller than our second and third quarters. As for our Risk Management segment, it is not nearly as seasonal. The only really significant item was the $6.9 million of work force and lease termination related charges that we announced in our third quarter, and nearly all of that came this fourth quarter.

Now let me give you some flavor heading into 2010. First, we expect about $20 million to $25 million of additional rollover revenues in 2010, from our 2009 Brokerage M&A activity. Looking out into the mid-part of 2010, you heard Pat say that we'll probably ramp up our activity somewhat, but we'll still be using a combination of cash and stock. Second, organic revenues are still the big unknown. You heard Pat say that our Brokerage results are highly dependent on insurance pricing, and the state of the global economy. And we believe that both will still have some strong head winds here in 2010. While we are cautiously pleased with our fourth quarter organic numbers given this environment, we are not counting on that to be the new norm in 2010.

For Risk Management, because our business is highly dependent on economic activity, we believe organic to be flat to slightly down in 2010, if the economy firms. Third, with respect to the Brokerage contingents and supplemental commissions, we had a great year in 2009. And we're hoping to repeat that here in 2010. As a side note, recall that we regained our ability to accept contingent commissions. That might ultimately add another $10 million of contingent revenue, but don't forget that we won't see that revenue until 2011 because of the lag effect. Fourth, as for investment income, you all know that there's no yield out there. So we're not counting on much more than $3 million to $4 million again, in 2010 for the year. Fifth, moving down to the compensation lines, you can see on page two of the earnings release, we believe our most recent work force reduction actions might contribute about $34 million of savings here in 2010, but $12 million to $14 million will be lost to benefit inflation, wage increases and incentive and performance compensation. Of the net $20 million of savings, about 55% of that should be seen in the Brokerage Segment, and 45% in the Risk Management segment.

Sixth, you will see our 2009 operating ratios were 17% in the Brokerage Segment, and 24% in the Risk Management segment. We are seeing some inflation and increased needs out there, so going into 2010. It will take a lot of hard work to just hold the current operating ratios. We are working on our occupancy cost, but any savings will probably not be seen until 2011. Seventh, depreciation and amortization in 2010 will be about consistent with 2009. And our tax rate for the Brokerage and Risk Management segments should be in the range of 39% to 41%.

Okay. Moving into the financial services and corporate segment, in 2010, we estimate that this segment will report interest expense on our debt of about $8.8 million per quarter, corporate related operating expenses of about $1 million per quarter, minimal operating expenses related to our remaining financial services assets. And now that section will also report all of the income and expense and tax credits related to our clean energy facilities. With respect to those clean energy facilities, the Gallagher team and our partners did a fantastic job of completing them on time and under budget here in December. We're currently operating under temporary regulatory permits, and it will take us six months to work out all of the operating kinks. Ultimately, we believe they will produce about $40 million of after tax earnings. But at this time, I can't predict how much they will actually contribute here in 2010. Okay, that is a lot of information, but I hope this helps you build your models, and I hope it helps you understand what business issues are driving the numbers. It was a great ride here in 2009, and we're looking forward to getting after it again, here in 2010. Back to you, Pat.

Thank you, Doug. Rob, we are ready to go to questions, and hopefully some answers.

Thank you. The call is now open for questions.

(Operator Instructions).

Our first question is coming from Bob Glasspiegel of Langen McAlenney. Please proceed with your question.

Good morning, gentlemen. I was wondering if you could -- on the third quarter press release, you highlighted some regulatory hurdles and IRS hurdles that were necessary. I did not see any reference to those in the fourth quarter. So can we infer that, all systems go from a regulatory perspective?

Two things, Bob. By the way, welcome back.

Thank you.

Good morning and welcome back.

Thank you.

First and foremost, the IRS guidance did come out in the fourth quarter, and we believe that the guidance is not negative to our position. So we feel good about that. Also with respect to regulatory permits, we operate under a temporary emissions regulatory permit until we prove over the next six months that the plants are doing a -- what it says they're going to do. And this is a regulatory item, not an IRS item. We believe that based on what we've seen so far, we should have no problem getting those permits. But it is a process that will take us six months.

Okay. Is there -- are there operating expenses in the six months that will flow through the P&L?

There will be income expense and tax credits during these six months. That -- because we can operate under the temporary permits. Okay. So I mean is that sort of break even or loss or profit run rate before it gets cranked up? No, I think we'll make money here over the next six months, I just don't know how much. If they run them for the next six months, if it was exactly running for the next six months, we'd make half of the $40 million. But they're going to down the plants on, and and they'll turn them off. They'll operate between coal prices and natural gas prices, because they can displace the coal in the burners with natural gas. So I just don't know where we'll be for -- in the next six months.

In Q4, was it a loss?

We probably had about $2 million to $3 million of a cost, that went through the corporate segment related to getting these things up and running.

Okay. Second question, is it too early to indicate whether new management has a change in strategy for a Risk Management segment?

Yes, it's -- no, it's not too early, Bob, this is Pat and we see no change in strategy at the present time. That's one of the nice things, I think for Scott coming aboard, he really has a good six months to get very knowledgeable with our clients and what it is, the value proposition we bring to them. And at that point, I think there will be a chance to talk strategy.

We'd love to hear from him.

We'll give him a little more than a week, Bob.

Sounds good.

Also, too, just to add on to that, Bob, if you really look at it, we've been trying to run that business at 15 points of EBITDA margin and this year they posted 14.9. So I think the team did a good job this year of getting the margins up 2.1% or 2.1 points, actually, for the year. So I think the franchise is in pretty good shape.

Thank you.

Thanks, Bob.

Our next question is coming from Michael Grasher with Piper Jaffray. Please proceed with your question, sir.

Thank you. Good morning,everyone.

Good morning.

First of all, congratulations on 2009. It was a very trying year, and you did quite well.

Thank you.

I guess the second comment would be a question around extrapolating on the change in organic growth in the quarter. Pat, you alluded to it, in terms of the wins which drove the improvement. Could you give a little bit more background on it?

First of all, there's no timing in that. There are no accounts that moved around. Our pipeline was good, we just had a -- really it was -- virtually was across the globe. Our London teams did extremely well, especially in the energy business. Our west coast had some very nice wins, especially in entertainment. Our Midwest region had some very strong wins in the Chicago area. And there was not one single account that really bolstered us. We just, I think, did a good job of holding on to our -- our loss business numbers were better in the quarter, than in the third quarter, and the team just performed well.

Okay. I guess how much -- I mean can you -- can you cite three or four that maybe had the biggest impact on all of those, or on the change, or is it truly just a dozen or so transactions?

It's more than a dozen, Michael, it's literally probably 50, 60 accounts. But there are -- there were some nice energy wins, there was a very nice entertainment win on the West coast, and in New York. And there was just -- then good solid middle market production.

Okay. Thank you for that.

Our next question is coming from the line of Keith Walsh with Citi. Please go ahead with your question, sir.

Hey, good morning, everybody.

Good morning, Keith.

First question I guess for Pat and/or Doug. Again, about the revenues, are we looking here -- just focusing on new business, I mean excluding new business, I apologize. Is the economy having an impact here? Or are we seeing better or decelerating revenue declines, let's say, from your existing book excluding the new business that you put on? And then maybe if you could talk more broadly about the interplay on revenues between just the economy in general, and pricing. And which one you view as more important shorter term and longer term? And then I have a couple of follow-ups, thanks.

Well, that's fine. Let me try a shot at that, and then I'll ask during Doug to pipe in as well. If you saw the CIAB numbers, in terms of fourth quarter reduction rate, their numbers across all categories were off about 6%. So that's a major head wind right there. Anecdotally, because I can't give you -- I'm not an economist, and I know that the economy supposedly grew in the fourth quarter over 5%. I will just tell you we're not seeing that. In particular, our construction book has been hammered. Not the infrastructure guys, but if you had a home builder, they're not building any homes. And all the trades are way, way, way off. People that were doing $15 million, $16 million, $17 million are doing $5 millions, $3 millions, and $2 millions. And we don't see that recovering right now.

Hopefully we will, but we don't see it. And our employee counts and our benefits businesses are not recovering just yet. Now, there's a lot of predictions that maybe during the year people will have to start adding head count again. But I think what you've got is two head winds that continue this year, that we think are going to continue to be strong at least for the first half. I think the economy is going to continue to hammer us. It hammered us in 2009. And as I said during my comments, you've seen the results that are being posted by our underwriting partners. They're having fantastic results and that's adding to surplus which is going to continue to put pressure on the rates. So I think 2010 portends to be a very difficult year. We don't have the expense levers that we had going into 2009 to pull. So we're really telling our team we've got to redouble our efforts. You got to make the call on Friday afternoon. You got to be out there on the street, this is about selling right now. We've got to really ramp up our sales efforts, and that's the message from the management team through the whole organization.

Okay. Doug, just to kind of piggyback on that, maybe just the interplay between the economy and pricing over a longer period of time, which one is actually a bigger lever for you guys, and how do you look at that?

I think that pricing is a bigger lever for us. I think that exposure units, they're coming down, of course, but when you've got carriers still cutting prices at 6%, it's tough for us to work over the top of that.

Well, I would say, however, I disagree with Doug on the Risk Management segment.

Oh yes, right.

When your claims count come down 8.2%, that's a tough head wind.

Yes, my comments were Brokerage.

And the economy, when the economy recovers, we typically in historical terms, would have anywhere from 2% to 5% organic claim count growth. And that's a very good tail wind. So it's going to take a while till we see that recover.

Okay. Very helpful. And then on Liberty, Doug -- you talked -- roughly 8 to -- you revised upwards several times last year what the contribution to EBITDA in 2009 would be. Maybe if you could just update what the actual contribution was, and if there's any updates to your thoughts for 2010 there?

Yes, good question. We said that when we got the deal, we thought it would contribute about $25 million to $30 millions dollars worth of EBITDA, when it finally gets ramped up. We got about $10 million of it this year, so we probably will have $15 million more coming in over the top in 2010.

Okay. So no change from the 25 to 30 total that you --

No.

-- talked about?

No, it's still a great deal right now.

And then just last question, it could be Pat or Doug. Just thinking about Brokerage in general, it seems like a pretty simplistic business model, right. When I think about Chem Mod, the question that just comes to mind is, why? Why are you guys doing this, how does it benefit shareholders, couldn't you be using your time, money and effort in a different direction? If you could just talk to that a little bit, thanks.

Well, I'd like to take -- I'll let Doug touch on Chem Mod. But I want to -- I appreciate your question on the Brokerage space. I gave a presentation in New York a week ago to the RIMS chapter there, and the question they asked is what does the Brokerage world look, like post the recession? And I have to tell you when I look out longer term, assets will grow and recover and that requires insurance. Virtually, and I think the Liberty deal proves this, every commercial account uses an agent or a broker. As you start at the top of the pyramid with the Fortune 100 or Fortune 5000, they use us differently than the small commercial accounts that are personal lines or small commercial accounts. But virtually 100% of those people use an agent or a broker.

So in the long term, you've got asset growth, and you've got more need to protect it. At the same time the world is getting riskier and as the world gets riskier, insurance is going to come into play more and more often. You step back from that, and look at 18,000 agencies and brokerages in the United States, there's five of us that buy them. I mean, long term, I couldn't be more bullish. And this is what -- this is what we're using to recruit young people into this business. We tell them it's the greatest business they could join coming out of college. It's tough, it's cyclical, long cycles, but long term this is one hell of a business. So I'll let Doug touch on Chem Mod and how that interrelates to this other business that I think is the greatest business on earth.

With respect to -- first of all, Chem Mod is the technology that we own 42% of, that we use in our Section 45 tax -- clean energy facility that generates tax credits. So we have eight facilities now. Why are we there? We have the investment, we explained last summer that in order for us to commercialize this investment, it needs to get plants up and running. We view this as -- not as building a business, it's a way to minimize our taxes and to generate cash.

Not build a business.

Yes. So it's not -- we're not building a business out of this, but it's a way to generate cash. And we think that it can generate $40 million of cash for us for the next ten years. So why are we doing it? We think this is a way for us to generate maybe upwards of $0.5 billion dollars of cash for the Company.

Okay. Thanks.

Our next question is from the line of Jack Sherck with SunTrust. Please proceed with your question, sir.

Thank you very much. I just had a question about the acquisition environment. Since we've seen a push out of any expectations for really a hard market, have you seen some -- some more, I guess, capitulation or agreement on behalf of sellers in terms of their interest level?

I -- Jack, this is Pat. I would say that the answer to that is, it depends. One of the things about acquisition activity is every single deal has its own flow. It really is a sales process, and it really turn -- we turn them into a marriage. We're not looking to synergize costs out and replace management. So when I say that there's more of a -- an acquiescence in the marketplace, I think there is a realization that the reality is you're not going to see a hard market in the short-term. So I also think there is a recognition that it's likely, the tax codes are going to change.

And that in order to be able to duplicate what we're willing to pay, in terms of getting the cash and stock up front. Someone would really have to look at growing their enterprise substantially over the next four or five years and holding on to it. Most of those 18,000 firms that I mentioned earlier are owned by baby boomers. So I think there is a closer meeting of the minds right now. Multiples are down a little bit, obviously, because growth is down a little bit. But I wouldn't say there's any substantial wave of change. We are actively working hard to sell people on the fact that they can do very well by joining us, taking our stock, receiving a nice dividend while they wait for an adjustment in rates. And so I think you'll see that activity ramp up slightly this year.

Great. Thank you very much.

Our next question is from the line of Meyer Shields with Stifel Nicolaus. Please proceed with your question.

Thanks, good morning, everyone.

Good morning, Meyer.

Should we expect any impact on future organic growth from the last two years head force reductions?

Head count reductions?

Yes.

No. Those weren't reductions of producers, unless the producers weren't validating.

Okay.

As I said, during 2009, we continued to recruit talent. Our producer headcount is up.

Okay. I'm just wondering about -- you've got producers in many cases that are under-producing. And obviously -- or there could be some drag there, but I think you've answered that. With regard to the lower travel, meeting and professional fees that you reported, how much of that comes back next year?

We're hoping to hold the line on it. There will be some that comes back in, and there's some natural inflation in just the travel that was out there, the fares were a little bit lower last year than we're expecting this year. Hotel prices are down, so that might offset the difference. But, we're hoping to hold the line own it.

Okay. That's all I needed. Thanks.

Thanks, Meyer.

Thanks, Meyer.

(Operator Instructions).

Our next question is from the line of Doug Mewhirter with RBC Capital Markets. Please go ahead with your question, sir.

Hi, good morning.

Good morning, Doug.

I had three, hopefully, quick questions. First, do you have an employee count for the -- as of the end of the year? Are you right around 10,000 still or --

Ask the next -- it's in our press release here on page -- we have 5,890 in Brokerage, and 3,741 in Risk Management. It's on page six of eight of the press release. So it will be 9500, if you add the two together, 9600.

Okay. Thanks. I guess I just skipped over that. The second is more about contingent -- contingent commissions. I may be a little lost in the semantics regarding contingent commissions. And also -- well, I guess what came to be called a supplemental commissions. You sort of -- you got a victory by getting those -- those sort of put back in there as allowed. But do you think that you would change any of your contracts change, maybe when the contingent commissions went away, they switched to more of a supplemental commission agreement, where you would just be trading dollars next year or in 2011? You're just -- it's the same money, so it wouldn't be necessarily a net add of commissions, you're just sort of trading one term for the other? Do you understand what I'm getting at?

I think I do. And, yes, I think that we're going to work hard to kind of maintain the level we've got. You're right in that it's a bit confusing. We have what are called guaranteed supplementals, we have supplementals that are not necessarily guaranteed, and then we've got contingent commissions. The good thing about getting our contingent commissions back was that we were at a point where our merger partners from the previous three years were going to have to stop taking them, and so that problem was eliminated.

In addition, the regional carriers that we were not able to negotiate any kind of a supplemental arrangement with, were now back in taking contingents from them. And one of those as an example, is Cincinnati Financial. They just simply were never going to convert. They believed in contingents. They didn't believe in supplementals, and they weren't going to bow to the whims of the Attorney Generals. And so, those are where we're able to gain back. And the reason we say it was about $10 million is we didn't want people to think, oh, my God, you had to plug another $30 million in. And that's what these people lost in 2005. A lot of that's been placed by these supplemental programs that the carriers have moved to. I hope I answered your question.

Yes. That was very helpful. Thanks. My last question, I guess, is more of an industry question. You said that claim counts were down in the range of 8%. That's sort of an absolute number. What do you think the actual claim frequency rates are, and do you see any movement on that side? Because obviously there's less payroll, there's less asset value, less business revenues, but do you think the actual claim frequencies are down or steady or up?

Yes, I think they're down. And they're down on the order of 8.2% at Gallagher Bassett last year. But there's an interesting thing that we're -- an interesting trend that we're seeing there, that we hadn't seen before. And that trend is, that where that claim count is coming down, in many instances is from medical only claims that are part of the workers' compensation work that we do. Now, medical only claim is the easiest claim for us to adjudicate. It's the quickest claim that comes into the system, and then is put to bed. And it really reflects someone that needs to go to an immediate care place, and get a few stitches and come back to work.

So we're sitting back looking at this saying, what's happening here? Are we -- in an economy where people are actually getting hurt at work, and not telling anybody? Are they afraid of their jobs, because we've never seen a drop off of med only claims like this. Those are the ones that typically kind of just stay steady as the work's done. Now, when you take the economy, and add to that the fact that we're -- most of our clients have reduced head counts substantially, that also is a major drag on those claim counts. Plus I will say our clients -- our clients' efforts at loss control, and we've got probably 25 or 30 years now of very strong focus in American business on loss control, they're having a positive effect which is a good thing.

Okay. Great. Thanks. That's all my questions.

Thanks, Doug.

Our next question is from the line of Alex Ducharme with Temujin Fund Management. Please go ahead with your question, sir.

Hi, good morning. I had a question about compensation expense in the Brokerage business. I notice that revenues are down about 2% sequentially, compensation when you back out the severance was up about 6%. It seems to be a bit more than you would expect given for seasonality and compensation. So I just wanted to see if there was anything unexpected in there that caused it to be a bit higher than what you were thinking?

Yes, sequential over in the third quarter, once you take out the -- the work force reduction related charges and everything, really happened for two reasons. Producer and branch manager bonuses were higher in the quarter than -- because we actually had a pretty good quarter, and that tripped them over into actually receiving more comps. So they did better as we closed out the year and so they -- so we booked more bonus there. And then, also, we had some medical expenses that hit in the quarter that drove it up a little bit, too. So that produced some volatility into the fourth quarter, which is kind of typical for us. Because if you've got a producer that's running along for a year or a branch, that doesn't look like they're going to make their numbers, and then all of a sudden they have a good fourth quarter, then you'll see a little bit of a catch up that goes into that number.

Okay. Now, the medical expenses, is that a one-time in nature? Or is that something you expect to kind of be at a new run rate in the fourth quarter?

We did have a little bit of one time in there. But also, in my opening comments, I said that we're seeing medical inflation out there. And when you look at the -- the -- we're going to try to -- our head count reduction is going to come down $34 million of savings, but we're going to get, you know, $12 million or so of that back, that's in that number there, so --

Okay. Thank you.

All right.

Thanks, Alex.

Our next question is from Alison Jacobowitz with Banc of America. Please go ahead with your question.

Hi, thanks. Most of my questions have been answered, but one favor, please, can you just repeat what the 2010 rollover amount was, the revenue from M&A activity? It just went by me too fast.

$20 million to 25 million.

So that's now from the less than $100 million about that you did in 2009, that's what's left to roll through in 2010?

Correct.

So barring any additional acquisitions coming forward, that would be your only acquired revenue in 2010?

Exactly.

Perfect.

Thank you.

Thanks, Alison.

Our next question is from the line of Brian DiRubbio with Yield Capital Appreciation, please go ahead with your question.

Good morning, guys.

Good morning, Brian.

A couple of questions. First of all, Gallagher Bassett, the revenue decline, is it -- that just purely a claims count issue? Or are you seeing any other trends such as rebundling or companies moving out of self-insurance into -- back into -- paying for it?

Yes, Brian, and we are see rebundling. It's probably one of our tougher years when it comes to lost business, and a big chunk of that was, in fact, rebundling. The main carriers would prefer to operate in a bundled environment. As hard as I've tried to get them to understand that if Gallagher Bassett's involved, it really doesn't -- it really doesn't hurt their interests, they do believe that their proprietary claims handling benefits them, either by retention or by reduced claims expense. I think we can prove to them that the reduced claims expense is a myth. But the simple fact is they will raise requirements on collateral, if they can. They will charge oversight fees and they will quote cheaper insurance rates, to get the claims work back.

Okay. And, Pat, on the Brokerage side, as you look at the niches that you have, one of them is cyber risk. Is that an area that you think you can really grow this year, given all the news in the paper about Google and the cyber attacks they experienced recently?

That's a great question, Brian. There's another thing in the New York times today, about the amount of cyber terrorism that could occur in the country. So, yes, I think that's a place that we're concentrating. Do I think it will explode in this year? Probably not, but I'll tell you what, there's going to be a lot more interest in that coverage.

Got you. And lastly, questions on the dividend. As I go back through your history, I don't think you've ever kept the dividend stable for this long. Can you just sort of give me your thought, and obviously the Board's thoughts about the dividend and do you have a targeted payout ratio in mind. Can you just help us along there, why the long pause?

Absolutely can help you out. The yield is very strong, strongest in the business. The Board felt that the level that we were paying was an appropriate level. There was good discussion about whether or not you go two years without increasing it. And it was the feeling of the board that we've got an excellent pay out right now, and that we should keep it the same.

In terms of the pay out ratio, we want to pay out between 50% and 60% of our free cash flows on it, and that's still within that range. And I think that also with us having some opportunities on the M&A side, I think the Board thought that it might actually be a signal that there's some good growth opportunities out there, too. So they'll look at it again next year, and we'll see where we go then.

Perfect. Thanks a lot, guys.

Thanks, Brian.

(Operator Instructions). Our next question is from the line of [Sarah DeWitt] with Barclays Capital. Please go ahead with your question.

Hi, good morning.

Good morning, Sarah.

Could you discuss your ability to continue to expand the Brokerage margin in 2010, if organic growth remains negative?

Yes. In my opening comments, I said that we're going to be fighting hard this year in order to hold the operating ratios, the way we have them here in 2009. With respect to the compensation line, we believe that what we've done right now should lower our compensation costs next year because of the head count reductions. Granted some of that is going to be given back in medical and incentive comp and some raises in there. If it's flat, I think it could be -- if we don't have negative organic change, you might see a slight expansion in the margin, but not much. If it's up, then you would see some margin expansion. If it's down, then you might give a little bit of margin back.

Great. Thanks for the answer.

Thanks, Sarah.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mr. Gallagher for closing remarks.

Thank you, Rob. I just have a very brief closing. I want to thank you all again for joining us. Thanks for your good questions. I hope you got the answers from us that you wanted. As I said at the outset, I'm really pleased with the progress the team made in 2009. I am worried, and I think that 2010 is going to be another test. But as I said, when I look out over a longer horizon, I'm really excited about our opportunities. We've got a tremendous sales focus. We've been able to maintain a very unique culture. And I think we can continue to recruit the best and the brightest, and if we do that, we know we're going to continue to build this great Company. So thank you for being with us today and that's it, Rob.

This does conclude today's conference call. You may disconnect your lines at this time.