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 opened for your questions following the presentation. And it’s important to note that some of the comments made by Arthur J. Gallagher & Co. today may constitute forward-looking statements within the meaning of 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 your host J. Patrick Gallagher Jr., Chairman, President, and CEO of Arthur J. Gallagher & Co. Sir the floor is yours.

Thank you, Melissa. Welcome everybody and thanks for being here this morning. We appreciate you 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 then I'll comment on the year as a whole. Dough will add some highlights. We'll move to questions and answers and after that I'll have a wrap-up. So, let me get started with some comments and color on fourth quarter. I'm sure by now that many of you have seen the CIAB, that's the Council of 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 $25,000 to $100,000 in revenue, and that really is right in our sweet spot. We would concur that. We are seeing just rate softening across all geographic locations and in every line of coverage. It's our belief that today's rate environment is every bit as difficult as what we saw in the late ‘90s. 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 businesses 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 larger property schedules were renewing at greater than 10% decreases in rates, and we were burdened by some costs of some new hires who are yet to have a positive impact. This caused the Brokerage Segment to be slightly down in the quarter from 2006. Our Risk…

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 pre-tax revenues we get from these operations. But, in the end, on a GAAP basis, we earned enough from running the plants and hedging our cost to bring Financial Services slightly above breakeven for the 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 will wrap-up some final housekeeping matters, make final cash settlements, and begin dissolving the partnerships. We do not expect these wrap-up 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, consider [ph] what you think you will pay in taxes and reduce our estimate by about $30 million to $40 million for each of the next five to six years. That way, your models will reflect a reasonable estimate of the effective monetization of our deferred tax asset. Also remember that the monetization of the 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…

Thanks Doug. Melissa, I think we are ready to go to questions. Question and Answer

Thank you. The floor is now open for questions. [Operator Instructions]. Your first question is coming from Dan Farrell with FPK. Please go ahead.

Hi, 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, are they higher or lower than what you've seen over the past year?

No. I think pricing is pretty consistent. We are spending typically somewhere on the order of 6 times 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 that you have?

I would say, 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.

Hi, thanks. In the Brokerage Segment, it looks 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 is anything unusual in there, if that's the new run rate?

Let the guys dig for number for you, Alison, but the amortization of course is going to increase as we do more deals.

On the depreciation side, Alison, what you are seeing there is the amortization of some of the our new IT systems that we've put in I talked about the new general idea, the new HR system, the new expense and budgeting system, the new T&E system. So, those are software costs, development costs that we are amortizing. But, it is up a little bit, but it's not dramatically up.

Okay. Thank you.

Thanks Alison.

Thank you. Your next question is coming from David Small of Bear Stearns. Please state your question.

Yes, hi this is Salsen [ph] on behalf of David.

Yes Salsen 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 and tax losses for the reinsurance division, are you able to provide you revenues and pre-tax 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, what our total discontinued operations look like. Well, there is a table in there on page three of the earnings release.

And that break out reinsurance specifically?

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

Okay.

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 Pleasanton, California… San Ramon, California actually, which is in the San Francisco Bay area. They left us to go to work for a smaller start-up brokerage. We believe that the manner in which these people left us was wrongful, and so we have filed up 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 is ongoing litigation, I am 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 are going to see as a systemic risk at all. We have a very strong culture, we have incredible teamwork, and this is very, very unusual in our company.

Any idea what is 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, but you guys are still active in M&A, buying companies, are you able to get the benefit of scales from these new acquisitions?

Yes, we get some benefit, but understand, we are not doing acquisitions to synergize out a lot of cost. These are professional firms that come to us, on average, above $5 million in revenue. There are some cost saves, but really what we are 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 are doing our due diligence, which is virtually all of about culture, because the 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 DiRubbio of U.S. Trust. Please state your question.

Good morning guys.

Good morning Brian.

Got a bunch of questions actually. Let me just start off with one of the more easier ones. The acquisition or the stake you purchased 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 and earnings as a single line item. So, we won't get a revenue boost level, we will get a pre-tax.

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 what... how big is the company, what do they produce, or are you guys not really taking about that?

I think we can tell you about what they do. They are basically an open brokerage in Caribbean. One of the largest, not the largest independent broker there. They have a good trading relationship with our London operations and we haven't disclosed the revenue related to that yet and we will see if we disclose that in the 10-K coming up in the next week.

But, Bryan, it’s not a huge deal.

Not a huge deal?

Yes.

Okay. On the employee headcount number, the 9,100 that you had at the end of the year, that includes the employees that you are going to separate when you sell the divisions that you are going to exit from?

No, that's just a continuing operations 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 announced 400 for 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, sort of, what the per employee, what these costs are?

I think that if you look at our workforce out there, between salary and benefits, you have a range of anywhere from $40,000 to $75,000 a year, kind of an average for… what I would refer to be the back-office, which is the non-production layer of our workforce. It is $40,000 to $75,000 per copy and we will see where the attrition comes, which layers.

Okay. I know you gave 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?

Yes, I can do that math for you here, I think that between… in the Brokerage Segment, between litigation charges and office closures, the total amount is almost $4 million. That's the numbers you are looking for.

Yes, that is. Thank you. I have a few more, but I will go back in queue, let a couple other people ask questions. Thank you.

Thank you.

Thank you. Your next question is coming from Chris Neczypor with Goldman Sachs. Please state your question.

Hi, good morning.

Good morning.

Just two questions. I think you guys mentioned that in terms of hired producers you are 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. And in that operation, we would expect the first 12 months that they will 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 are seeing in the construction business given your successful niche in Gallagher Construction Services, kind of what you are seeing from a production point of view and maybe also as it relates to the [inaudible] business as well?

Yes, it is very interesting time for our construction team and we have got what we think is probably the best construction team in the business. They have done a terrific job. Interesting time in that if you look at anything that's related to homebuilders, you going to have problems. I mean, 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 are bidding in opportunities. So, our larger contracting clients that have sizable infrastructure type jobs are requiring a sizable amount of bonding and getting a lot of work awarded. So, when you get into 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 Saka Cook [ph] of Diamond Back. Please state your question. Saka Cook your line is live.

Sorry, sorry about that. Just have a couple questions. How are you?

Good.

I am just looking at your supplement and since it's the first time disclosure on the 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 am looking at.

Why don't I have Doug take you through the numbers, if that's the question, I'll be glad to talk --

Yes, that will be great.

Let me just make a few comments operationally. I think if you look at the chart on page three of our press release, you can kind of get a picture if why internally with numbers that we weren't necessarily sharing with the Street, we thought we had a chance to build this business. 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 to that staff and for modeling capabilities, followed nicely by a revenue jump in 2006, which brought us almost back to breakeven. So, if you are standing in my chair.. if you are sitting in my chair, at the end of 2006, you’ve doubled out on this business and say, hey, we really 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 cost 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 will let Doug take you… a question 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 refer to the supplement, we have this quarterly spread that for the last five years or so that we post out on the website, and to find our discontinued operation segment, you would go to the total company section.

Yes, I am there right now.

Okay. And you should see that those numbers jibe with the page three of the press release. So, illustratively, if you go to 2005, come down and there you see earnings and loss from discontinued operation before income taxes of negative $15.5 million. That number, you can get... I think I have got the right number… you get that number from the face of the press release... or excuse me, page three of the press release, and those numbers tie in… they are on the supplements. So, 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, that's what you are referring to?

Yes.

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. Let me say 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 mark it for sale, and you record that impairment. Now, when we go to sell that business, at that time we'll evaluate any goodwill associated with it, we'll evaluate any cost to wind down leases and those amounts will be offset against any of the gain that’s recognized on the sale of the operation.

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

I don't have that number for... I am not giving that number out right now.

Okay. And what's the situation as far as… you say you want to sell… presumably you paid people out for 2007, so how do you get people to stay while you are trying to find a buyer?

These are professional people. These are people that trade extremely well in the business, and they are people that… buyers going to want on the team.

But, they could be recruited directly by a buyer?

If they're recruit 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?

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

Right, understood, understood, there is lots of parameters and stuff. Okay, thanks very much for taking my questions.

Sure.

Thank you. Your next question is coming from Dan Farrell of FPK. Please state your question. Dan Farrell – FPK: Hi, 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 are 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? How do you see all that pulling out?

Here is the way it's going to play out. As we have lots of opportunities right now 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 time-to-time when we consider it to be appropriate, and we think that we got good cash flows from operation. We 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 are comfortable with the debt that we have in structure, we're comfortable with our revolver, we like the opportunities in acquisitions, and we like the opportunities on our stock buyback. So, we'll just have to see how 2008 plays out.

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

Probably more opportunistic.

Okay, all right, thanks guys.

Thanks, Dan.

Thank you. Your next question is coming from Brian DiRubbio of U.S. Trust. Please state your question.

Pat, I want to hit you up with another border question. Gallagher Bassett sees a lot of the economy and what're you hearing from those companies in terms of the economic outlook? Are they concerned or are they not concerned, you're willing to comment on that?

I'll comment, Brian, but you are asking me for an opinion, and I will also throw the ball to Rich McKenna if 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… remember the industries that are large industries for Gallagher Bassett, transportation, hotel and hospitality, 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'll remind you that after 2001, 9/11… when 9/11 hit and people just hunkered down and didn't go to Las Vegas and didn't fly in airplanes and airlines were letting 20% of their operating staff go, GB took a real dip... took a dip that took a couple of quarters to come back from. So, your question is a good one, are the clients worried about a recession? The clients, I am 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 saving measures? Who at the end of the day is responsible for getting this through? As 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?

Ultimately, Brian, I'm responsible. But, the operating team that I've sitting around this table right now have their assignments and their responsibilities. I'd like to see business just got up 15% every quarter and have a nice straight-line in our earnings like that. But, it doesn't happen that way. We're looking at this every week, everyday, what are we doing, where can we not replace a person, and we're going to just have to see what the business demands are? Now, I'm saying that I'm going to be very stingy on replacements, if I've got an office out there running 35% margins, and they lose somebody, we're going to replace him. If I have got a Gallagher Bassett desk that we call a hot desk, where you get tons of claims coming in; we are going to replace quickly. So, it's really going to be 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.

And the last question I have is related to cap structure. Looking at the stock price today, you know that's sub 25, it's the same stock price it was since September of 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 anticipated in anything with company?

Brian, I think that, when you take a look at the last five years; you've got a lot of issues there, and the Board is very, very 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 million to $50 million of pre-tax profits that some of our competitors have not lost. Stock-based compensation is something that we've had to run through our veins over these past five years. If you go back to 2001 after 9/11, I think we've talked about this before, our price to earnings multiple ran to 28 times earnings. It was unfounded exuberance in the stock at that point. Everybody thought that the insurance marketplace 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. Having the stock go up is what everybody gets up and comes to work every day to see happen. So, we're not anymore 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.

Hi, good morning. Just a couple of questions that haven't already been hit upon. You provided the revenues with respect to the Gallagher Bassett businesses, is most of that fee or commission business?

All fee.

All fee. Thank you. And then the second question, really I am not sure how easily you will be able to comment, but I 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 on 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 is Gallagher Bassett.

I'm sorry, I misspoke, I meant Gallagher Re

Yes, Gallagher Re, you are absolutely right. 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.

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

That will be all my questions.

Right.

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 go about our results and it is interesting to me, when I look at 2007, it is 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, that contingent controversy of three years ago has taken us three years to grow out of and frankly, I believe we are back on a growth track. Now, it is tough in this market, there is no doubt about it. Make no mistake, it is 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.