Good morning, ladies and gentlemen and welcome Arthur J. Gallagher & Company First Quarter 2008 Conference Call. At this time, all participants have been placed on a listen-only mode. Your line lines will open for questions following the presentation. As a reminder, today's call is being recorded. If you have any objection, you may disconnect at this time. Some of the comments made during this conference call, including answers given is response to questions may constitute forward-looking statements within the meaning of the securities laws. These forward-looking statements are subject the certain risks and uncertainties describe 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 hand the floor to your host J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher & Company. Sir the floor is yours.

Thank you very much. Good morning every one and thank you very much for joining us for our first quarter conference call. I am joined this morning Doug Howell, our Chief Financial Officer, as well as the heads of our operating divisions. I'll make a few comments on the quarter by segment. Doug will have some comments and we will move rather quickly to questions and answers and get to what the things that are you interested in. So let me start with the brokerage segment. Revenue up 11%, EBITDA up 13%, pretax profit up 10%, earnings-per-share up 24%, 1% of that growth was organic. I am pleased with that result. As you know as our first quarter is difficult to compare in many years we don't have a start that's as strong as that. We are also as you all know trading in a very, very competitive market. Given any kind of competition on an account, rates are falling anywhere between 15% and 35% or 40%. In particular, our property/casualty retail business is fighting a very strong market headwind. If rates continue to slide at this pace, it will be tough to grow organically in 2008. But let's remember this is good for our customers. Our brokerage results were helped by a strong quarter for our wholesaling in MGA business. Both the U.S and the U.K contributed to that growth, risk placement services, our U.S wholesale operation had strong results that were aided nicely by our performance bonuses from our MGA activities. Our benefits brokerage and consulting business continue to post strong revenue gains. Our real bright spot for company continues to be our merger and acquisition activity. 11 deals, $31 million in revenue purchased and literally a pipeline with more opportunities than I have ever seen in our…

Thanks Pat and good morning every one. Today I have six comments. First, a comment about funding our acquisitions. As you can see, during the last couple of quarters, we have been favoring acquisitions over stock repurchases in terms of allocating our free cash. We expect to again favor acquisition over share repurchases though out 2008. Further, because there are opportunities, we might return to using stock in more of our deals. Second, some of you have asked from time to time about our IT platform and its ability to handle our growth. We are nearly finished with a year long project to re-platform our datacenter, our global network and our corporate IT infrastructure. These new platforms make us industrial strength and they can easily handle all of our new applications that I have discussed before. Such as our up and running new financial and human resource applications and the rollout of our new document management systems. In addition, this new platform supports fast and stable workflows with our offshore service centers. In nut shell, these new systems can now easily handle nearly unlimited organic business and hundreds and hundreds of new branch locations. So my third point, a quick update on our headcount reduction and expense savings initiatives that we announced at the end of January. In addition to the reductions associated with a sale of our reinsurance operations through mid April we are down about 70 people, nearly all from attrition. Dollar wise, we didn't see much savings in the first quarter, because most of the heavy activity came later in the quarter, given that we implemented this initiative in late January and there were replacement hirers pending in the pipeline of that time, we are satisfied with these early efforts and we remained focused on reducing our…

Also, I think we are ready for questions and answers. Questions any way. Question And Answer

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Bob Glasspiegel with Langen McAlenney. Please go ahead.

Good morning

Hey Bob.

Pat good to talk to you. On the acquisition analysis guidance that you have given, Doug it sounds like you are saying share counts should trend up over the year that stock used for acquisitions were exceed buyback, is that a fair summation?

Really, what I'm saying is that our pipeline is very full right now. We will use as much cash as we have and then to the extent that we have more opportunity in cash, then we probably favor using some of the... some stock in those deals as we get later in the year.

Okay, so no guidance guiding on share count, just some sore [ph] factors?

I don't know about exactly when the opportunities will arise and how will be timing of our cash flows, but I am telling you that there were favoring acquisitions and that if we need to use the stock to typically with the rest of our deals.

Okay, I think you've answered this question, but I just want to be double sure. I'm interpreting quickly, when you are using stock instead of cash, it's being driven by you are out of cash to do it, not the PE is, I mean this is in ahead of the statement about why the earnings are high and the PE is higher and stock is more advantageous. I guess sort of different way, how do you value the cost of equity in doing an acquisition, versus cash?

Way you said it first is correct. We view this is as a way to fund our acquisitions and this is not a signal of where do we think the stock is fairly valued, overvalued or undervalued.

I think it's undervalued.

That is big surprise. Thanks Pat.

Thank you. Our next question is coming from David Small with Bear Stearns. Please go ahead.

Hey Pat. This is actually Sal [ph] on behalf of David Small.

Hey Sal.

How is it going?

Good

Quick question for you. At the beginning of the call, you mentioned how the acquisition pipeline is very strong. This differs somewhat from what we heard yesterday from HRH, as they said that they are seeing quality shops take themselves of the market, as these shops are unable to maximize their value in current rate environment. Are you not seeing this trend, and if not, at what point in the pricing cycle do you believe that you will start to see this trend and how far are we from that point?

Well that's... those are, those are a series of questions that are difficult. Let me start with where we are coming from in terms of our pipeline. Our pipeline is, as I said it's never been this robust. It's as strong as it's ever been. In terms of Letter of Intent being prepared, firms are coming in to see us, we have seen absolutely no fall off, whatsoever, I will say that we are also not seeing huge declines in valuations and at some point that may occur and people may be coming after market, but from our activity, we see strong, strong opportunities. Talking to more people today and at very serious levels than we've ever had in our history. When we that fall off? That's a good question, as I said the motivation for selling is multifold. These people recognized that in our likelihood capital gains, taxes are going to change. These are smart buyers who also realize that given the competitiveness of the market, it's likely that their revenue base without some assistance and some other opportunities to grow might begin to slip, chances are, contingents are probably at all time highs and the outlook for the future is cloudy. So I think that now it is actually a very good for sellers to be contemplating this, what we have to do and what you can be assured we are doing is maintain our disciple. The rules for us are very clear and very simple. We do not buy turnaround projects. That's not what we are in the business for doing. We are buying successful entrepreneurs, who are good in our business, who love this business and want to stay in the business and we are not interested in helping people retire or frankly financial institutions exit. That's not the business we are in. We will not dilute. So even for the platform agency that really is a terrific location, we are not going to dilute. So basically we follow those rules. We find strong entrepreneurs and there are plenty of them who want to join us.

Great thanks and just on a different note, the MGA/MGU performance income is up around 66% year-over-year, can you provide some additional details into that and the margin impact?

Well first all, most of that goes directly to the bottom-line, but as know, if you are running an MGA or MGU, all of your profitability comes from profit share of commissions. That means you are basically getting a subsistence living from the under-writing company to do the under-writing for them, where you cover your cost. But where you make your money is when you've done a good of under-writing form and we've had very, very strong results from the MGAs and MGUs.

Great, thanks.

Thank you. Our next question is coming from of Keith Walsh of Citi. Please go ahead

Hey, good morning everybody.

Good morning Keith.

Pat you guys seem to have a real disciple around, your M&A strategy average deal size has been between $3 million and $5 million of revenues, whereas some of your competitors have really gone up market with some of the deals they've done and I just want that if you can give us broad comments about some of the challenges and may be integrating some larger deals on why you choose to stick in that and then I have got a follow up?

Well Keith thank you for the comment. I mean part of our discipline around that is if there are more opportunities at that level. But the integration issue is clearly a part of whole desire to stay in the net huge deals. I mean would we look at a deal that was $25 million in revenue, sure. Have we look at deals that were $100 million revenue, not really and would we look at deals that are bigger than that, not likely. We've got a mantra that there is no reason to make a big mistake. And you can get your hands around the culture and the people of a smaller deal much more easily than you can a large deal. So number one there is more opportunities, because there is more of them, but number two, we do favor them. Now, as I said from time to time, there are a little bit bigger agencies that become available and we will take a very serious look at those. Those are very successful entrepreneurs that have built some of those companies. But by-and-large you will see us stick to sweet spot, $3 million to $5 million to $10 million right in there; we can do those all day long, your follow-up.

Yeah and just... if you can just talk broadly again about valuing a business in the soft market, I mean you're looking at a business and maybe it's got $3 million of revenues. Do you factor in that it could potentially shrink when you are doing your valuation and then how do you think about supplementals that they generate as well?

Absolutely, we do factor and we got to look at these... that's another reason that some of the small ones are easier. You an actually get your hands on their accounts. Often times, most times, in a firm that's $3 million to $5 million, the top 20 accounts are all the pre-tax, adding contingents or supplementals to that. So you have to factor in the industry that there in, that the accounts they have and what's going on the marketplace around those accounts and also what's interesting to us, the smaller guys out there, have actually been showing some growth, that's they tend to be niche focused and they tend to do very well, even in the soft market.

Great. Thank you.

Thank you. Our next question is coming from [indiscernible] with Stifel Nicolas. Please go ahead.

Good morning.

Good morning.

Taking [ph] 1% organic growth in brokerage, can you just breakdown between the retail and wholesale segments for that?

I don't have that.

Okay, and the supplementals today had impacted all the organic growth in rate in the year-over-year basis?

Yes, there is a slight fueling of the organic growth as a result of supplemental commissions, but it's not more than a point.

Okay, fine. And other than supplementals. Do you have any successes in pushing for higher commissions in either retail or wholesale?

Yes, and in fact we allow our production team production people to negotiate their deals at the under-writing test [ph] deal by deal, and as you know by-and-large our production forces on a revenue formula. So at every opportunity you are asking me, local under-writer to give consideration to additional commissions and where there is room in deal, they are getting them.

Okay, and then first and lastly. As far as wholesale, the M&A pipeline give unusual pressures in that segment. You've seen interest sale [ph] at lower prices?

No and we're being very, very cautious about straight open market wholesale. But you'll see our activity in the wholesale arena be primarily MGAs/MGUs.

All right. Thank you very much.

Thank you.

Thank you. Our next question is coming from Bryan [ph] [indiscernible]. Please go ahead.

Good morning guys.

Good morning Bryan [ph].

How are you?

Good. How are you?

Okay. Just a couple of housekeeping questions. At the end of the quarter, if you get about a $185 million in cash on the balance sheet that was yours, but you still opted to attend the revolver. Just give me a sense as you are thinking about your decision to keep. What kind of cash would you want to keep in the bank or how much you wanted towards the revolver and why we hope hold them all this cash, when you can use it to make the acquisitions.

Bryan, first of all, the nature of the cash and the balance sheet, a big piece of that number is international and we are domestic acquisitions. So rather than bringing that back to the U.S, we leave it internationally and over there because of the tax situation there. So I involve a lot of that, the $185 million, well technically free cash flow as to use as we would like. It really relates to our customer funds, it's not technically in a premium trust account. So we tend to keep that cash as if we are in a premium trust account. And so we don't use our customer's cash in order to fund the acquisitions.

It's a good thing. I think they appreciate that.

I know, we could technically, but it's not that we have ever done, now [ph] just doing it.

No problem, Doug IT system, you mentioned that you are sort of getting up and running on all the various systems you have been implementing over the last few years. There has been added cost due to those system upgrades. Where do we stand in terms of the cost... added cost of those and we can see any database [ph] in the second half of this year, as we go online.

I guess that before our improvement initiatives have caused us probably a margin point, each year for the last couple of years and that's the way it's running here in 2008 also. We expect that with our headcount control initiatives and with our offshore initiatives that we will begin to see payback on that towards the end of the year.

Great thanks guys.

Thanks, Bryan [ph].

[Operator Instructions].

Also I think we are at end of the questions and answers period here.

We do have one final question would you like to take it?

Sure, I would be glad to.

Our final question is coming from Jay Gelb with Lehman Brothers. Please go ahead.

Good morning. I was hoping Pat, may be, you could reconcile the statements on the risk management segment where you anticipate claims counts could go up, but at the same time the country could be headed in a recession. My recollection was that a meaningful portion of the risk management segment was driven by economically sensitive sectors?

Jay that's a very good question and you are absolutely right on it. If you remember back to 2001, after 9/11 when we really had a slowdown in transportation and light [ph] claim counts dropped precipitously. In a normal recession, we don't see claim counts dropping off precipitously. They tend to go down slowly and right now we have such a strong new business pipeline that we are pretty confident that for at least the first half of this year, we will see claims counts grow.

I remember you used to also give actually the claim count numbers. Can you... I don't know if you have those handy, or you give sort of the percentage change. What you saw in the first quarter?

We are up 3% in claim count in the first quarter over last year.

And what was that number for May, perhaps all of 2007?

Well, the claim counts through all of '07 were up about 5% and the total claim counts, I will ask Rich McKenna to speak up? Richard J. McKenna - Corporate Vice President; President - Risk Management Operations: Yeah we brought in about 600,000 claims in the U.S market in '07 and that's about, that was a 5% increase over '06.

Okay and then just so we can square our models a bit should... what should we anticipate the impact being on being on the sale of the reinsurance business going forward. My recollection was that was sort of a breakeven business and what could the impact beyond margins?

We lost about $12 million pre-tax last year in that business.

I think Jay the best thing to do is that we have closed out all the reinsurance operations, go to our [ph]... that the five year quarterly spread on the website. We pushed all of the reinsurance business out of the brokerage segment. It's in the one line and discontinued ops and in accordance of discontinued operation accounting. So you can get a run rate there. So if you look at the website and show [ph] it up at that... that spread sheet on our website, you can trigger models up to that. That's probably the safest way for me to answer the question.

That's helpful. Thanks very much.

Thanks Jay.

Thank you Mr. Gallagher. We do have two more questions in through queue.

Sure, let's take them.

Okay. Our next question is coming from Nick Prendergast with Signal Hill. Please go ahead.

Hi, good morning guys.

Hello Nick.

I just had a question with regard to your risk management section. As far as looking in our model, you guys came in line with our revenues. The expenses were a little bit higher and I know you had mentioned that headcount is a pretty sensitive issue, given that you need to have the capacity in place and case claims through. I was just curious, have you guys actually hired more people in that segment?

Yes.

Yes, you have, okay and I presumably... I have seen you hiring, because you expect to see increased claim activity throughout the year.

There are worth about 27 people in that segment.

Okay.

And for the year, that's off of the December 31 and here's how we see. We tried to predict, as closer as we can the claims that will arise in the future. So when you write a new piece of business. Let's say you have got a piece of business that's going to give you 5,000 claims.

Sure.

Literally, try to predict when and where those claims are going to hit.

Understood.

And you better just in time higher rate, because you have claims coming in and they are not adjusted, you've got a big problem

I see, okay well thank you for that little bit. Also, my other question with regard to your... the discontinued operations and I know that you guys give an income statement, a little breakout of what the components are, but was there anything that came as a surprise in any of those line of items to you guys?

No,I don't think so. We gave our... when we did the deal in our early, when we announced the deal, we were pretty close to where we are and just a reminder and we still have the lease termination cost that will probably hit in the third quarter, which will probably be about $15 million, some of that cash, some of that non-cash.

Okay, all right, well thank you very much.

Thanks Nick.

Thank you. Our final question is coming from Mark Dwelle with Ferris, Baker Watts, Inc. Please go ahead

Hey, good morning.

Good morning Mark.

Just two questions and they are both pretty simple. With respect to your discontinued operations, when you take the lease termination charge, as well as any settle up on you sort of an earn-out payment, that will all be below the line, which is to say non-operating, whenever that occurs?

Correct, it will all be in the discontinued line item that is not in the brokerage segment, nor in the risk management segment.

Okay, that's what I figured. Just wanted to be sure and with respect to the risk management segment, the international unit's been grown pretty nicely; can you tell us what the split is between domestic revenues and international revenues at this point?

Our, excuse me, our international revenues are 15% of our total revenues.

Okay, that's all my questions. Thank you.

Thanks Mark.

Thank you. At this time, I would like to turn the floor back over to you for any further closing remarks.

Yes, I do have a few closing remarks and first and foremost, thanking you, all of you for joining us this morning. It is very, very competitive out there, but we as an organization, as a management team are focused on five very specific down on priorities. Number one, increasing our organic growth, we are a sales and marketing company, we get out and get after new business every single day. Secondly, aligning our service deliverables with our compensation. In other words, we've got to get paid properly for what we do, three, increasing our productivity in our margins. Fourth, hiring and retaining the right people, frankly the best people, because we are a people business. And fifth continuing to drive our merger and acquisition opportunities. If we deliver on these five areas, we will continue to grow and build the company and we are confident that we can do that. Thank you everybody for joining us this morning. We appreciate it.

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.