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Executives

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Douglas K. Howell - Corporate VP and CFO

Analysts

Keith Walsh - Citigroup

Dan Farrell - Fox-Pitt Kelton

Meyer Shields - Stifel Nicolaus

Alison Jacobowitz - Merrill Lynch

David Louis - Raymond James

Arthur J. Gallagher & Co. (AJG) Q2 FY08 Earnings Call July 30, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen. And welcome to the Arthur J. Gallagher & Company Second Quarter 2008 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. Your lines will open for questions following the presentation. As a reminder, today's call is being recorded. If you have any objections, you may disconnect at this time.

Some of the comments made during the conference call, including answers given in response to questions, may constitute forward-looking statements within the meaning of the securities laws. Those 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 hand the floor over to your host J. Patrick Gallagher, Jr., Chairman, President and CEO of Arthur J. Gallagher. Sir, the floor is yours.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Thank you very much Judith. Good morning everyone, and thank you for joining us on our second quarter conference call. We appreciate you being with us today. This morning I am joined by Doug Howell, our Chief Financial Officer, Walt Bay our General Counselor as well as the division heads that run our operating businesses.

I'll add some color to the quarter, then Doug will add some comments, and we'll get pretty quickly to questions-and-answers. I think it is no secret to anyone who is doing any kind of business out there today that is tough, you just can't pick up a newspaper without reading about a company or an industry that's in dire straits. When I see what's going on in the global credit markets, or the airline business, the automobile business or home building business, many of those by the way are clients of ours, its really, really difficult. So when I look at the environment, and I step back and I think about how we performed? I think we did well in the quarter.

Revenue grew 6 %, EBITDA grew 8%, net earnings grew 9%, and we had one point of margin improvement in the Brokerage segment. And that's pretty good, facing the difficulty we are in the marketplace.

Let me get into the individual segments. Our Brokerage segment was really a mix of varying results. Over the years, we built the Brokerage segment and we're lucky, I think to build a balance, we have in our PC retail business, we have our benefits retail business, our wholesaling and our MGAs and MGUs.

Our retail benefits operation, you will recall had a fantastic 2007, and our momentum is continuing to build nicely though the first half of 2008. We will have another very, very strong growth yield and benefits this year. Another bright spot in the segment was our wholesaling in MGA business.

Surprisingly, even in this soft market, our open market wholesale group was essentially flat in revenue and in pre-tax. The MGA and program business, we received underwriting profit sharing bonuses that lifted all of our wholesaling operations to actual growth over prior year.

Our retail PC operations had a tough quarter and a tough first half. Year-to-date, we're slightly ahead of last year in revenues but we're essentially flat in EBITDA. The market is just unbelievably competitive. The Counsel of insurance agents and brokers does a survey, that I know most of you are aware of every quarter. In the last survey, 77% of the respondents said that they felt the market was down 10% to 20%. 12% of the respondents said that they felt the market was down 20% to 30%. And I will give you too many illustrations and too many details on by line of coverage we'll have you. Let me just given you one illustration.

Even we're finding in ... even in catastrophe exposed areas, places that are exposed to wind and earthquake. Large accounts, I am talking multi-billion dollar schedules that need virtually the entire property market to complete, are down 20% this year. It's unbelievable slide. And to the rate deterioration, the fact that the economy is slowing, virtually every sector we worked in with the exception of oil and gas is slowing.

Construction and infrastructure projects continues but other than that, there is very little construction. Our clients are really, really being challenged in this business environment. So that said the business we've achieved in our Brokerage segment, I think served us well in the quarter in the first half, and frankly showing growth in this environment, seen with a lot of really hard work in the field, I am proud of what the people have accomplished out there.

Let me turn to the merger and acquisition front. We are off to our best start in our history. We've done 20 deals and remember last year we did 21 all in, for $58 million in revenues so far this year. And we're going to continue to aggressively build our company with new partners.

You can also see 20 deals averaging $3 million per deal in terms of revenue, this is closed to an organic hiring strategy as we can get so called acquisitions. These new partners are choosing Gallagher because they believe they and their colleagues will have great opportunities to prosper and grow with Gallagher. We welcome our new partners, and as I say every quarter, thank you, we are proud you chose to join us.

I would like to make a comment on the state of New York's hearings, over the past few weeks, on the contingent commission issue. I personally have been very, very vocal on this issue. I think dual regulation, once set of rules for one group, and a different set for another, is totally unfair. I applaud New York for opening up this topic to industry wide discussion.

As I've said very often, the issue simply should be transparency. Complete open discussion with clients on our remuneration. Once you are transparent, and the client decides how to pay you, then any form of compensation is appropriate. I hope that New York levels of playing field we should all have to play by the same rules.

Let me turn now to the Risk Management segment. Our Risk Management segment, is also been being slowed by market forces. I'll focus on three specific areas; the soft market and PC in the property/casualty business, our existing client claim count growth and the economy.

As for the soft market, when the market is soft there is just fewer opportunities to move people to self insurance or what we refer to as the alternative market. People tend to stay put and first all the coverage. Re-bundling also occurs, that is deter when they cheat clients or actually get them to re-bundle their claim service by operating cheaper premiums.

Or just in clients claim counts are not growing. We need our existing clients businesses to grow. Expanding employment usually causes claim counts to go up and this just we are just not seen this happen. We're not seen the frequency of claims arising that we expected. Our client safety and loss control efforts are creating safer work environments, and frankly this is a good thing, its good for our clients and its good for the employees.

The economy is clearly starting to hurt us. All employers are seem to be cutting back, fewer people moving, fewer new hires, all this adds up to a tough environment to grow Gallagher Bassett which is a very labor intensive business. A bright spot for Gallagher Bassett is their international boom. International is up 26% in the quarter. We now have 500 people, about 500 people in Australia and tremendous growth opportunities there. In UK we have about 200 people, and now over 50% of our UK business is coming from commercial accounts.

You'll recall, just a few years ago, virtually all Gallagher Bassett's UK business was related to the public sector. So as I said our comments will be brief, let me just kind of summarize.

Soft market, slow economy, those are headwinds, but I step back from the second quarter and especially when I concentrate on the brokerage unit I see a 11% growth in EBITDA, 11% growth in EPS, a one point margin improvement, I think that's good. Those are respectable results.

Also note on a combined basis, in our core operating businesses, that's Brokerage segment and Risk Management together, we had a record quarter in earnings and in EBITDA and in fact, this is our largest EBITDA quarter ever.

Our niches are growing. Our new sales are strong, retention is good. I am very proud of our sales culture. I am proud of the work that our sales people do every day to getting out and getting after new businesses and holding on to clients. Everyone at Gallagher understands that we are sales and marketing company. We are proud of that. Everyone understands that our clients come first. Everyone understands that nothing happens to when we win the cash register, that's a very important part of our culture.

Our internship was a big success this summer. We had over 170 college interns who really energized the company. My dad started this program 40 years ago. Last three to four years, we've had over a 150 interns participate per year. This is a big part of our commitment to our future.

Organic recruiting for production channel was good globally, London, California, New York, Chicago and others, all put some nice season talent there and finally mergers and acquisitions are coming at a record rate, and our pipeline is the best in serving them.

So we do continue to fight the market forces, there is no getting on that, but I am pleased to show growth in the quarter and I believe we'll show growth for the year. Doug?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Thanks Pat, and good morning everyone. Today I have seven comments. First, let's go back to our merger and acquisition activity. Now clearly the number of deals is increasing but we're still at manageable levels. Remember, I was thinking to netting [ph] by doing deals with brokers that have between $2 million and $10 million of revenue, right now a sweet spot.

In terms of integration, these deals are being spread across our four brokerage units: domestic PMC, domestic employee benefits, domestic wholesaling and our London based International unit. Each unit has their own deal makers and integration support. These deals are quality shops and are run by solid brokers that have developed a culture in their offices that is the terrific match with our sales and service culture. All of these points help us joint forces and integrate quickly.

For my second point, a few comments on funding acquisitions. If our current pace continues, we will likely supplement internally generated cash with long-term borrowings and common stock. So your model assume robust acquisition activity, just assume that we will use about one third internally generated cash, one third long term borrowings, and one third common stock. A blend of these three sources should allow us to fund acquisitions well into the future.

In connection with using more common stock, it is time for us to update our shelf registration. Accordingly, after we file our 10-Q, we intend on filing an S-4 to register 10 million shares of common stock that can be used for acquisitions over the coming years.

My third point is an update on our head count reduction and expense saving initiatives. Through mid-July back office attrition in our brokerage units have allowed us to contract staffing by about 150 people and we are on pace to reduce our back office headcount by about 400 by the end of the 2008 or early 2009.

In addition, during the second quarter we completed the roll-out, of our new perquisite and out-of-pocket travel and entertainment expense programs in all of our units. A large portion of our Brokerage segment is 1.1 point improvement in EBITDA margin is as a result of these initiatives.

For my fourth point, a short update on our other operational improvement initiatives. Most of you know that we continue to invest substantial time, energy and resources, into improving the quality, and reducing the cost of our systems and operations. These projects are moving along very nicely, and I am pleased with our progress.

This quarter let me give you one example of how these longer term projects can deliver important payback. In 2004 and 2005, we invested heavily in our policy review, and policy issuance work flows within our brokerage units. Since then, as a direct results of this improvement exercise, our E&L expense has improved dramatically, both in terms of frequency and severity and in total cost. Most satisfying, we are being told by E&L markets that our client service levels and professionalism is producing the best experience they've seen in our industry. This is a great accomplishment by our field, our producers, our client service folks and a win-win for our clients and our shareholders.

My fifth point relates to our Financial Services segment. Remember, that all of our Section 29 tax projects cease to operate in December 31, 2007 and most all of the post production matters have been wind down in the last six months. We only have a couple of partnerships left to dissolve and we should tie it that up here in the next few months.

So our Financial Services segment continues to evolve into a corporate segment that will house our remaining investments and investment income. Our debt and interest expense, and annually it'll absorb about $46 million of expenses related to managing these items, our income taxes and our corporate related activities.

For my sixth point, remember that we have a substantial deferred tax asset that we'll be realizing over the coming years. When you do your future cash flow models, compute what we think we pay in taxes, then you reduce your estimate by about $30 to $40 million for each of the next five to six years; that way your models will reflect an estimate of the cash flows coming in from the realization of deferred tax asset.

My seventh and last point is just a few housekeeping items. We intend on filing our 10-Q later this week, and shortly thereafter we will file our S-4 shelf registration. Also don't forget that our website has a downloadable five year quarterly spread that helps you see trends and seasonality, and I think we think that's useful as you build your annual and quarterly models.

Okay, Pat. Those are my comments. Back to you.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Judith, if you would go to questions and answers, we would appreciate it.

Question And Answer

Operator

Thank you. The floor is now open for questions. [Operator Instructions]. Your first question is coming from Keith Walsh of Citi. Please go ahead.

Keith Walsh - Citigroup

Hey, good morning everybody.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Good morning Keith.

Keith Walsh - Citigroup

First question is for Doug on brokerage. As your EBITDA margin up under 10 bits [ph] but gross margin actually flat. Maybe if you can give us some color on why depreciation and amortization rate increased year-over-year and then I have got a follow-up for Pat?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

While amortization is going to increase year-over-year because of the deals that we're putting on, if you remember we're amortizing about 60% to 70% of the purchase price that of acquired entities. So we are... that's the piece and as for depreciation, most of the additional depreciation is coming from our system initiative that we put in place. We spend about $10 million on that over the last year and half and that depreciates pretty rapidly.

Keith Walsh - Citigroup

Okay, great. And then, I guess the second question for Pat, it sort of relates to Doug's comment on issuing stock for robust M&A for assuming that miles going forward. And just on dividend philosophy, I mean I see your pay-out ratio has expanded very shortly over the last five years, and this mix means for you have slow internal growth prospects.

If you could comment on that and then just, may be comment on why wouldn't shareholders be better served using this cash to grow commissions and fees through M&A versus dividend? Thanks.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Well, I'll let Doug pile in as well Keith, but I think if you look at our dividend distribution history, we've essentially returned to shareholders either through stock buybacks or dividends. About a third of our free cash year and we did that we brought the dividend up at a time prior to the Attorney General's efforts to eliminate contingent commissions.

So we probably ran a little bit ahead of what would be the norm in terms of paying out something in the order 50% of our EBITDA. So you'll see that dividend increases have essentially been about a penny a quarter for the last couple of years. So we've going to slow the increase there, but we believe very strongly in keeping the dividends solid and maintaining that dividend, in terms of how our stockholders get serve and offers a very nice return I think, while they wait around for an explosion in the market. Doug, you want to comment on that?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Yes, I think what Pat said is exactly right. Now we tend to.... historically we return two-thirds of our cash to our clients use dividends or share repurchases...

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Shareholders.

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Shareholders, I am sorry. And so we just made a decision a few years ago that we'll more heavily weight on dividends than we would on share repurchases. I think we are comfortable with that level. I think it does provide a meaningful return to our shareholders wait for the hard market to return.

So I think that it still leaves us plenty of capacity to move forward. We were under leveraged, and then we feel it's a good use of our cash flow shareholders.

Keith Walsh - Citigroup

And just a follow-up on that, and I think about return on cash. With the way the market has changed, it seems you guys are doing a great job on the M&A front. Wouldn't it be better, wouldn't you get a better return on your dollar, doing more acquisitions than dividends necessarily. I mean don't think in the environment change can you change your philosophy with it I guess is the question?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Sure we could. But we just are reluctant not to do that at this point.

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Well I think we've been... I have been very vocal with shareholders. I have been asked this many, many times so I will just Pat... as to whether or not that dividend is safe, and my answer has been from the very beginning, the answers to the question is 'yes'.

Keith Walsh - Citigroup

Okay. Thank you very much.

Operator

Thank you. Your next question is coming from Dan Farrell of Fox-Pitt Kelton. Please go ahead.

Dan Farrell - Fox-Pitt Kelton

Good morning.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Good morning.

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Hi Dan.

Dan Farrell - Fox-Pitt Kelton

A couple of questions. Firstly, can you just comment on what you're seeing on pricing of deals currently. And then, secondly you've had the increase to leverage to fund some of these deals. I think you had around 40%, 41% debt to cap. What level of leverage are you comfortable with if you can continue to have pretty active M&A in terms of debt cap or debt to EBITDA or whatever measure you can quantify?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Dan,first of all we have been paying six times EBITDA for our deals, plus or minus a little bit from that, maybe more like 6.3 times EBITDA. So... and that's been fairly consistent over the last couple of years. We're seeing totaling in there but we're seeing a slight drop and that's nothing that I consider it to be meaningful at this point.

In terms of what do we feel comfort on leverage, when we get around two times EBITDA, that's about... that's when we start looking at using common stocks or two times EBITDA. I think that we've got some debt capacity there.

Dan Farrell - Fox-Pitt Kelton

Okay, and then just one additional question. Can you talk a little bit about efforts on the supplemental commission front, and I don't know if you could quantify how much is falling through results this quarter versus said a year ago or anything you can add there?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Well I could say to illustrate that. The efforts have been....we worked very, very hard since we made our deal with the Attorney General, on getting supplemental commissions from our insurance company partners, and I will tell you that they we're very, very careful to disclose each and everyone of them.

In terms of... it's difficult for me to give you the dollar amount and probably of the reason is some of these arrangements are paid literally account-by-account at the underwriting desk. We do have some that are paid at the corporate level. In terms of what we've kind of in a percentage bases recovered, we gave up about $30 million in contingent income, call it $27 to $30 million after the two... in the 2004 settlement.

I think that it would be fair to say that we're probably somewhere on the order on an annualized basis of getting a third to that ... maybe a half of it back.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

And Dan just quarter-over-quarter doesn't have any impact on our growth numbers.

Dan Farrell - Fox-Pitt Kelton

Okay. Great, thanks. That was helpful.

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Okay, Dan.

Operator

Thank you. Your next question is coming from Meyer Shields of Stifel Nicolaus. Please go ahead.

Meyer Shields - Stifel Nicolaus

Thanks. Good morning all.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Good morning Meyer.

Meyer Shields - Stifel Nicolaus

I guess relative to the three largest brokers, you have a much larger domestic presence of the percentage of revenues, are you looking at all at international expansion into markets where the economies are growing more rapidly?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

That's a great question and the answer to that is yes. We will be very cautious, but last year for instance, we did a deal where we picked up 40% of the largest broker in Jamaica and Barbados. It's a really nice deal because we've been able to be very additive to their business, the niches and whatever that we bring are benefits capabilities that help them grow there business.

And at the same time, we've open a very significant trading relationship with them in our London operation. So there are great synergies there and to your point they are growing faster than the domestic market. We will see efforts to expand in Asia, probably Australia, some of the emerging markets of Europe, and I think you will see those and Singapore as well. I think you'll see that expansion again. It will be cautious, it will be partners that we know and it will have to have synergies for our London and domestic operations as well. But we have good opportunities there.

Meyer Shields - Stifel Nicolaus

That's good to hear. And switching gears to head count, should we expect the head count reduction within Risk Management, if head counts are going to be depressed by the economy?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Would you say that again there?

Meyer Shields - Stifel Nicolaus

I am sorry. Within Risk Management, should we expect head count reductions if claim counts are expected to be depressed by the economy?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

If the actual claim counts were to go down then yes, we would expect head count reductions. But what we're seeing is the existing pipeline in my comments was that existing clients, those are renewing. In order for GB model has really worked. We have to have those existing clients have growth in their claim counts. That's really a big driver, typically, historically of part of our top line revenue. But the new business that Gallagher Bassett is riding does actually... does create additional claim counts. So our claim counts are growing, it is just not growing at the pace we hoped.

Meyer Shields - Stifel Nicolaus

Okay. But you feel like a staffing is at the right level now?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

You know what the truth there... I think I would say we are probably had [ph] over staffed. The problem is that over staffing of that capacity falls into a 100 offices domestically and probably five in the UK and four or five in Australia, and I can go on and get bits of people out of the system.

Meyer Shields - Stifel Nicolaus

Got it, okay. Thanks so much.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Thanks Meyer.

Operator

Thank you. Your next question is coming from Alison Jacobowitz, of Merrill Lynch. Please go ahead.

Alison Jacobowitz - Merrill Lynch

Thanks. My connection waved for a second, I just wanted to check on that number you drew out for the Financial Services segment, the $46 million, was that a new number, or is that something we've been including all long?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

$46 million of cost are being shown in the corporate slash Financial Services segment, that's consistent with the last couple of years Alison. So that's just what staying down in that segment, that's the cost of one of our corporate activities, our tax activities, our investment activities, cost associate with running the debt, and that's pretty consistent with where its been for the last few years.

Alison Jacobowitz - Merrill Lynch

And also, what effort that the same point there, there was like static on my line deep [ph], the cash flow discussion you were having, the 30 million, that too was related to the, the synthetic fuel facilities that we've been talking about all along as well, was it?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Yes, that's the same number. Yes, I think that was an update of the stuff I talked about in the last three or four quarters.

Alison Jacobowitz - Merrill Lynch

Perfect. Thank you very much.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Thanks Allison.

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

Thanks Alison.

Operator

Thank you. [Operator Instructions] You have a follow-up question coming from Keith Walsh of Citi. Please go ahead.

Keith Walsh - Citigroup

Hi thanks again. Pretty interesting comment before I thought on, how softness in the economy, we know about pricing. I guess, if you can may be give me a little more color behind that, do you have a renewal coming up and like say, a client to your shrunk 10% may be their business is declining, would the insurance program or the amount placement that you are making on their behalf, shrink with that basically, is that like a one-to-one correlation between the two?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

In general terms, Keith, the answer there will be 'yes'. I am very worried about the economy. We have not really seen a full impact for what I think is going out there. And remember all insurance premiums and pricing are predicated on exposure units whether its payroll, sales, the value of your buildings, the new buildings you're putting up, automobiles, adding automobiles and would have you ... and if you come to a renewal and a client says, Look, my payrolls are coming down 10%,immediately their workers compensation premium are down 10%.

He says my sales are going down 10% immediately his general liability premiums coming down 10%. So I am really fearful about what that means in terms of headwinds in the future.

Keith Walsh - Citigroup

That's very helpful. And then, just a last question, I guess will this HRH integration, does that present any interesting opportunities for you guys to still some business?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Well, I think that we try to unchanged. And so I would hope there will be opportunities there but we are not seeing anything at this point.

Keith Walsh - Citigroup

Okay. Thank you very much.

Operator

Thank you. Your next question is coming from David Louis of Raymond James. Please go ahead.

David Louis - Raymond James

Hi, Good morning Pat.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Good morning David.

David Louis - Raymond James

A question for you. Markets that also put out a survey that June was the first deceleration and downward pricing trend. I guess down to 11% by their aggregate number, I mean do you see any sense that people are starting to become or the insurers are starting to become little more concern about the likely deterioration in ROEs and maybe we could see some stabilization developed in '09?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Absolutely not. I would tell you that the market is... I would call it, frothy, and I saw that similar a comment on the CAB survey that the look like the rate of decline was slowing. We're feeling... let me put it this way, we're not feeling that.

David Louis - Raymond James

Okay. So your guess is that we're probably and they won't or [ph] kind of throughout you might be see some stabilization at least developed by 2010, I mean what's your gut feel given your experience in the industry?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

David,this is my fourth cycle for soft market. I have been the worse predictor in each cycle. I will give you my prediction but I mean in the last soft market we started in '86 and went to 2001, I kept saying that when we saw a major insurer get into some real trouble then every penny get religion in and we would see some firming. And I don't need to go through the Whitney [ph] of carriers that disappeared through the decade of '86, the 15 years from '86 to 2001, its an unbelievable list of companies that disappeared. Because the disciple, it's almost impossible. It's a supply and demand driven market.

So, I do think 2010, when we do our discussions around the table here, we kind of think that its looks like 2010, could be the year. I've heard reports that this year's deterioration in combined loss and expense could be the worst single year deterioration in the history of the industry. We wait to see, they have had two of the greatest underwriting opportunities that two of their most successful years back-to-back since the 50s. So, we just have to wait and see.

David Louis - Raymond James

I understand. Thanks for your thoughts.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Sure.

Operator

Thank you. [Operator Instructions] You have a follow-up question coming from Meyer Shields of Stifel Nicolaus. Please go ahead.

Meyer Shields - Stifel Nicolaus

Thanks, two quick follow-ups. One, is there a rough breakdown on an annual basis, in terms of within brokerage segment, how much is retail, how much is wholesale, and how much is benefit?

Douglas K. Howell - Corporate Vice President and Chief Financial Officer

I think that we have given specific numbers down there. But if you really look at the whole unit our retail units are going to comprise 80% and our wholesale units going to comprise 20%.

Meyer Shields - Stifel Nicolaus

Benefitswould be within retail?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Yes.

Meyer Shields - Stifel Nicolaus

Okay. And second, is it safe to take it as a given that if New York, as we call for complete transparency and there is a relaxation of the contingent that even what lying [ph] on to that?

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Well, I cannot speak for our Attorney General. But let's just say that I will be in the office suggesting that, that would be an appropriate decision.

Meyer Shields - Stifel Nicolaus

Okay. That's perfect. Thank you.

Operator

Thank you. There appears to be no further questions at this time. I would like to turn the floor back over to your host for any closing remarks.

J. Patrick Gallagher, Jr. - Chairman of the Board, President and Chief Executive Office

Yes, I have just a very brief wrap up comment. Everyone knows that it's a tough environment out there. In fact, I think it's as toughest as I have ever seen in my career and I mentioned already today that I am proud of the efforts our people are putting in out there.

I think our results really are credit to hard work in the field. But as we fight the headwinds of this market and the economy, we are continuing to build our company. And we're going to continue to recruit organically, and we will continue with the help of merger partners to build what I believe is a world class franchise whose whole focus is on our customers and on growing this business which I do believe we'll continue to see in 2008. So thank you for being with us this morning and everybody have a great day.

Operator

Thank you for your participation. Ladies and gentlemen, this does concludes the teleconference. You may disconnect your lines at this time. And have a wonderful day.

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Source: Arthur J. Gallagher & Co. Q2 2008 Earnings Call
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