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Arthur J. Gallagher & Co. Announces Fourth Quarter and Full Year 2006 Financial Results

ITASCA, Ill., Jan. 30 /PRNewswire-FirstCall/ -- Gallagher today reported its financial results for the quarter and full year ended December 31, 2006. A printer-friendly format is available at http://www.ajg.com .


    Quarter Ended December 31                                    Diluted Net
                                                      Pretax       Earnings
                                                     Earnings     (Loss) Per
                                   Revenues           (Loss)        Share
                                                   4th Q  4th Q  4th Q   4th Q
    Segment                  4th Q 06 4th Q 05 Chg   06     05     06     05

                              $ in millions         $ in millions

    Brokerage                 $288.1  $263.9   9%  $44.9  $39.7  $0.26  $0.21
         Contingent
          Commission Matters     0.4     0.7        (8.6) (37.9) (0.05) (0.23)
         Medical and Pension
          Plan Changes           -       -          (4.6)   -    (0.03)   -
         Claims Handling
          Obligations            -       -           -    (15.0)   -    (0.10)

    Total Brokerage            288.5   264.6        31.7  (13.2)  0.18  (0.12)

    Risk Management             99.3    95.1   4%    8.9   16.2   0.05   0.10
         Medical and Pension
          Plan Changes           -       -          (2.9)   -    (0.01)   -

    Total Risk Management       99.3    95.1         6.0   16.2   0.04   0.10

    Financial Services          26.9    16.4       (22.1)  (4.1)  0.03   0.10

    Total Company             $414.7  $376.1       $15.6  $(1.1) $0.25  $0.08


                                                                 Diluted Net
    Year Ended December 31                                         Earnings
                                                Pretax Earnings   (Loss) Per
                                Revenues             (Loss)         Share
    Segment             Year 06   Year 05  Chg Year 06 Year 05 Year 06 Year 05

                           $ in millions         $ in millions

    Brokerage          $1,068.2    $972.0  10%  $168.2  $128.1  $1.01  $0.68
         Contingent
          Commission
          Matters           2.5      28.8        (6.5)  (44.8) (0.04) (0.28)
         Pension and
          Medical Plan
          Changes           -         -          (4.6)    6.9  (0.03)  0.04
         Claims Handling
          Obligations       -         -           -     (15.0)   -    (0.10)

    Total Brokerage     1,070.7   1,000.8       157.1    75.2   0.94   0.34

    Risk Management       401.3     370.6  8%    56.2    65.3   0.35   0.40
         Pension and
          Medical Plan
          Changes           -         -          (2.9)    3.1  (0.02)  0.02

    Total Risk
     Management           401.3     370.6        53.3    68.4   0.33   0.42

    Financial Services     62.0     112.5       (57.5)  (15.4)  0.04   0.42
         Litigation
          Matters           -         -           -    (131.0)   -    (0.88)

    Discontinued
     Operations             -         -           -       -      -     0.02

    Total Company      $1,534.0  $1,483.9      $152.9   $(2.8) $1.31  $0.32

Percentages used hereinafter are computed excluding retail contingent commission revenues, expenses related to settling contingent commission matters, expense impacts related to medical and pension plan changes and expenses related to claims handling obligations. See notes to fourth quarter 2006 earnings release and non-GAAP financial measures on page 7.

"I'm extremely pleased with the meaningful progress our Brokerage Services Segment made during 2006," said J. Patrick Gallagher, Jr., Chairman, President and Chief Executive Officer. "For the year, revenues were up 10%, organic growth was 6% and pretax earnings for the segment were up 31%. We improved our pretax margin by 2.5%, our merger and acquisition activity has returned to historical levels and our brokerage teams are thriving in the new transparent world. This is an outstanding effort in light of the turmoil that has been facing the insurance brokerage industry for over two years.

"Our Risk Management Segment posted revenue growth of 8% during 2006, all of which was organic, but fell slightly short of our margin expectations. We announced last year that we were targeting a 2006 margin of 15% to 16%, but posted a respectable 14% margin for the year. Pretax margin decreased because we maintained our staffing levels in anticipation of higher reported claims - which did not occur. This lower than expected frequency seems to be a trend throughout the insurance industry. We are off to a good start in 2007 and believe we are well positioned to grow into our excess capacity in 2007.

"Our Financial Services Segment had a busy year as we increased the pace of disposing of our non-core investments and reducing related off-balance sheet commitments. We eliminated most of the debt on our balance sheet and only a few investments remain.

"2005 and 2006 were the most difficult years in Gallagher's 79 year history. I am optimistic with so many distractions behind us, particularly the recent settlement of our portion of the class action litigation that is still facing the insurance industry. Despite these challenges, Gallagher is now nearly debt free, our current dividend yield of 4.3% is the best of all the public brokers, and most importantly, our teams have hung together and continue to deliver high quality professional services to our clients. Gallagher has a deep and undying culture that served us well in tough times and positions us well for the future."

    Brokerage Segment Fourth Quarter Highlights
     -- Revenue growth of 9%, excluding contingent commissions, of which 4% is
        organic.
     -- Effective January 1, 2005, Gallagher stopped accepting contingent
        commissions on retail business (except for retail contingent
        commissions associated with acquired entities for a period of up to
        three years after the acquisition date).  The following is a summary
        of revenues recognized related to retail contingent commission
        contracts in 2005 and 2006 (in millions):


      Contingent Commission
       Income                 1st Q         2nd Q        3rd Q         4th Q

      2005                    $16.7         $9.4          $2.0          $0.7

      2006                      1.0          0.9           0.2           0.4


     -- As previously announced, on December 29, 2006, Gallagher reached an
        agreement to resolve all claims in the Federal Multi-District class
        action litigation (MDL) pending in the New Jersey Federal District
        Court against commercial insurers and brokers relating to industry-
        wide contingent commission matters.  Gallagher admitted no wrongdoing,
        but chose to conclude its involvement, rather than prolong what could
        have been a costly and burdensome lawsuit.  Gallagher established a
        provision for this matter in 2005, and as a result, substantially all
        of the costs associated with the MDL settlement have been previously
        reserved.  In fourth quarter 2006, Gallagher recorded a pretax charge
        of $9.0 million to increase its reserve for the costs to be incurred
        to administratively conclude the MDL settlement and to resolve other
        regulatory and civil litigation matters.
     -- As previously announced, Gallagher changed its medical plan
        administrator during fourth quarter 2006 and recorded a one-time
        termination pretax charge of $4.6 million.
     -- Fourth quarter 2006 compensation expense ratio was 0.6% higher than
        2005.  The ratio was impacted by increased employee benefit expenses
        of 0.8%, additional stock compensation expense of 0.3%, and the
        adverse impact of foreign currency of 0.4%, partially offset by
        productivity gains.
     -- Fourth quarter 2006 operating expense ratio was 2.0% lower than 2005,
        mostly reflecting improvements in bad debts of 0.8% and the impact of
        productivity improvements and expense savings initiatives put in place
        in 2005.  In addition, there was increased rent expense in fourth
        quarter 2006 related to $1.9 million of lease termination costs due to
        the previously announced lease rationalization initiative.
     -- Fourth quarter 2006 pretax margin of 16%.  The 0.5% margin improvement
        over 2005 resulted primarily from the operating expense factors
        discussed above.  In addition, there was increased amortization
        expense in fourth quarter 2006 related to a $1.0 million intangible
        asset impairment.
     -- Beginning January 1, 2006, Gallagher adopted a new accounting
        standard, which resulted in additional stock compensation expense of
        approximately $1.2 million in fourth quarter 2006 related to stock
        options granted prior to 2003.  Gallagher had previously been
        expensing only those stock options granted subsequent to 2002.
     -- Fourth quarter effective tax rate was 42% in 2006 and 13% in 2005.
        The effective tax rate in 2005 was impacted by the income tax effects
        associated with the retail contingent commission matter and claims
        handling obligation charges incurred in 2005.  See effective tax rate
        discussion below.

    Risk Management Segment Fourth Quarter Highlights
     -- Revenue growth of 4%, all of which is organic.  International revenues
        were up 40%, reflecting the previously announced large new Australian
        client.
     -- As previously announced, Gallagher changed its medical plan
        administrator during fourth quarter 2006 and recorded a one-time
        termination pretax charge of $2.9 million.
     -- Fourth quarter 2006 compensation expense ratio was 5.0% higher than
        2005.  The ratio was impacted by increased staffing levels, additional
        stock compensation expense of 0.6% and increased employee benefit
        expenses of 1.8%.
     -- Fourth quarter 2006 operating expense ratio was 2.4% higher than 2005
        due to increased real estate lease costs of 0.8%, business insurance
        costs of 0.4% and outside fees of 1.1%.
     -- Fourth quarter 2006 pretax margin of 9%.  The 8.1% margin decrease
        from 2005 resulted primarily from the compensation and operating
        expense factors discussed above.
     -- Beginning January 1, 2006, Gallagher adopted a new accounting
        standard, which resulted in additional stock compensation expense of
        approximately $0.2 million in fourth quarter 2006 related to stock
        options granted prior to 2003.  Gallagher had previously been
        expensing only those stock options granted subsequent to 2002.
     -- Fourth quarter effective tax rate was 42% in 2006 and 41% in 2005.
        See effective tax rate discussion below.

    Financial Services Segment Fourth Quarter Highlights

During fourth quarter 2006, significant progress was made in reducing Financial Services' assets and related financial commitments as follows:

     -- On December 1, 2006, Gallagher was released from its remaining $12.6
        million letter of credit related to a Florida real estate development,
        which was sold in 2005.
     -- On December 7, 2006, the real estate partnership that Gallagher has a
        60% ownership interest in, sold Gallagher's home office building.  As
        a result of the sale, Gallagher received cash proceeds of $7.9 million
        extinguished related debt of $75.2 million and recognized a $4.2
        million pretax loss.
     -- On December 22, 2006, Gallagher received cash of $13.2 million in full
        repayment of certain debentures and accrued interest from Asset
        Alliance Corporation.
     -- On December 22, 2006, Gallagher agreed to sell its 90% interest in an
        airplane leasing company and recognized a $2.7 million pretax loss.
        On January 25, 2007, the transaction closed and Gallagher received
        cash of $0.7 million and extinguished related debt of $27.9 million.
     -- On December 28, 2006, Gallagher sold its 27% ownership interest in a
        low income housing developer, received cash of $4.0 million and
        recognized a $3.0 million pretax loss.
     -- On December 31, 2006, Gallagher recognized a $2.4 million loss on the
        write-down of Biomass partnerships.
     -- During fourth quarter 2006, Gallagher resolved a number of income tax
        matters related to prior years and revised estimates of its tax
        reserves.  As a result, the Financial Services Segment recognized a
        $2.7 million net tax benefit in fourth quarter.

    Financial Services Segment - IRC Section 29-related Syn/Coal Investments
     -- For the full year 2006, Gallagher operated its three unconsolidated
        IRC Section 29-related Syn/Coal facilities that generate installment
        sale gains, but relatively few tax credits for Gallagher.  Beginning
        June 12, 2006, Gallagher operated its two consolidated IRC Section 29-
        related Syn/Coal facilities that have historically generated pretax
        losses yet produce substantially all of Gallagher's IRC Section 29-
        related tax credits.  Installment sale gains and IRC Section 29-
        related tax credits are subject to phase-out if oil prices reach
        certain levels (see table below).
     -- As of this date, Gallagher continues to operate all five of its coal
        facilities and intends to operate those plants throughout 2007
        provided oil prices remain at levels where these facilities can
        generate positive returns (see table below for forecasted phase-out
        prices).  If there is no phase-out in 2007, Gallagher estimates that
        its Financial Services Segment will report earnings per diluted share
        of $0.30 to $0.40 for full year 2007.  If there is a complete phase-
        out in 2007, Gallagher estimates that its Financial Services Segment
        will report earnings (loss) per diluted share of ($0.10) to $0.00 for
        full year 2007.
     -- To partially mitigate the financial risk of a phase-out, which reduces
        the value of the tax credits earned and reduces the installment sale
        gains from Gallagher's IRC Section 29-Syn/Coal investments, Gallagher
        has entered into an arrangement with an unaffiliated third party which
        constitutes a call spread on oil futures to create a financial hedge
        that is designed to generate gains to Gallagher in the event of
        certain levels of increased oil prices.  This hedge is not intended to
        be a "perfect hedge" for accounting purposes, but is intended to
        mitigate a substantial portion of the negative impact to Gallagher of
        increased oil prices.  The hedging gains are designed to offset a
        portion of the expenses associated with operating Gallagher's IRC
        Section 29-Syn/Coal facilities in the event of a phase-out of Section
        29 tax credits, which phase-outs are based on oil prices averaging
        certain levels for calendar year 2007.  Gallagher made an up-front
        payment of $2.7 million on January 17, 2007 to enter into this
        financial hedge, which will be marked to market value each quarter as
        part of the Financial Services Segment operating results, through
        December 31, 2007, the date the contract expires or the date the
        contract is sold.
     -- The following table provides information about NYMEX oil prices and
        the phase-out.  Information related to 2006 and 2007 are estimates and
        actual information will not be known until the IRS publishes actual
        information in April 2007 and 2008, respectively.



                                                  Calendar Year
                                            2005     2006        2007
      Phase-out information:               Actual  Estimated  Forecasted

      Beginning phase-out NYMEX price       $59.53   $60.60     $62.00

      Complete phase-out NYMEX price        $74.75   $76.10     $78.00

      Calendar year average NYMEX price     $56.49   $66.12     $54.23 (1)

      Resulting full year phase-out
       percentage                               0%      36%        TBD


    (1)  Through January 25, 2007.

     -- The information provided above is highly dependent on future events
        and actual results may differ materially.  Significant uncertainty
        with respect to future events includes, among others, the availability
        of coal stocks and corresponding coal prices, weather, plant operating
        capacities, the actual levels of Syn/Coal facility production and
        whether Gallagher elects in the future to pursue additional
        operational and/or financial hedging strategies. Gallagher cannot at
        this time predict whether or to what extent it will ultimately be able
        to benefit from its IRC Section 29-related Syn/Coal facilities nor can
        Gallagher definitively estimate the revenues, income and/or tax
        credits that these facilities will provide.  In addition, the
        information presented above may differ materially due to the potential
        variability in the operating results of the Financial Services
        Segment's other investments.

    Effective Tax Rate
     -- Gallagher's projected annual effective tax rate for 2006 was 16.1%,
        which decreased from a projected rate of 24.0% used in third quarter
        2006.  This decrease results from a smaller than expected phase-out of
        IRC Section 29-related tax credits than was previously estimated as of
        September 30, 2006 and the benefit recognized as a result of resolving
        a number of income tax matters related to prior years and revised
        estimates of its tax reserves.
     -- In second quarter 2006, Gallagher changed its segment allocation
        method for income taxes.  Previously, Gallagher had applied its
        overall effective tax rate for the consolidated group to each
        reporting segment.  Beginning in second quarter 2006, Gallagher is
        allocating the provision for income taxes to the Brokerage and Risk
        Management segments as if those segments were preparing income tax
        provisions on a separate company basis.  As a result, the provision
        for income taxes for the Financial Services Segment now reflects the
        entire benefit to Gallagher of the IRC Section 29-related credits
        because that is the segment which produces the credits.  Historical
        results have been reclassified to conform to the current presentation.
        Gallagher anticipates reporting an effective tax rate of approximately
        40% to 42% in both its Brokerage Segment and its Risk Management
        Segment for the foreseeable future, regardless of historical or future
        oil prices.

The company will host a webcast conference call on Wednesday, January 31, 2007 at 9:00 a.m. ET to further discuss these quarterly results. To listen, please go to http://www.ajg.com .

Arthur J. Gallagher & Co. (NYSE: AJG), an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in seven countries and does business in 120 countries around the world through a network of correspondent brokers and consultants. Gallagher is traded on the New York Stock Exchange under the symbol AJG.

This press release may contain certain forward-looking statements relating to future results. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected, depending on a variety of factors such as changes in worldwide and national economic conditions, changes in premium rates and in insurance markets generally and changes in securities and fixed income markets as well as developments in the areas of tax legislation and crude oil prices. Please refer to our filings with the Securities and Exchange Commission, including Item 1, "Business - Information Concerning Forward-Looking Statements" and Item 1A, "Risk Factors", of our Annual Report on Form 10-K, for a more detailed discussion of these factors.


                          Arthur J. Gallagher & Co.
                        Segment Statement of Earnings
               (Unaudited - in millions except per share data)

                                          4th Q   4th Q    Year     Year
                                          Ended   Ended    Ended    Ended
                                         Dec 31, Dec 31,  Dec 31,   Dec 31,
    BROKERAGE SEGMENT                      2006    2005     2006     2005

    Commissions                           $223.1  $203.0   $849.5   $784.3
    Retail contingent commissions            0.4     0.7      2.5     28.8
    Fees                                    57.0    55.8    188.5    169.8
    Investment income and other              8.0     5.1     30.2     17.9
         Revenues                          288.5   264.6  1,070.7  1,000.8

    Compensation                           168.1   152.5    640.4    590.9
    Medical and pension plan changes         4.6      -       4.6     (6.9)
    Operating                               64.1    64.1    220.3    219.1
    Depreciation                             3.4     2.7     15.0     13.6
    Amortization                             7.6     4.9     24.1     20.3
    Retail contingent commission related
     matters                                 9.0    38.6      9.0     73.6
    Claims handling obligations               -     15.0       -      15.0
         Expenses                          256.8   277.8    913.4    925.6

    Earnings from continuing operations
     before income taxes                    31.7   (13.2)   157.3     75.2
    Provision for income taxes              13.4    (1.7)    64.5     42.3
    Earnings from continuing operations    $18.3  $(11.5)   $92.8    $32.9

    Diluted earnings from continuing
     operations per share                  $0.18  $(0.12)   $0.94    $0.34
    Growth - revenues excluding retail
     contingent commissions                   9%      7%      10%      10%
    Organic growth in commissions and
     fees  (1)                                4%      4%       6%       2%
    Compensation expense ratio  (2)          58%     58%      60%      61%
    Operating expense ratio  (3)             22%     24%      21%      23%
    Pretax profit margin excluding retail
     contingent commission and
       claims handling matters, and
        medical and pension plan changes
        (4)                                  16%     15%      16%      13%
    Effective tax rate                       42%     13%      41%      56%

    RISK MANAGEMENT SEGMENT

    Fees                                   $98.2   $94.2   $397.3   $367.7
    Investment income                        1.1     0.9      4.0      2.9
         Revenues                           99.3    95.1    401.3    370.6

    Compensation                            60.4    53.1    233.0    209.0
    Medical and pension plan changes         2.9      -       2.9     (3.1)
    Operating                               27.3    23.9    102.1     88.2
    Depreciation                             2.6     1.8      9.5      7.7
    Amortization                             0.1     0.1      0.5      0.4
         Expenses                           93.3    78.9    348.0    302.2

    Earnings from continuing operations
     before income taxes                     6.0    16.2     53.3     68.4
    Provision for income taxes               2.5     6.6     21.3     28.1
    Earnings from continuing operations     $3.5    $9.6    $32.0    $40.3

    Diluted earnings from continuing
     operations per share                  $0.04   $0.10    $0.33    $0.42
    Growth - revenues                         4%      6%       8%       7%
    Organic growth in fees  (1)               4%      5%       8%       7%
    Compensation expense ratio               61%     56%      58%      56%
    Operating expense ratio                  27%     25%      25%      24%
    Pretax profit margin excluding
     medical and pension plan changes (4)     9%     17%      14%      18%
    Effective tax rate                       42%     41%      40%      41%

    FINANCIAL SERVICES SEGMENT

    Investment income:
      Asset Alliance Corporation            $0.4   $(3.7)   $(0.9)   $(2.7)
      Low income housing developments       (0.3)    0.2     (1.7)     0.2
      IRC Section 29 Syn/Coal facilities:
         Three unconsolidated facilities    12.0    13.5     32.2     55.5
         Two consolidated facilities        24.0     4.1     49.3     42.8
      Other alternative energy
       investments                           0.5    (0.5)    (1.3)     0.8
      Home office land and building          1.8     1.2      4.9      6.5
      Airplane leasing company               0.9     1.1      3.5      4.1
      Real estate, venture capital and
       other investments                     0.1     1.1      1.1      1.7
                                            39.4    17.0     87.1    108.9
    Investment gains (losses)              (12.5)   (0.6)   (25.1)     3.6
         Revenues                           26.9    16.4     62.0    112.5

    Investment expenses:
      IRC Section 29 Syn/Coal facilities:
         Three unconsolidated facilities     5.1     3.1     18.4     15.8
         Two consolidated facilities        34.7     6.5     74.1     73.4
      Compensation, professional fees and
       other                                 5.0     5.2     11.2     15.7
                                            44.8    14.8    103.7    104.9
    Interest                                 2.2     3.1      8.5     11.6
    Depreciation                             2.0     2.6      7.3     11.4
    Litigation related matters                -       -        -     131.0
         Expenses                           49.0    20.5    119.5    258.9

    Earnings (loss) from continuing
     operations before income taxes        (22.1)   (4.1)   (57.5)  (146.4)
    Benefit for income taxes               (24.9)  (13.6)   (61.2)  (101.7)
    Earnings (loss) from continuing
     operations                             $2.8    $9.5     $3.7   $(44.7)

    Diluted earnings (loss) from
     continuing operations per share       $0.03   $0.10    $0.04   $(0.46)

    See notes to fourth quarter 2006 earnings release and non-GAAP
    financial measures on page 7.



                      Consolidated Statement of Earnings
               (Unaudited - in millions except per share data)

                                          4th Q   4th Q     Year     Year
                                          Ended   Ended     Ended    Ended
                                         Dec 31, Dec 31,   Dec 31,  Dec 31,
    TOTAL COMPANY                          2006    2005     2006     2005

    Commissions                           $223.1  $203.0   $849.5   $784.3
    Retail contingent commissions            0.4     0.7      2.5     28.8
    Fees                                   155.2   150.0    585.8    537.5
    Investment income - Brokerage and
     Risk Management                         9.1     6.0     34.2     20.8
    Investment income - Financial
     Services                               39.4    17.0     87.1    108.9
    Investment gains (losses)              (12.5)   (0.6)   (25.1)     3.6
         Revenues                          414.7   376.1  1,534.0  1,483.9

    Compensation                           228.5   205.6    873.4    799.9
    Medical and pension plan changes         7.5      -       7.5    (10.0)
    Operating                               91.4    88.0    322.4    307.3
    Investment expenses                     44.8    14.8    103.7    104.9
    Interest                                 2.2     3.1      8.5     11.6
    Depreciation                             8.0     7.1     31.8     32.7
    Amortization                             7.7     5.0     24.6     20.7
    Litigation related matters                -       -        -     131.0
    Retail contingent commission related
     matters                                 9.0    38.6      9.0     73.6
    Claims handling obligations               -     15.0       -      15.0
         Expenses                          399.1   377.2  1,380.9  1,486.7

    Earnings (loss) from continuing
     operations before income taxes         15.6    (1.1)   153.1     (2.8)
    Provision (benefit) for income taxes    (9.0)   (8.6)    24.6    (31.4)
    Earnings from continuing operations     24.6     7.5    128.5     28.6

    Earnings on discontinued operations,
     net of income taxes                      -       -        -       2.2

    Net earnings                           $24.6    $7.5   $128.5    $30.8

    Diluted earnings from continuing
     operations per share                  $0.25   $0.08    $1.31    $0.30
    Diluted earnings on discontinued
     operations per share                    -       -        -       0.02
    Diluted net earnings per share         $0.25   $0.08    $1.31    $0.32

    Dividends declared per share           $0.30   $0.28    $1.20    $1.12

    Other Information
    Basic weighted average shares
     outstanding (000s)                   98,091  95,382   97,123   94,141
    Diluted weighted average shares
     outstanding (000s)                   99,382  97,260   98,401   96,051
    Common shares repurchased (000s)         706       6    1,165       76
    Annualized return on beginning
     tangible net worth (5)                                   37%       8%
    Number of acquisitions closed              3       2       11       10
    Workforce at end of period (includes
     acquisitions)                                          8,757    8,135

    Earnings From Continuing Operations
     Before
     Litigation and Contingent Commission
      Related Matters, Investment (Gains)
      Losses, Medical and Pension
      Plan Changes, Depreciation,
      Amortization and Stock
      Compensation Expense (6)
    Earnings from continuing operations    $24.6    $7.5   $128.5    $28.6
    Litigation and contingent commission
     related matters                         9.0    38.6      9.0    204.6
    Claims handling obligations               -     15.0       -      15.0
    Investment (gains) losses               12.5     0.6     25.1     (3.6)
    Medical and pension plan changes         7.5      -       7.5    (10.0)
    Depreciation                             8.0     7.1     31.8     32.7
    Amortization                             7.7     5.0     24.6     20.7
    Amortization of deferred comp and
     restricted stock                        1.5     1.6      8.6      7.2
    Stock compensation expense               3.8     2.4     16.0      8.9
    Tax effect                             (20.0)  (28.1)   (49.0)  (110.2)
    Earnings from continuing operations
     before,
       litigation and contingent
       commission related matters,
       investment (gains) losses, medical
       and pension plan changes,
       depreciation, amortization and
       stock compensation expense          $54.6   $49.7   $202.1   $193.9

    On a diluted per share basis           $0.55   $0.51    $2.05    $2.02

    See notes to fourth quarter 2006 earnings release and non-GAAP
    financial measures on page 7.



                          Arthur J. Gallagher & Co.
                          Consolidated Balance Sheet
               (Unaudited - in millions except per share data)

                                                Dec 31, 2006      Dec 31, 2005

    Cash and cash equivalents                       $208.0            $317.8
    Restricted cash                                  588.9             518.3
    Unconsolidated investments - current              49.2              43.2
    Premiums and fees receivable                   1,422.3           1,396.8
    Other current assets                             107.8             125.7
         Total current assets                      2,376.2           2,401.8

    Unconsolidated investments -
     noncurrent                                       32.5              68.2
    Fixed assets related to consolidated
     investments - net                                32.5             126.0
    Other fixed assets - net                          70.6              59.1
    Deferred income taxes                            286.8             236.1
    Other noncurrent assets                           91.8              80.1
    Goodwill - net                                   316.6             245.7
    Amortizable intangible assets - net              213.1             172.5
         Total assets                             $3,420.1          $3,389.5


    Premiums payable to insurance and
     reinsurance companies                        $1,958.8          $1,917.4
    Accrued compensation and other
     accrued liabilities                             316.4             378.3
    Unearned fees                                     39.7              35.7
    Income taxes payable                              51.0              24.6
    Other current liabilities                         26.5              25.0
    Corporate related borrowings                        -                 -
    Investment related borrowings -
     current                                           8.9               5.3
         Total current liabilities                 2,401.3           2,386.3

    Investment related borrowings -
     noncurrent                                       25.9             107.6
    Other noncurrent liabilities                     128.8             126.5
         Total liabilities                         2,556.0           2,620.4

    Stockholders' equity:
    Common stock - issued and outstanding             98.4              95.7
    Capital in excess of par value                   285.7             216.3
    Retained earnings                                475.0             463.7
    Accumulated other comprehensive
     earnings (loss)                                   5.0              (6.6)
         Total stockholders' equity                  864.1             769.1
         Total liabilities and
          stockholders' equity                    $3,420.1          $3,389.5

    Other Information
    Tangible net worth  (7)                         $334.4            $350.9
    Book value per share                             $8.78             $8.04
    Tangible book value per share  (8)               $3.40             $3.67



    Notes to Fourth Quarter 2006 Earnings Release and Non-GAAP Financial
    Measures

    Non-GAAP Financial Measures
    This exhibit contains supplemental non-GAAP financial information within
    the meaning of Regulation G of the SEC's rules.  Consistent with
    Regulation G, a description of such information is provided below and a
    reconciliation of certain of such items to U.S. generally accepted
    accounting principles (GAAP) is provided elsewhere in this press release.
    Gallagher believes the items described below provide meaningful
    additional information, which may be helpful to investors in assessing
    certain aspects of Gallagher's operating performance and
    financial condition that may not be otherwise apparent from GAAP.
    Industry peers provide similar supplemental information, although
    they may not use the same or comparable terminology and may not make
    identical adjustments.  This non-GAAP information should be
    used in addition to, but not as a substitute for, the GAAP information.

    Non-GAAP Measures Defined

    (1)  Organic growth excludes the first twelve months of net commission
         and fee revenues generated from the acquisitions accounted for as
         purchases and the net commission and fee revenues related to
         operations disposed of in each year presented.  These commissions
         and fees are excluded from organic revenues in order to determine
         the revenue growth that is associated with the operations that were
         a part of Gallagher in both the current and prior year.  In
         addition, organic growth excludes contingent commission revenues.

    (2)  Represents compensation expense, which excludes the impact of
         medical and pension plan changes, divided by total revenues,
         excluding retail contingent commissions.

    (3)  Represents operating expenses, which excludes the impact of  retail
         contingent commission related matters and claims handling
         obligations, divided by total revenues, excluding retail contingent
         commissions.

    (4)  Represents pretax earnings (loss) from continuing operations before
         the impact of pretax retail contingent commission related matters
         medical and pension plan changes and claims handling obligations,
         divided by total revenues, excluding retail contingent commissions.

    (5)  Represents year-to-date net earnings divided by total stockholders'
         equity, less net balance of goodwill and amortizable intangible
         assets, as of the beginning of the year.

    (6)  Represents earnings from continuing operations before the after-tax
         effect of the impact of litigation and contingent commission related
         matters, claims handling obligations, investment gains (losses),
         medical and pension plan changes, depreciation, amortization,
         amortization of deferred compensation and restricted stock expense
         and stock compensation expense.

    (7)  Represents total stockholders' equity less net balance of goodwill
         and amortizable intangible assets.

    (8)  Represents tangible net worth divided by the common shares
         outstanding at the end of the period.



                          Arthur J. Gallagher & Co.
                      Unconsolidated Investment Summary
                          (Unaudited - in millions)

                                                            December 31, 2006

                       December 31, 2006  December 31, 2005  LOCs &    Funding
                                                             Financial Commit-
                      Current  Noncurrent Current Noncurrent Guarantees ments

    Unconsolidated
     Investments:
    Direct and indirect
     investments in
     Asset Alliance
     Corporation (AAC):
      Common stock      $-       $13.7      $-      $15.5        $-      $-
      Preferred stock  13.4         -       0.1      13.3         -       -
      Debentures         -          -      13.2        -          -       -
      Indirectly held    -         1.1       -        1.4         -       -

     Total AAC         13.4       14.8     13.3      30.2         -       -

    Low income housing
    (LIH) investments:
      Bridge loans      1.8         -       5.4        -          -       -
      Partnership
       interests         -         0.8       -        1.1         -       -
      LIH Developer      -          -        -        8.9         -       -

      Total LIH
       developments     1.8        0.8      5.4      10.0         -       -


    Alternative energy
     investments:
      IRC Section 29
       Syn/Coal
       production
       net
       receivables     25.7        -       14.9        -         -       -
      IRC Section 29
       Syn/Coal
       unamortized
       assets           6.6        -        6.5       6.7        -       -
      Equity interest
       in biomass
       projects and
       pipeline         0.1       9.5       0.1      13.9        -       -
      Clean energy
       related
       ventures          -        0.6        -        0.7        -      0.8

      Total
       alternative
       energy
       investments     32.4      10.1      21.5      21.3        -      0.8

    Real estate,
     venture capital
     and other
     investments        1.6       6.8       3.0       6.7       5.4*    1.0

      Total
       unconsolidated
       investments    $49.2     $32.5     $43.2     $68.2      $5.4    $1.8

      *Consists of a $4.4 million letter of credit (LOC) related to the
       reclamation of a former IRC Section 29-related Syn/Coal site and a $1.0
       million letter of credit to support the escrow requirements related to
       the sale of Gallagher's home office real estate.



                       Consolidated Investment Summary
                          (Unaudited - in millions)

                                                            December 31,
                                                                2006

                                      December  December   LOCs &   Funding
                                         31,      31,    Financial  Commit-
                                        2006      2005   Guarantees  ments

    Home office land and building:
      Fixed assets                         $-     $101.9     $-      $-
      Accumulated depreciation              -      (18.3)     -       -
      Non-recourse borrowings - current     -       (0.9)     -       -
      Non-recourse borrowings -
       noncurrent                           -      (72.2)     -       -
      Recourse borrowings - noncurrent      -       (3.0)     -       -
      Net other consolidated assets and
       liabilities                          -        4.0      -       -

           Net investment                   -       11.5      -       -

    Airplane leasing company:
      Fixed assets                        49.1      51.8      -       -
      Accumulated depreciation           (21.3)    (17.7)     -       -
      Non-recourse borrowings - current   (2.1)     (1.9)     -       -
      Non-recourse borrowings -
       noncurrent                        (25.9)    (28.0)     -       -
      Recourse borrowings - noncurrent      -         -       -       -
      Net other consolidated assets and
       liabilities                         0.2      (0.4)     -       -

           Net investment                   -        3.8      -       -

    IRC Section 29 Syn/Coal partnerships:
      Fixed assets                        15.7      15.6      -       -
      Accumulated depreciation           (11.0)     (7.3)     -       -
      Non-recourse borrowings - current   (6.8)     (2.5)     -       -
      Non-recourse borrowings -
       noncurrent                           -       (4.4)     -       -
      Recourse borrowings - noncurrent      -         -       -       -
      Net other consolidated assets and
       liabilities                         2.1      (1.3)     -       -

           Net investment                   -        0.1      -       -

    Total consolidated investments:
      Fixed assets                        64.8     169.3      -       -
      Accumulated depreciation           (32.3)    (43.3)     -       -
      Non-recourse borrowings - current   (8.9)     (5.3)     -       -
      Non-recourse borrowings -
       noncurrent                        (25.9)   (104.6)     -       -
      Recourse borrowings - noncurrent      -       (3.0)     -       -
      Net other consolidated assets and
       liabilities                         2.3       2.3      -       -

           Net investment                  $-      $15.4     $-      $-

SOURCE  Arthur J. Gallagher & Co.
    -0-                             01/30/2007
    /CONTACT:  Marsha J. Akin, Investor Relations of Arthur J. Gallagher &
Co., +1-630-773-3800/
    /Web site:  http://www.ajg.com /
    (AJG)

CO:  Arthur J. Gallagher & Co.
ST:  Illinois
IN:  FIN INS
SU:  ERN CCA

TG-JK
-- CGTU069 --
5850 01/30/2007 17:02 EST http://www.prnewswire.com