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Arthur J. Gallagher & Co. Announces Second Quarter 2006 Financial Results

ITASCA, Ill., July 25 /PRNewswire-FirstCall/ -- Gallagher today reported its financial results for the quarter and six-month period ended June 30, 2006. A printer-friendly format is available at http://www.ajg.com .


    Quarter Ended June 30

                                                                  Diluted Net
                                                                   Earnings
                                                 Pretax Earnings  (Loss) Per
                                 Revenues             (Loss)         Share
                              2nd Q    2nd Q        2nd Q 2nd Q   2nd Q  2nd Q
                                06      05    Chg    06    05      06     05
    Segment                   $ in millions       $ in millions

    Brokerage                 $269.2  $237.4  13%  $46.8  $27.2  $0.29  $0.15
         Contingent
          Commission Matters     0.9     9.4         0.9    9.4    -     0.05
         Pension Curtailment
          Gain                   -       -           -      6.9    -     0.04

    Total Brokerage            270.1   246.8        47.7   43.5   0.29   0.24

    Risk Management             98.4    89.6  10%   13.5   15.4   0.08   0.09
         Pension Curtailment
          Gain                   -       -           -      3.1    -     0.02

    Total Risk Management       98.4    89.6        13.5   18.5   0.08   0.11

    Financial Services           2.1    34.7       (13.5)  (4.6)   -     0.11
                                                                   -
    Discontinued Operations      -       -           -      -      -     0.08

    Total Company             $370.6  $371.1       $47.7  $57.4  $0.37  $0.54



    Six Months Ended June 30
                                                                Diluted Net
                                                                 Earnings
                                               Pretax Earnings  (Loss) Per
                               Revenues            (Loss)          Share
                            6 Mths  6 Mths     6 Mths  6 Mths 6 Mths  6 Mths
                              06      05   Chg    06     05      06     05
    Segment                 $ in millions       $ in millions

    Brokerage               $493.4  $446.0 11%  $63.7   $37.0  $0.39   $0.18
         Contingent
          Commission Matters   1.9    26.1        1.9    (8.9)  0.01   (0.04)
         Pension Curtailment
          Gain                 -       -          -       6.9    -      0.03

    Total Brokerage          495.3   472.1       65.6    35.0   0.40    0.17

    Risk Management          196.4   181.2  8%   28.7    32.6   0.18    0.20
         Pension Curtailment
          Gain                 -       -          -       3.1    -      0.02

    Total Risk Management    196.4   181.2       28.7    35.7   0.18    0.22

    Financial Services         6.4    64.6      (17.6)   (7.0) (0.03)  (0.04)
         Litigation Matters    -       -          -    (131.0)   -     (0.67)
                                                                 -
    Discontinued Operations    -       -          -       -      -      0.03

    Total Company           $698.1  $717.9      $76.7  $(67.3) $0.55  $(0.29)

"I am pleased with our strong second quarter results. Our Brokerage Segment posted 9% organic revenue growth and our Risk Management Segment posted 10% organic revenue growth," said J. Patrick Gallagher, Jr., President and Chief Executive Officer. "On a combined basis, our Brokerage and Risk Management Segments posted 12% revenue growth and a 40% increase in pretax earnings, excluding contingent commission matters and pension plan curtailment gains. Around the globe, our team is energized and our clients are receiving excellent advice and service."

    Brokerage Segment Highlights

    -- Revenue growth of 13%, excluding contingent commissions, of which 9% is
       organic.
    -- Under its settlement with the State of Illinois, Gallagher can no
       longer accept contingent commissions on retail business effective
       January 1, 2006, 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

    -- Investment income and other for second quarter 2006 includes a
       $1.0 million one-time gain related to sales of small books of business.
    -- Excluding the impact of the 2005 pension curtailment gain and retail
       contingent commission matters, second quarter 2006 compensation expense
       ratio was 2.2% lower than 2005.  Reduced employee benefit expenses of
       1.5%, improved results from new hires, and operational efficiencies
       gained throughout the past year were partially offset by additional
       stock compensation expense of 1.1% and severance costs.  The new hires
       made in the latter part of 2004 and early 2005 are continuing to
       validate in second quarter 2006.
    -- Second quarter operating expense ratio, excluding retail contingent
       commission matters, was 3.5% lower than 2005, mostly reflecting
       decreased insurance costs of 0.9%, favorable foreign currency
       translation of 0.3% and expense savings initiatives put in place in the
       latter part of 2005.
    -- Pretax margin of 17%, excluding retail contingent commission matters.
       Excluding the impact of the 2005 pension curtailment gain, the 5.9%
       margin improvement over 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 $1.2 million in second quarter 2006 in the Brokerage
       Segment related to stock options granted prior to 2003.  Gallagher had
       previously been expensing only those stock options granted subsequent
       to 2002.
    -- Second quarter effective tax rate was 40% in 2006 and 47% in 2005.  The
       effective tax rate for the Brokerage Segment in second quarter 2005 was
       adversely impacted by the retail contingent commission related charges.
       See effective tax rate discussion below.

    Risk Management Segment Highlights

    -- Revenue growth of 10%, all of which is organic.  International revenues
       were up 70%, reflecting the previously announced large new client in
       Australia, and an increase in annual performance based revenues.
    -- Excluding the impact of the 2005 pension curtailment gain, second
       quarter 2006 compensation expense ratio was 1.5% higher than 2005.
       Reduced employee benefit expenses of 1.0%, were offset by additional
       stock compensation expense of 0.5% and increased staffing levels.
    -- Second quarter operating expense ratio was 2.2% higher than 2005 due to
       increased insurance costs of 0.6%, increased lease costs of 0.4% and
       increased office expenses of 0.5%.
    -- Pretax margin of 14%.  Excluding the impact of the 2005 pension
       curtailment gain, the 3.6% margin reduction from 2005 results 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 second quarter 2006 in the Risk
       Management Segment related to stock options granted prior to 2003.
       Gallagher had previously been expensing only those stock options
       granted subsequent to 2002.
    -- Second quarter effective tax rate was 39% in 2006 and 41% in 2005.  See
       effective tax rate discussion below.

    Financial Services Segment Highlights

    As previously reported in Gallagher's Current Report on Form 8-K filed on
    June 14, 2006, tax credits and tax credit-related revenues associated with
    Gallagher's IRC Section 29-related Syn/Coal investments will phase-out if
    the calendar year 2006 average of the commonly reported crude oil price
    (NYMEX Price) per barrel reaches certain levels.

    -- Gallagher estimates that the NYMEX Price would need to average
       approximately $62.00 per barrel for calendar 2006 for any phase-out to
       begin and average approximately $78.00 per barrel for calendar 2006 for
       a complete phase-out.  There was no phase-out in 2005 or prior years.
    -- The average daily NYMEX Price for 2006 through June 30, 2006 was
       $67.00.  The ending NYMEX Price at June 30, 2006 was $73.94 and $73.54
       on July 18, 2006.
    -- It is not possible for Gallagher to predict what oil prices will
       average for all of calendar year 2006.  When establishing its estimates
       for second quarter 2006 revenues, expenses and income tax provisions,
       Gallagher estimated an average 2006 calendar year NYMEX Price of
       $70.40.  This average would produce an IRC Section 29 phase-out of
       approximately 53% and was determined by using actual daily closing
       prices from January 1, 2006 to June 30, 2006 and with the assumption
       that oil prices would average approximately $74.00 per barrel for the
       remainder of 2006.
    -- Gallagher has continued to operate its three IRC Section 29-related
       Syn/Coal facilities that have historically generated installment sale
       gains, but relatively few tax credits for Gallagher.
    -- Through June 12, 2006, Gallagher did not operate its two IRC Section
       29-related Syn/Coal facilities that have historically generated pretax
       losses yet produce substantially all of Gallagher's IRC Section 29-
       related Syn/Coal tax credits.  Effective June 12, 2006, Gallagher
       restarted production at these two facilities.
    -- 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 2006.  Gallagher made an up-front payment of $8.5 million
       on June 8, 2006 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, 2006, the date the
       contract expires or the date the contract is sold.  The financial hedge
       was valued at $9.6 million at June 30, 2006, which resulted in an
       unrealized gain of $1.1 million that was included in the Financial
       Services Segment second quarter operating results.  Gallagher has not
       determined whether it will enter into similar hedging arrangements for
       2007.
    -- At June 30, 2006, the remaining carrying value of the five facilities
       and other related assets was approximately $14.7 million in the
       aggregate.  Gallagher has historically depreciated/amortized these
       assets at approximately $2.5 million per quarter and expects to
       continue to do so.  If Gallagher chooses to either permanently shut
       down the facilities or enter into a significantly prolonged idle
       period, all or part of this remaining carrying value could become
       impaired and require a non-cash charge against earnings in the period
       that such a determination is made.
    -- As a result of the actions taken above, Gallagher anticipates reporting
       the following results for its Financial Services Segment for full year
       2006, assuming three possible average oil prices:


       Average           Estimated Range of Operating Results for the
       Annual                   Financial Services Segment
       2006 NYMEX                                    Earnings (Loss)
       Oil Price        Pretax Loss                per Diluted Share


       $66.00     $38.0 to $42.0 million            $0.13 to $0.17

       $69.00     $43.0 to $47.0 million            $0.00 to $0.03

       $72.00     $42.0 to $46.0 million           $(0.11) to $(0.07)


    -- Marked to market accounting related to the call spread requires
       management to periodically obtain estimates of the current market value
       of the call spread, which estimates are based on the market's
       perception of what the average 2006 calendar year NYMEX Price will be
       at December 31, 2006.  The changes in market value could cause
       volatility in the quarterly operating results of the Financial Services
       Segment.  In addition, the potential variability in the operating
       results of the Syn/Coal facilities and other Financial Services
       Segment's investments could also cause volatility in the quarterly
       operating results of the Financial Services Segment.  As a result, even
       though full year information is provided above, Gallagher is unable to
       provide quarterly earnings guidance for its Financial Services Segment.
    -- 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's hedging strategy performs as expected and is held
       for its duration.  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 as of June 30, 2006 was
       30%, which is reduced from the 41% reported for first quarter 2006.
       This decrease is a direct result of anticipated IRC Section 29-related
       credits earned from restarting operations at the two Syn/Coal
       facilities that have historically produced substantially all of
       Gallagher's IRC Section 29-related credits.
    -- Gallagher has 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
       each segment 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 of the IRC Section 29-related credits because that is the
       segment that is producing the credits.  Historical results have been
       reclassified to conform to the current presentation.  Gallagher
       anticipates reporting an effective tax rate of approximately 39% to 41%
       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, July 26, 2006 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)

                                         3 Months 3 Months 6 Months 6 Months
                                           Ended    Ended    Ended    Ended
                                          June 30, June 30, June 30, June 30,
    BROKERAGE SEGMENT                       2006     2005     2006     2005

    Commissions                            $214.4   $191.7   $396.6   $367.5
    Retail contingent commissions             0.9      9.4      1.9     26.1
    Fees                                     48.8     40.9     83.5     70.3
    Investment income and other               6.0      4.8     13.3      8.2
         Revenues                           270.1    246.8    495.3    472.1

    Compensation                            161.3    140.7    310.7    282.5
    Operating                                51.9     53.7    101.0    102.1
    Depreciation                              3.8      3.7      7.2      7.1
    Amortization                              5.4      5.2     10.8     10.4
    Retail contingent commission related
     matters                                   -        -        -      35.0
         Expenses                           222.4    203.3    429.7    437.1

    Earnings from continuing operations
     before income taxes                     47.7     43.5     65.6     35.0
    Provision for income taxes               19.1     20.4     26.5     18.9
    Earnings from continuing operations     $28.6    $23.1    $39.1    $16.1

    Diluted earnings from continuing
     operations per share                   $0.29    $0.24    $0.40    $0.17
    Growth - revenues                          9%      11%       5%      11%
    Organic growth in commissions and
     fees  (1)                                 9%       1%       7%       1%
    Growth - pretax earnings                  10%      -2%       NMF      NMF
    Compensation expense ratio  (2)           60%      59%      63%      63%
    Operating expense ratio  (2)              19%      23%      20%      23%
    Pretax profit margin before retail
     contingent commission matters (2)        17%      14%      13%      10%
    Effective tax rate                        40%      47%      40%      54%

    RISK MANAGEMENT SEGMENT

    Fees                                    $97.5    $89.0   $194.5   $180.0
    Investment income                         0.9      0.6      1.9      1.2
         Revenues                            98.4     89.6    196.4    181.2

    Compensation                             58.0     48.4    114.1     99.8
    Operating                                24.6     20.4     49.1     41.5
    Depreciation                              2.2      2.2      4.3      4.0
    Amortization                              0.1      0.1      0.2      0.2
         Expenses                            84.9     71.1    167.7    145.5

    Earnings from continuing operations
     before income taxes                     13.5     18.5     28.7     35.7
    Provision for income taxes                5.3      7.6     11.5     14.6
    Earnings from continuing operations      $8.2    $10.9    $17.2    $21.1

    Diluted earnings from continuing
     operations per share                   $0.08    $0.11    $0.18    $0.22
    Growth - revenues                         10%       4%       8%       8%
    Organic growth in fees  (1)               10%       4%       8%       8%
    Growth - pretax earnings                 -27%      32%     -20%      35%
    Compensation expense ratio                59%      54%      58%      55%
    Operating expense ratio                   25%      23%      25%      23%
    Pretax profit margin                      14%      21%      15%      20%
    Effective tax rate                        39%      41%      40%      41%

    FINANCIAL SERVICES SEGMENT

    Investment income:
      Asset Alliance Corporation            $(1.9)   $(0.8)   $(1.0)    $0.1
      Low income housing developments         0.1      0.1      0.3       -
      IRC Section 29 Syn/Coal facilities:
         Three unconsolidated facilities      1.6     15.3      3.7     27.8
         Two consolidated facilities          3.6     12.8      3.6     25.6
      Other alternative energy
       investments                           (0.7)     0.3     (1.4)     1.3
      Home office land and building           1.3      2.3      2.0      3.7
      Airplane leasing company                0.9      1.0      1.7      2.0
      Real estate, venture capital and
       other investments                      0.6     (0.1)     0.9      0.4
                                              5.5     30.9      9.8     60.9
    Investment gains (losses)                (3.4)     3.8     (3.4)     3.7
         Revenues                             2.1     34.7      6.4     64.6

    Investment expenses:
      IRC Section 29 Syn/Coal facilities:
         Three unconsolidated facilities      3.8      7.7      7.3      8.6
         Two consolidated facilities          5.6     22.3      5.9     44.9
      Compensation, professional fees and
       other                                  2.6      3.2      3.2      6.1
                                             12.0     33.2     16.4     59.6
    Interest                                  2.1      3.0      4.2      5.6
    Depreciation                              1.5      3.1      3.4      6.4
    Litigation related matters                 -        -        -     131.0
         Expenses                            15.6     39.3     24.0    202.6

    Earnings (loss) from continuing
     operations before income taxes         (13.5)    (4.6)   (17.6)  (138.0)
    Benefit for income taxes                (13.3)   (14.8)   (15.0)   (71.4)
    Earnings (loss) from continuing
     operations                             $(0.2)   $10.2    $(2.6)  $(66.6)

    Diluted earnings (loss) from
     continuing operations per share         $-      $0.11   $(0.03)  $(0.71)

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


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

                                         3 Months 3 Months 6 Months 6 Months
                                           Ended    Ended    Ended    Ended
                                          June 30, June 30, June 30, June 30,
    TOTAL COMPANY                           2006     2005     2006     2005

    Commissions                            $214.4   $191.7   $396.6   $367.5
    Retail contingent commissions             0.9      9.4      1.9     26.1
    Fees                                    146.3    129.9    278.0    250.3
    Investment income - Brokerage and
     Risk Management                          6.9      5.4     15.2      9.4
    Investment income - Financial
     Services                                 5.5     30.9      9.8     60.9
    Investment gains (losses)                (3.4)     3.8     (3.4)     3.7
         Revenues                           370.6    371.1    698.1    717.9

    Compensation                            219.3    189.1    424.8    382.3
    Operating                                76.5     74.1    150.1    143.6
    Investment expenses                      12.0     33.2     16.4     59.6
    Interest                                  2.1      3.0      4.2      5.6
    Depreciation                              7.5      9.0     14.9     17.5
    Amortization                              5.5      5.3     11.0     10.6
    Litigation related matters                 -        -        -     131.0
    Retail contingent commission related
     matters                                   -        -        -      35.0
         Expenses                           322.9    313.7    621.4    785.2

    Earnings (loss) from continuing
     operations before income taxes          47.7     57.4     76.7    (67.3)
    Provision (benefit) for income taxes     11.1     13.2     23.0    (37.9)
    Earnings (loss) from continuing
     operations                              36.6     44.2     53.7    (29.4)

    Earnings on discontinued operations,
     net of income taxes                       -       7.6       -       2.2

    Net earnings (loss)                     $36.6    $51.8    $53.7   $(27.2)

    Diluted earnings (loss) from
     continuing operations per share        $0.37    $0.46    $0.55   $(0.32)
    Diluted earnings on discontinued
     operations per share                     -       0.08      -       0.03
    Diluted net earnings (loss) per share   $0.37    $0.54    $0.55   $(0.29)

    Dividends declared per share            $0.30    $0.28    $0.60    $0.56

    Other Information
    Basic weighted average shares
     outstanding (000s)                    96,814   93,790   96,472   93,135
    Diluted weighted average shares
     outstanding (000s)                    98,034   95,584   97,905   95,194
    Common shares repurchased (000s)          431       59      449       59
    Annualized return on beginning
     tangible net worth (3)                                     31%       NMF
    Number of acquisitions closed               4        5        5        7
    Workforce at end of period (includes
     acquisitions)                                            8,358    8,052

    Earnings (Loss) From Continuing
     Operations Before Litigation and
     Contingent Commission Related
     Matters, Investment (Gains) Losses,
     Pension Plan Curtailment Gain,
     Depreciation, Amortization and
     Stock Compensation Expense (4)
    Earnings (loss) from continuing
     operations                             $36.6    $44.2    $53.7   $(29.4)
    Litigation and contingent commission
     related matters                           -        -        -     166.0
    Investment (gains) losses                 3.4     (3.8)     3.4     (3.7)
    Pension plan curtailment gain              -     (10.0)      -     (10.0)
    Depreciation                              7.5      9.0     14.9     17.5
    Amortization                              5.5      5.3     11.0     10.6
    Amortization of deferred comp and
     restricted stock                         3.9      1.4      5.7      4.1
    Stock compensation expense                3.9      2.0      8.2      4.2
    Tax effect                               (9.7)    (1.6)   (17.3)   (75.5)
    Earnings (loss) from continuing
     operations before, litigation and
     contingent commission related matters,
     investment (gains) losses, pension
     plan curtailment gain depreciation,
     amortization and stock compensation
     expense                                $51.1    $46.5    $79.6    $83.8

    On a diluted per share basis            $0.52    $0.49    $0.81    $0.88

    See notes to second 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)

                                             June 30, 2006      Dec 31, 2005

    Cash and cash equivalents                       $222.4            $317.8
    Restricted cash                                  609.1             518.3
    Unconsolidated investments - current              28.1              43.2
    Premiums and fees receivable                   1,618.2           1,396.8
    Other current assets                             122.0             125.7
         Total current assets                      2,599.8           2,401.8

    Unconsolidated investments -
     noncurrent                                       62.0              68.2
    Fixed assets related to consolidated
     investments - net                               122.9             126.0
    Other fixed assets - net                          66.5              59.1
    Deferred income taxes                            246.6             236.1
    Other noncurrent assets                           83.1              80.1
    Goodwill - net                                   273.3             245.7
    Amortizable intangible assets - net              184.1             172.5
         Total assets                             $3,638.3          $3,389.5


    Premiums payable to insurance and
     reinsurance companies                        $2,239.6          $1,917.4
    Accrued compensation and other
     accrued liabilities                             242.8             378.3
    Unearned fees                                     34.7              35.7
    Income taxes payable                              24.5              24.6
    Other current liabilities                         19.4              25.0
    Corporate related borrowings                      35.0                -
    Investment related borrowings -
     current                                           7.2               5.3
         Total current liabilities                 2,603.2           2,386.3

    Investment related borrowings -
     noncurrent                                      104.3             107.6
    Other noncurrent liabilities                     129.6             126.5
         Total liabilities                         2,837.1           2,620.4

    Stockholders' equity:
    Common stock - issued and outstanding             97.2              95.7
    Capital in excess of par value                   250.9             216.3
    Retained earnings                                459.1             463.7
    Accumulated other comprehensive
     earnings (loss)                                  (6.0)             (6.6)
         Total stockholders' equity                  801.2             769.1
         Total liabilities and
          stockholders' equity                    $3,638.3          $3,389.5

    Other Information
    Tangible net worth  (5)                         $343.8            $350.9
    Book value per share                             $8.24             $8.04
    Tangible book value per share  (6)               $3.54             $3.67

    Notes to Second 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 pretax earnings (loss) from continuing operations before
         the impact of pretax retail contingent commission related matters
         divided by total revenues, excluding retail contingent commissions.
         Compensation expense and operating expense ratios are computed using
         total revenues after excluding retail contingent commissions matters.

    (3)  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.

    (4)  Represents net earnings before the after-tax effect of the impact of
         litigation and contingent commission related matters, investment
         gains (losses), pension plan curtailment gain, depreciation,
         amortization, amortization of deferred compensation and restricted
         stock expense and stock compensation expense.

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

    (6)  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)

                                                               June 30, 2006
                                                              LOCs &
                         June 30, 2006    December 31, 2005 Financial Funding
                                 Non-              Non   -    Guaran- Commit-
                        Current  current  Current  current     tees    ments

    Unconsolidated
     Investments:
    Direct and indirect
     investments in Asset
     Alliance Corporation
     (AAC):
      Common stock          $-     $14.0      $-    $15.5        $-      $-
      Preferred stock      0.1      13.3     0.1     13.3         -       -
      Debentures          12.8         -    13.2        -         -       -
      Indirectly held        -       1.3       -      1.4         -       -
     Total AAC            12.9      28.6    13.3     30.2         -       -

    Low income housing
       (LIH) developments:
      Bridge loans         4.4         -     5.4        -         -       -
      Partnership
       interests             -       0.9       -      1.1         -       -
      LIH Developer          -       9.1       -      8.9         -       -

      Total LIH
       developments        4.4      10.0     5.4     10.0         -       -

    Alternative energy
     investments:
      IRC Section 29
       Syn/Coal
       production net
       receivables        (6.3)        -    14.9        -         -       -
      IRC Section 29
       Syn/Coal
       unamortized
       assets              6.4       3.4     6.5      6.7         -       -
      Equity interest
       in biomass
       projects and
       pipeline            0.1      12.6     0.1     13.9         -       -
      Clean energy
       related             0.1       0.8       -      0.7         -     0.7
      Oil price
       derivative          9.6         -       -        -         -       -

      Total alternative
        energy investments 9.9      16.8    21.5     21.3         -     0.7

    Real estate, venture
     capital and other
     investments           0.9       6.6     3.0      6.7      17.0(7)  0.6

      Total unconsolidated
       investments       $28.1     $62.0   $43.2    $68.2     $17.0    $1.3


    (7)  In 2005, Gallagher sold its ownership interest in a Florida
         residential real estate development.  Terms of the transaction
         require Gallagher to continue to post a  $12.6 million letter of
         credit to guarantee $12.4 million related to certain bonds issued by
         the residential development during Gallagher's ownership of that
         development.  Gallagher will be fully indemnified from any loss that
         it may incur on these LOCs by a guarantee from an affiliate of the
         purchaser.

         Gallagher has a $4.4 million LOC outstanding related to the
         reclamation of a former IRC Section 29-related Syn/Coal site.


                         Consolidated Investment Summary
                            (Unaudited - in millions)

                                                           June 30, 2006
                                                          LOCs &
                                  June 30, December 31, Financial    Funding
                                    2006      2005      Guarantees Commitments

    Home office land and building:
      Fixed assets                 $102.0    $101.9        $-          $-
      Accumulated depreciation      (17.9)    (18.3)        -           -
      Non-recourse borrowings
       - current                     (1.0)     (0.9)        -           -
      Non-recourse borrowings
       - noncurrent                 (71.7)    (72.2)        -           -
      Recourse borrowings
       - noncurrent                  (3.0)     (3.0)        -           -
      Net other consolidated
       assets and liabilities         3.3       4.0        3.0          -

           Net investment            11.7      11.5        3.0          -

    Airplane leasing company:
      Fixed assets                   51.8      51.8         -           -
      Accumulated depreciation      (19.5)    (17.7)        -           -
      Non-recourse borrowings
       - current                     (2.0)     (1.9)        -           -
      Non-recourse borrowings
        - noncurrent                (27.0)    (28.0)        -           -
      Recourse borrowings
       - noncurrent                     -         -         -           -
      Net other consolidated
       assets and liabilities        (0.5)     (0.4)        -           -

           Net investment             2.8       3.8         -           -

    IRC Section 29 Syn/Coal
      partnerships:
      Fixed assets                   15.6      15.6         -           -
      Accumulated depreciation       (9.1)     (7.3)        -           -
      Non-recourse borrowings
       - current                     (4.2)     (2.5)        -           -
      Non-recourse borrowings
       - noncurrent                  (2.6)     (4.4)        -           -
      Recourse borrowings
       - noncurrent                     -         -         -           -
      Net other consolidated assets
       and liabilities                0.2      (1.3)        -           -

           Net investment            (0.1)      0.1         -           -

    Total consolidated investments:
      Fixed assets                  169.4     169.3         -           -
      Accumulated depreciation      (46.5)    (43.3)        -           -
      Non-recourse borrowings
       - current                     (7.2)     (5.3)        -           -
      Non-recourse borrowings
        - noncurrent               (101.3)   (104.6)        -           -
      Recourse borrowings
       - noncurrent                  (3.0)     (3.0)        -           -
      Net other consolidated assets
       and liabilities                3.0       2.3        3.0          -

           Net investment           $14.4     $15.4       $3.0         $-
SOURCE  Arthur J. Gallagher & Co.
    -0-                             07/25/2006
    /CONTACT: Investor Relations, Marsha J. Akin 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

CM-AB
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0400 07/25/2006 16:31 EDT http://www.prnewswire.com