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

ITASCA, Ill., Oct. 24 /PRNewswire-FirstCall/ -- Gallagher today reported its financial results for the quarter and nine-month period ended September 30, 2006. A printer-friendly format is available at http://www.ajg.com .



    Quarter Ended September 30
                                                     Pretax       Diluted Net
                                                    Earnings       Earnings
                              Revenues               (Loss)        Per Share
                            3rd Q    3rd Q         3rd Q  3rd Q  3rd Q  3rd Q
    Segment                  06       05    Chg     06     05     06     05
                           $ in millions         $ in millions

    Brokerage              $286.7   $262.1   9%   $59.8  $51.4  $0.36  $0.28
      Contingent Commission
       Matters                0.2      2.0          0.2    2.0    -     0.01

    Total Brokerage         286.9    264.1         60.0   53.4   0.36   0.29

    Risk Management         105.6     94.3  12%    18.6   16.5   0.12   0.10

    Financial Services       28.7     31.5        (17.8)  (4.3)  0.03   0.13

    Total Company          $421.2   $389.9        $60.8  $65.6  $0.51  $0.52


    Nine Months Ended September 30
                                                                  Diluted Net
                                                     Pretax         Earnings
                                                    Earnings         (Loss)
                               Revenues              (Loss)        Per Share
                            9 Mths   9 Mths       9 Mths  9 Mths 9 Mths 9 Mths
    Segment                   06       05    Chg    06      05     06     05

                            $ in millions         $ in millions

    Brokerage               $780.1   $708.1  10%  $123.5  $88.4  $0.75  $0.46
      Contingent Commission
       Matters                 2.1     28.1          2.1   (6.9)  0.01  (0.04)
      Pension Curtailment
       Gain                    -        -            -      6.9    -     0.04

    Total Brokerage          782.2    736.2        125.6   88.4   0.76   0.46

    Risk Management          302.0    275.5  10%    47.3   49.1   0.29   0.30
      Pension Curtailment
       Gain                    -        -            -      3.1    -     0.02

    Total Risk Management    302.0    275.5         47.3   52.2   0.29   0.32

    Financial Services        35.1     96.1        (35.4) (11.3)  0.01   0.10
      Litigation Matters       -        -            -   (131.0)   -    (0.66)

    Discontinued Operations    -        -            -      -      -     0.03

    Total Company         $1,119.3 $1,107.8       $137.5  $(1.7) $1.06  $0.25


"I am pleased with our solid third quarter results. Our Brokerage Segment posted 5% organic revenue growth and our Risk Management Segment posted 12% organic revenue growth," said J. Patrick Gallagher, Jr., President and Chief Executive Officer. "For the nine months ended September 30, 2006, our combined Brokerage and Risk Management Segments posted a 24% increase in pretax earnings, excluding contingent commission matters and pension plan curtailment gains. Everyday, our global network of professionals focus on delivering excellent and high quality service to our clients."

    Brokerage Segment Highlights

    --  Revenue growth of 9%, excluding contingent commissions, of which 5% 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          0.2



    --  Third quarter 2006 compensation expense ratio, excluding retail
        contingent commission matters, was 0.5% lower than 2005.  Reduced
        employee benefit expenses of 0.7% and productivity improvements gained
        throughout the past year were partially offset by additional stock
        compensation expense of 0.5%, the impact of foreign currency of
        0.3% and severance costs.
    --  Third quarter operating expense ratio, excluding retail contingent
        commission matters, was 0.9% lower than 2005, mostly reflecting
        decreased insurance costs of 0.4%, the impact of productivity
        improvements and expense savings initiatives put in place in the
        latter part of 2005.
    --  Pretax margin of 21%, excluding retail contingent commission matters.
        The 1.2% 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 third 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.
    --  Third quarter effective tax rate was 41% in 2006 and 47% in 2005.  The
        effective tax rate for the Brokerage Segment in 2005 was adversely
        impacted by the annualized effect of nondeductible operating losses in
        some foreign operations.  See effective tax rate discussion below.


    Risk Management Segment Highlights

    --  Revenue growth of 12%, all of which is organic.  International
        revenues were up 72%, reflecting the previously announced large new
        Australian client.  In addition, during third quarter 2006, Gallagher
        recognized $5.2 million of service and quality-based performance bonus
        revenue related to a large Australian client.  A similar $1.7 million
        bonus was recognized in third quarter 2005.
    --  Third quarter 2006 compensation expense ratio was 0.8% lower than
        2005.  Additional employee benefit expenses of 0.8%, additional stock
        compensation expense of 0.3% and increased staffing levels, were more
        than offset by the impact of the performance bonus revenue discussed
        above.
    --  Third quarter operating expense ratio was 0.2% higher than 2005 due to
        increased real estate lease costs, outside fees and office expenses,
        which were offset in part by decreased insurance costs and the impact
        of the performance bonus revenue discussed above.
    --  Pretax margin of 18%, which is consistent with 2005.  Excluding the
        incremental impact of the performance bonus revenue discussed above,
        the 2006 pretax margin would have been 2.6% lower due to 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 third 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.
    --  Third quarter effective tax rate was 39% in 2006 and 41% in 2005.  See
        effective tax rate discussion below.


    Financial Services Segment Highlights

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 $61.00 per barrel for calendar 2006 for any phase-out to
        begin and average approximately $77.00 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 September 30, 2006 was
        $68.16.  The ending NYMEX Price at September 30, 2006 was $62.91 and
        $58.93 on October 17, 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 third quarter 2006 revenues, expenses and income tax
        provisions, Gallagher estimated an average 2006 calendar year NYMEX
        Price of $67.00.  This average would produce an IRC Section 29
        phase-out of approximately 37% and was determined by using actual
        daily closing prices from January 1, 2006 to September 30, 2006 and
        with the assumption that oil prices would average approximately
        $63.00 per barrel for the remainder of 2006.
    --  Gallagher has operated its three IRC Section 29-related Syn/Coal
        facilities, that have historically generated installment sale gains,
        but relatively few tax credits for Gallagher, throughout 2006.
    --  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
        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 $0.3 million at September 30, 2006
        and $9.6 million at June 30, 2006, which resulted in an unrealized
        loss of $9.3 million in third quarter 2006 that was included in the
        Financial Services Segment operating results.  Gallagher has not
        determined whether it will enter into similar hedging arrangements for
        2007.
    --  At September 30, 2006, the remaining carrying value of the five
        facilities and other related assets was approximately $11.2 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
        fourth quarter 2006, assuming three possible average oil prices:


           Average       Estimated Range of Operating Results for the
        Fourth Quarter  Financial Services Segment - Fourth Quarter 2006
          2006 NYMEX                                    Earnings (Loss)
          Oil Price           Pretax Loss              per Diluted Share
           $60.00       ($16.0) to ($14.0) million      $0.04 to $0.06
           $63.00       ($17.0) to ($15.0) million      $0.00 to $0.02
           $66.00       ($18.0) to ($16.0) million    ($0.03) to ($0.01)


    --  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 have caused
        volatility in the 2006 quarterly operating results of the Financial
        Services Segment and could continue to do so in fourth quarter 2006.
        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.
    --  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 September 30,
        2006 was 24%, which decreased from a projected rate of 30% used in
        second 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 June 30, 2006.
    --  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 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, October 25, 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  9 Months  9 Months
                                       Ended     Ended     Ended     Ended
                                       Sep 30,   Sep 30,   Sep 30,   Sep 30,
    BROKERAGE SEGMENT                   2006      2005      2006      2005

    Commissions                        $229.8    $213.8    $626.4    $581.3
    Retail contingent commissions         0.2       2.0       2.1      28.1
    Fees                                 48.0      43.7     131.5     114.0
    Investment income and other           8.9       4.6      22.2      12.8
         Revenues                       286.9     264.1     782.2     736.2

    Compensation                        161.6     149.0     472.3     431.5
    Operating                            55.2      52.9     156.2     155.0
    Depreciation                          4.4       3.8      11.6      10.9
    Amortization                          5.7       5.0      16.5      15.4
    Retail contingent commission
     related matters                       -         -         -       35.0
         Expenses                       226.9     210.7     656.6     647.8

    Earnings from continuing
     operations before income taxes      60.0      53.4     125.6      88.4
    Provision for income taxes           24.6      25.1      51.1      44.0
    Earnings from continuing
     operations                         $35.4     $28.3     $74.5     $44.4

    Diluted earnings from continuing
     operations per share               $0.36     $0.29     $0.76     $0.46
    Growth - revenues                      9%       10%        6%       11%
    Organic growth in commissions and
     fees (1)                              5%        1%        6%        1%
    Growth - pretax earnings              12%       -6%       42%      -34%
    Compensation expense ratio (2)        56%       57%       61%       61%
    Operating expense ratio (2)           19%       20%       20%       22%
    Pretax profit margin before retail
     contingent commission matters (2)    21%       20%       16%       13%
    Effective tax rate                    41%       47%       41%       50%

    RISK MANAGEMENT SEGMENT

    Fees                               $104.6      $93.5    $299.1    $273.5
    Investment income                     1.0        0.8       2.9       2.0
         Revenues                       105.6       94.3     302.0     275.5

    Compensation                         58.5       53.0     172.6     152.8
    Operating                            25.7       22.8      74.8      64.3
    Depreciation                          2.6        1.9       6.9       5.9
    Amortization                          0.2        0.1       0.4       0.3
         Expenses                        87.0       77.8     254.7     223.3

    Earnings from continuing
     operations before income taxes      18.6       16.5      47.3      52.2
    Provision for income taxes            7.3        6.8      18.8      21.4
    Earnings from continuing
     operations                         $11.3       $9.7     $28.5     $30.8

    Diluted earnings from continuing
     operations per share               $0.12      $0.10     $0.29     $0.32
    Growth - revenues                     12%         7%       10%        8%
    Organic growth in fees (1)            12%         7%        9%        8%
    Growth - pretax earnings              13%         6%       -9%       25%
    Compensation expense ratio            55%        56%       57%       55%
    Operating expense ratio               24%        24%       25%       23%
    Pretax profit margin                  18%        18%       16%       19%
    Effective tax rate                    39%        41%       40%       41%

    FINANCIAL SERVICES SEGMENT

    Investment income:
      Asset Alliance Corporation        $(0.3)     $0.9     $(1.3)     $1.0
      Low income housing developments    (1.7)       -       (1.4)       -
      IRC Section 29 Syn/Coal
       facilities:
         Three unconsolidated
          facilities                     16.5      14.2      20.2      42.0
         Two consolidated facilities     21.7      13.1      25.3      38.7
      Other alternative energy
       investments                       (0.4)       -       (1.8)      1.3
      Home office land and building       1.1       1.6       3.1       5.3
      Airplane leasing company            0.9       1.0       2.6       3.0
      Real estate, venture capital
       and other investments              0.1       0.2       1.0       0.6
                                         37.9      31.0      47.7      91.9
    Investment gains (losses)            (9.2)      0.5     (12.6)      4.2
         Revenues                        28.7      31.5      35.1      96.1

    Investment expenses:
      IRC Section 29 Syn/Coal facilities:
         Three unconsolidated
          facilities                      6.0       4.1      13.3      12.7
         Two consolidated facilities     33.5      22.0      39.4      66.9
      Compensation, professional
       fees and other                     3.0       4.4       6.2      10.5
                                         42.5      30.5      58.9      90.1
    Interest                              2.1       2.9       6.3       8.5
    Depreciation                          1.9       2.4       5.3       8.8
    Litigation related matters             -         -         -      131.0
         Expenses                        46.5      35.8      70.5     238.4

    Earnings (loss) from continuing
     operations before income taxes     (17.8)     (4.3)    (35.4)   (142.3)
    Benefit for income taxes            (21.3)    (16.8)    (36.3)    (88.2)
    Earnings (loss) from continuing
     operations                          $3.5     $12.5      $0.9    $(54.1)

    Diluted earnings (loss) from
     continuing operations per share    $0.03     $0.13     $0.01    $(0.56)

    See notes to third 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  9 Months  9 Months
                                       Ended     Ended     Ended     Ended
    TOTAL COMPANY                      Sep 30,   Sep 30,   Sep 30,   Sep 30,
                                        2006      2005      2006      2005

    Commissions                        $229.8    $213.8    $626.4    $581.3
    Retail contingent commissions         0.2       2.0       2.1      28.1
    Fees                                152.6     137.2     430.6     387.5
    Investment income - Brokerage
     and Risk Management                  9.9       5.4      25.1      14.8
    Investment income - Financial
     Services                            37.9      31.0      47.7      91.9
    Investment gains (losses)            (9.2)      0.5     (12.6)      4.2
         Revenues                       421.2     389.9   1,119.3   1,107.8

    Compensation                        220.1     202.0     644.9     584.3
    Operating                            80.9      75.7     231.0     219.3
    Investment expenses                  42.5      30.5      58.9      90.1
    Interest                              2.1       2.9       6.3       8.5
    Depreciation                          8.9       8.1      23.8      25.6
    Amortization                          5.9       5.1      16.9      15.7
    Litigation related matters             -         -         -      131.0
    Retail contingent commission
     related matters                       -         -         -       35.0
         Expenses                       360.4     324.3     981.8   1,109.5

    Earnings (loss) from continuing
     operations before income taxes      60.8      65.6     137.5      (1.7)
    Provision (benefit) for
     income taxes                        10.6      15.1      33.6     (22.8)
    Earnings from continuing
     operations                          50.2      50.5     103.9      21.1

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

    Net earnings                        $50.2     $50.5    $103.9     $23.3

    Diluted earnings from continuing
     operations per share               $0.51     $0.52     $1.06     $0.22
    Diluted earnings on discontinued
     operations per share                 -         -         -        0.03
    Diluted net earnings per share      $0.51     $0.52     $1.06     $0.25

    Dividends declared per share        $0.30     $0.28     $0.90     $0.84

    Other Information
    Basic weighted average shares
     outstanding (000s)                97,456    94,912    96,800    93,727
    Diluted weighted average shares
     outstanding (000s)                98,453    96,583    98,089    95,653
    Common shares repurchased (000s)       10        11       459        70
    Annualized return on beginning
     tangible net worth (3)                                   39%        8%
    Number of acquisitions closed           3         1         8         8
    Workforce at end of period
     (includes acquisitions)                                8,469     8,099

    Earnings 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 from continuing
     operations                         $50.2     $50.5    $103.9     $21.1
    Litigation and contingent
     commission related matters            -         -         -      166.0
    Investment (gains) losses             9.2      (0.5)     12.6      (4.2)
    Pension plan curtailment gain          -         -         -      (10.0)
    Depreciation                          8.9       8.1      23.8      25.6
    Amortization                          5.9       5.1      16.9      15.7
    Amortization of deferred comp
     and restricted stock                 1.4       1.5       7.1       5.6
    Stock compensation expense            4.0       2.3      12.2       6.5
    Tax effect                          (11.8)     (6.6)    (29.0)    (82.1)
    Earnings from continuing
     operations before,
     litigation and contingent
     commission related matters,
     investment (gains) losses,
     pension plan curtailment gain
     depreciation, amortization and
     stock compensation expense         $67.8     $60.4    $147.5    $144.2

    On a diluted per share basis        $0.69     $0.63     $1.50     $1.51

    See notes to third 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)

                                                Sep 30, 2006      Dec 31, 2005

    Cash and cash equivalents                       $231.1            $317.8
    Restricted cash                                  637.9             518.3
    Unconsolidated investments - current              36.9              43.2
    Premiums and fees receivable                   1,303.1           1,396.8
    Other current assets                             128.9             125.7
         Total current assets                      2,337.9           2,401.8

    Unconsolidated investments - noncurrent           57.4              68.2
    Fixed assets related to consolidated
     investments - net                               121.1             126.0
    Other fixed assets - net                          68.0              59.1
    Deferred income taxes                            263.9             236.1
    Other noncurrent assets                           85.7              80.1
    Goodwill - net                                   287.0             245.7
    Amortizable intangible assets - net              194.1             172.5
         Total assets                             $3,415.1          $3,389.5


    Premiums payable to insurance and
     reinsurance companies                        $1,952.1          $1,917.4
    Accrued compensation and other
     accrued liabilities                             276.1             378.3
    Unearned fees                                     36.4              35.7
    Income taxes payable                              38.9              24.6
    Other current liabilities                         18.3              25.0
    Corporate related borrowings                        -                 -
    Investment related borrowings - current            8.1               5.3
         Total current liabilities                 2,329.9           2,386.3

    Investment related borrowings - noncurrent       102.7             107.6
    Other noncurrent liabilities                     136.7             126.5
         Total liabilities                         2,569.3           2,620.4

    Stockholders' equity:
    Common stock - issued and outstanding             98.1              95.7
    Capital in excess of par value                   273.8             216.3
    Retained earnings                                479.9             463.7
    Accumulated other comprehensive
     earnings (loss)                                  (6.0)             (6.6)
         Total stockholders' equity                  845.8             769.1
         Total liabilities and
          stockholders' equity                    $3,415.1          $3,389.5

    Other Information
    Tangible net worth (5)                          $364.7            $350.9
    Book value per share                             $8.62             $8.04
    Tangible book value per share (6)                $3.72             $3.67



    Notes to Third 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)
                                                            September 30, 2006
                                                               LOCs &
                       September 30, 2006  December 31, 2005 Financial Funding
                                    Non-                Non-   Guar-   Commit-
                         Current  current    Current  current  antees  ments
    Unconsolidated
     Investments:
    Direct and indirect
     investments in Asset
     Alliance Corporation
     (AAC):
         Common stock       $-     $13.5       $-      $15.5     $-      $-
         Preferred stock    0.1     13.3       0.1      13.3      -       -
         Debentures        13.0       -       13.2        -       -       -
         Indirectly held     -       1.2        -        1.4      -       -

      Total AAC            13.1     28.0      13.3      30.2      -       -

    Low income housing
     (LIH) developments:
      Bridge loans          1.8       -        5.4        -       -       -
      Partnership
       interests             -       0.8        -        1.1      -       -
      LIH Developer          -       7.3        -        8.9      -       -

      Total LIH
       developments         1.8      8.1       5.4      10.0      -       -

    Alternative energy
     investments:
      IRC Section 29
       Syn/Coal
       production net
       receivables         14.4       -       14.9        -       -       -
      IRC Section 29
       Syn/Coal
       unamortized
       assets               6.4      1.8       6.5       6.7      -       -
      Equity interest in
       biomass projects
       and pipeline         0.1     12.2       0.1      13.9      -       -
      Clean energy
       related               -       0.6        -        0.7      -      0.8
      Oil price
       derivative           0.3       -         -         -       -       -

      Total alternative
       energy investments  21.2     14.6      21.5      21.3      -      0.8

    Real estate, venture
     capital and other
     investments            0.8      6.7       3.0       6.7    17.0(7)  0.6

      Total unconsolidated
       investments        $36.9    $57.4     $43.2     $68.2   $17.0    $1.4


    (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)

                                                            September 30, 2006
                                                             LOCs &
                                                            Financial Funding
                                 September 30, December 31,   Guar-   Commit-
                                     2006          2005       antees   ments

    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       (71.4)        (72.2)        -       -
      Recourse borrowings -
       noncurrent                     (3.0)         (3.0)        -       -
      Net other consolidated
       assets and liabilities          3.0           4.0        3.0      -

           Net investment             11.7          11.5        3.0      -

    Airplane leasing company:
      Fixed assets                    51.8          51.8         -       -
      Accumulated depreciation       (20.4)        (17.7)        -       -
      Non-recourse
       borrowings - current           (2.1)         (1.9)        -       -
      Non-recourse
       borrowings - noncurrent       (26.5)        (28.0)        -       -
      Recourse borrowings -
       noncurrent                       -             -          -       -
      Net other consolidated
       assets and liabilities         (0.5)         (0.4)        -       -

           Net investment              2.3           3.8         -       -

    IRC Section 29 Syn/Coal
     partnerships:
      Fixed assets                    15.7          15.6         -       -
      Accumulated depreciation       (10.1)         (7.3)        -       -
      Non-recourse
       borrowings - current           (5.0)         (2.5)        -       -
      Non-recourse
       borrowings - noncurrent        (1.8)         (4.4)        -       -
      Recourse borrowings -
       noncurrent                       -             -          -       -
      Net other consolidated
       assets and liabilities          0.3          (1.3)        -       -

           Net investment             (0.9)          0.1         -       -

    Total consolidated
     investments:
      Fixed assets                   169.5         169.3         -       -
      Accumulated depreciation       (48.4)        (43.3)        -       -
      Non-recourse
       borrowings - current           (8.1)         (5.3)        -       -
      Non-recourse
       borrowings - noncurrent       (99.7)       (104.6)        -       -
      Recourse borrowings -
       noncurrent                     (3.0)         (3.0)        -       -
      Net other consolidated
       assets and liabilities          2.8           2.3        3.0      -

           Net investment            $13.1         $15.4       $3.0     $-
SOURCE  Arthur J. Gallagher & Co.
    -0-                             10/24/2006
    /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:  INS FIN
SU:  ERN ERP CCA

AM-JR
-- CGTU058 --
7910 10/24/2006 16:28 EDT http://www.prnewswire.com