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. , 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 $-