Willis Towers Watson PLC (WTW) 2002 Q3 法說會逐字稿

Good morning and welcome to the Willis third quarter earnings conference call.

All participants will be able to listen only until the question and answer session.

At that time, you'll be instructed as to how to ask a question.

For instant replay purposes, this conference call is being recorded.

If you have any objections, you may disconnect at this time.

I'd now like to turn your conference over to Ms. Kerry Calaiaro.

Good morning and welcome to our conference call.

On our call today are Joe Plumeri, chief executive officer, Tom Colraine, our chief financial officer, and Richard Buckall, chief operating officer.

This teleconference call will be available for replay beginning at 10:30 this morning eastern standard time and ending at 5:00 p.m. on November 12th.

To access the audio replace, please call (888)568-0902 within the U.S., or (402)998-1576 from outside, or by accessing the website.

If you have any questions after the call, please call me directly at (212)837-0880.

As we begin our call, let me remind you that we may make certain statements relating to future results which are forward-looking statements as this term is defined by the securties exchange reform act of 1995.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results for those anticipated.

Additional information concerning risk factors that could cause such a difference can be found in the company's documents filed with the securities and exchange commission from time to time.

I'd like to call the turn over to Joe Plumeri now.

Good morning everybody, As usual, when we're finished with our comments, we'll be glad to answer any questions that you might have.

I guess the overview of the quarter is a manifestation of what we've been trying to do here at Willis, which is to build a great company.

And you do that by improving quarter by quarter, doing all the kinds of things that we always suggested very simply.

Build a sales culture, invest in our people, train our people, recruit good talent, invest in systems, and don't waste any money while we're doing all of that stuff, so that we could continue to build on this great company and build quarter by quarter, and I think the third quarter, although traditionally not the quarter that everybody looks toward in terms of sequencing or (incomprehensive), we're very pleased that it meets all the criteria that I just mentioned.

As a pure broker and with our model that we adhere to all the time, what you see is our revenues growing because of the sales culture beginning to take hold, manifesting itself, our pipelines manifesting itself, hiring good people as we said we would on the last call.

I said we were going to hire people, and we were going to invest in training and invest in systems, and you see all of that wrapped up in the expenses that we have incurred or are all sales-related types of expenses that build on a theme, build toward an objective, build toward a platform that improves the service and the delivery of that service, which is what those system builds are all about.

So when I look back, as we should, and the entire company is focused on those items, you look back, as I said, to our people, I look back on those things, I say, you know, are we gaining on it?

Our dream, our goal is to build a great company, and every day you're supposed to wake up and figure out whether or not you gained on that dream, on that goal.

And if I look at the third quarter and I look at the results, I will say that we definitely gained on it, building steadily quarter by quarter, getting better every time.

The market conditions, just to throw our 2 cents in, obviously the global market, insurance market is hard, and we, as I've mentioned on several occasions, expect it to continue for some time.

Certainly through 2003, and we wouldn't be surprised if it goes through 2004.

Rates continue to rise around the world, although it varies considerably by geography and line, we even see rates getting harder in Europe in some places, in France and Spain and places like that, which should obviously help reinforce the fact that our services are needed next year but also as it relates to rate.

It doesn't suggest, though, that there's lots of challenges in terms, conditions and pricing are all very, very difficult, but we look at it from the point of view that that represents great opportunity for our company.

Obviously as a pure broker, we don't underwrite.

Our model is the same.

That means that everybody at Willis works harder.

We have not in all the things that we've done, just to remind everybody changed the structure or the process of the way we do business.

Client advocates take care of our clients, and the rest of the company stands ready to help the client advocate because that's the person who knows our client the best, enhance our capabilities by virtue of the knowledge that we have of our client, so that we could do as good a job as possible.

That is the best model, I think, in the business, because it's model our clients tell us they want.

I will tell you, though, that means our people work harder than anybody else because we don't have people parachuting in to sell their wares.

We think it's the right model, it's certainly harder, and our people work very, very hard at what they do.

We're generating new business as well during all of this.

Our new account opening, which is the result of our pipeline, is about two accounts to every one that we lose, so I think we're moving along.

We're gaining on it, if you will, building a great company, and part of that definition is the sales culture that I make reference to.

Remember the way we look at business is you grow in three ways.

First and foremost, organically.

Open more accounts, sell more things to more people by virtue of understanding who they are and making them feel like they have an advocate, recruiting people to our company, who want to be part of what we're doing, rather than just moving from place to place.

That's not what we're looking for, but people that really want to engage.

Thirdly, in acquisitions, which we haven't done any of in the last year almost, but I'll talk about that in a second.

On an earnings basis, as you probably have already seen, our operating cash earnings rose 84% to 46,000,000 in the quarter and rose 92% to 188,000,000 for the nine months.

Our operating cash earnings per share for the quarter rose 75% to 28 cents and were up 64% to $1.13 for the nine months.

Our margins, operating margin was 21% for the quarter, for the nine months it was 27% and 800 basis point increase over 19% last year.

EBITDA margin was 23% for the quarter.

Before the nine months, EBITDA margin was 29% of500 basis points over last year, which was 24%, and just a remainder that our EBITDA margin for the entire year last year was 26%.

So we're already up 300 basis points over the entire year of a year ago.

The revenue grew 20% to 390 million in the quarter, and are up 21% to 1.252 billion through nine months, reflection of a sales culture and the hard market.

Organic revenue growth was 17% in the third quarter, up from 13% a year ago.

For the nine months, organic revenue growth was 17%.

So when I talk about the steady growth and improvement, obviously we look at the revenue line as being most important to us here.

Revenues is the way you build long-term growth and greatness in a company, it is building the top line.

And that's what we continue to focus on. 96% of our revenue are generated in commissions and fees with only 4% contribution from investment income, and of that, 96%, 70% is still commission-driven and 30% is fee-driven, which obviously provides us a great deal of leverage in this environment.

Each of our business units performed well.

They each contributed to our strong performance, and I would -- as far across the board teamwork.

As far as our recruit recruitment, which is one of the pegs in our growth, we've hired about 250 producers in 2002.

Most of them experienced.

This is in addition to the 230 producers we brought on board in 2001.

However, our net head count is up less than 2% from year-end.

It's about 165 net, to about 10,600 on a full time equivalent basis.

So what that means is, is that we keep our head count controlled, even though our revenues are growing, our employees and associates are working very, very hard.

We're very judicious about throwing people he problem.

And when I think you have a net head count up less than 2% and about half of those are producers, I think that's very good head count control and expense control and shows that what we try to do is look at rearranging our processes, engineering our business in such a way that it's more efficient rather than just go out, you know, and hire a lot of people, which I think over a long-term basis doesn't work.

We don't want to be a business where people are in and then they're out and depending upon cycles and all that sort of stuff.

We're trying to build a long-term great business and protect our people and do the right thing.

Our acquisition strategy is still in fine form.

It's very active, anticipating a question you might have, we've talk today a lot of people.

We're having lots of discussions, lots of diet cokes with people just to say hello because we don't know, speaking for myself, a lot of people that make up the insurance broking industry, but we've been very, very active.

We have a very disciplined pricing criteria.

We mentioned that before.

We want people who want to be in business with us and share our same passion and share our same sense of excitement for the future.

But believe me, we're very much in the game, looking at a lot of people, but only people who want to go in the same direction we want to go into and fit our pricing model.

We did complete three acquisitions, one in the United States, Goldman in California which has turned out to be just terrific, great partners.

I couldn't be more pleased to be in business with the Goldmans and two in Sweden, and we increased our ownership -- by the way, our position in Sweden is clearly number one, and it's a great place to grow business, do business, and these two acquisitions will really be helpful, you know, to us, one very fine employee benefits company which is something that we spend a lot of time in growing here.

We increased our ownership positions in certain business units in Germany, Italy, Australia, and Indonesia consistent with our strait strategy to unify our global presence. under the Willis brand.

We also announced four disposals of the business, of business units outside of our core brokerage.

What that means is, is you've heard me talk a lot about we're not in the hobby business, and if it's not a core brokerage, we don't do it.

And I guess it's been two years and we've disposed of almost every hobby now which, you know, goes outside the definition of simply getting up in the morning and generating commission or a fee.

So that is going quite well, and that strategy is being exercised.

I might tell you that in the quarter, we also did some things which are not numbers-related but I think will manifest itself in numbers in the future.

One of the great points of leverage of Willis, I think, is our major account business.

We haven't -- we don't have the major account business or profile that I think we should have given our great ability to be able to transact business and advise our clients.

So we sort of reorganized our major account business and now our major account business is separate under one roof, it reports to Mario Vitale, who has been here I guess as long as I brought him when I came.

A real sales-oriented person, and we're going to build a great major account business in this company.

Two things will happen, or many things will happen when that happens.

We're doing what we're doing without, I think, firing at all pistons with regard to major accounts.

It is our quest that when there is a major account up for bid or there's a major account in this world, that Willis is going to show up.

I can guarantee you that.

Our account coverage, our bidding process, whatever the case may be, Willis is going to show up.

If we haven't so far, then we're going to make sure if we missed a couple, that it's not going to happen ever, and this major account business will be built.

I'm also proud to say Joe McSweeney, who was responsible for a lot of our global businesses, is now going to concentrate his time on building Willis risk solutions in North America, reporting to Mario and Gary Mathison working on sales and recruiting, I think, make a great team.

So what we're trying to do is focus on the great things that can propel us to the next dimension.

I've asked our chief operating officer who's been a tremendous help to me to concentrate on our international business.

I've always said that we've had great points of leverage in our two least seasoned businesses, which are international because international basically is a product of the last 10 years, and North America, which is a product of the last 10 years.

And I think those are huge points of leverage.

I've asked Richard to devote most of his time working with Sarah Turvell on building our international business even more, and so I'm really excited about that, and he'll continue to assist me in a lot of other matters as well, and so I thought it was important from a revenue-generating point of view that you knew those things even though they are internal, talking about North America for a second, internal in nature, but big messages as far as Willis is concerned about growing the revenue and focusing on the points of leverage that I think are there for this company.

North America reported revenues up $140 million.

That's organic revenue growth of 12% from 7% a year ago, and 13% through nine months.

There's tremendous opportunity in the middle market business to grow, and I think that quarter by quarter, we're improving nicely in North America and we're getting -- doing a good job in getting a sales culture and the traction on the sales culture going, and we see that growth rate accelerating.

We continue there's a couple things in North America you ought to know.

We reorganized North America so that, again, we can move the ball even further.

Instead of having large regions which had seven regional officers, we reorganized that into 13 so these regional executive officers can be in the offices every week, can be talking about the sales culture, recruiting people, talking to local businesses for possibility of acquisition and being more engaged than having to worry about big pieces of geography.

Again, focusing on growing the business for us, and we're still in the throws of hiring a replacement for Brian Johnson, who has been the chairman of North America for so many years and has done a great job and is retiring this year, but we're not going to do that until we think that that's a person, you know, who can assist in growing our culture.

Who feels very comfortable with what we're trying to do.

The hard market obviously continues throughout the region with no sign of slowing.

Our global businesses, I think continue to be outstanding.

Revenues were $197 million, that's a growth of 20% in the quarter, 19% through the nine months.

When you're growing your revenue consistently, you know, at 20% and it stays up there at 20%, that's an outstanding achievement, and all our people in the United Kingdom and throughout the world who are associated with that should be congratulated.

Those are our most seasoned specialties, but the opportunities are huge.

I still consider that to have huge leverage in it because our construction, aerospace, marine, reinsurance, global property and casualty expertise more fully, you know, throughout the network has really not been shown yet.

It's concentrated, it's concentric in Europe and the United Kingdom, but it has not been leveraged throughout the world, and once we do that, even those high numbers, I think, you know, can be exceeded over time, especially in North America.

If you look just as an example what can be done, one of our fastest growing businesses is reinsurance and one of the fastest growing parts of reinsurance in North America, and I think when we can get that kind of thing going throughout the world for all specialisms, I think we can even exceed, as our sales culture takes place and we begin to work together, and then benefit from the hard market that is very pronounced in Europe, and those rates are increasing, as I said earlier.

Our international revenues were 53 million, the organic growth was 17% in the quarter led by continental Europe, eastern Europe , especially Australia rally doing a great job, and Latin America where we have a new person that joined us, Jose Riberro, 20% through the first nine months increase in international and as I said, in a lot of those markets, they haven't even become hard yet.

So I'm really excited about what's going on there.

The revenue through the nine months was $177 million, reported revenues for all of 2001.

I'll say that again.

The first nine months of $177 million matched the whole revenue base of 2001, so we have a quarter spot on the fourth quarter.

That's a combination of organic growth and several acquisitions that we've made this year that I mentioned earlier.

So we continue to do well, continue to grow.

We have investments to make in international, in systems and building a global platform.

I tell you, when I keep saying we're building our systems and investing in it, what I mean is building a global platform in claims and accounting.

So everybody is on the same page, that our claims and service capability is all going in the same direction, and the biggest -- everybody's a beneficiary on that, especially on an international basis, and obviously that's an expenditure cost and we continue, you know, to do that.

Our expenses for the quarter, general administrative expenses rose 16% on a reported basis.

That's consistent with the revenue growth of the most of our spend something generating, as I said before, and hiring and training performance-based compensation, but the sales -- salaries and benefits including incentive sincerely running about 50% of revenue through the first the first nine months, down from about 54% a year ago.

And as I said, we continue to do the investments we're doing, enhancing the operating platform, and we're very, very excited about that.

We're always watching our expenses, and I think a good way to track that is to see what our embedded costs are, which is basically our T and A, stationary supplies, postage, overtime, temps, all that kind of stuff, which is running lower than it did a year ago, which was running a year ago lower than it was the year before.

So we're really happy about that.

As far as capitalization and liquidity is concerned at the end of the quarter, one of our strategies is to retire our debt as best we can by continuing to generate cash flow to do that.

Total long term debt was 658 million, down 178 million or 21% in one year.

Our debt to total capitalization declined 41% at the end of the quarter.

The first nine months of 2002.

We were paid 129 million of debt with excess cash flow generated by the business.

Our next mandatory debt payment is November of 2005.

Our cash held in the Treasury was about 90 million at quarter-end, so we got a lot of flexibility.

If we continue to do what we're doing, we work hard at our business, obviously the flexibility that we have and the choice that is we have are terrific.

As usual, as we continue to do well, so much we talk about is noncash charges for the performance stock options, this quarter is no different.

The way that works, the better we do, the more the performance options predictably will kick in, so we take the noncash charge, this time was 18 million in the quarter.

We've now recorded about 81% of the charge since the third quarter last year with the remaining to be exercised through 2004.

These are performance options that date back to 1998 with the buyout of KKR, and this was done to attract and retain people obviously and all the performance criteria have been hit so, therefore, this is a good thing.

As it relates to corporate governments, just a quick word.

As you probably know, we added another independent director to our board, Senator Bill Bradley joined us about a month ago.

It was in our first board of directors meeting last week.

I think few have achieved as much as he has.

All the while, a respective of one's political pensioned, I think his integrity is unquestionable, and he has forthright leadership and we're proud to have him on our board.

I might also tell you that we will probably be adding one or two more independent directors in the course of the next several months, so in conclusion, we like to believe, as I said earlier, that at the end of every quarter, we look back and we say are we gaining on it. "It" being building a great company.

And I would say that I look back and I think we gained on it.

We're building this quarter by quarter the right way, investing in our business, doing the kinds of things that we need to do for our people, for our systems to build a great insurance broker.

We'll continue to make those investments.

Our model will continue to be what it is, and steady as she goes, but I think we're proving that we can be a global company with a local focus.

This is work in progress, but I think we can do better.

That is our overview of what's going on, and as usual, we'll be very, very glad to answer any questions that you may have.

At this time, we will now begin the question and answer session.

If you'd like to ask a question, you may press star 1 on your touchtone phone.

You'll be announced prior to asking your question.

To withdraw your question, please press star 2.

Again to ask your question, please press star 1 now.

First question comes from John Balkin of Fox Pitt

Good morning

Good morning, John how are you?

Good, just a couple of questions with regard to your large account business.

One, it seems to me just by looking at the market that the market for people is getting a bit frothy, so could you talk about the die the dynamic for producers and product specialists, and two, with respect to that business, your management changes seem to imply you're not winning the level of new business you would like, and if that is the case, why has it been the case so far?

Well, I'll answer the second one first.

The management change did not take place because I didn't think we were winning.

I thought we could do better.

I believe that in lots of businesses, John, what happens is, is that people are given too much responsibility and, therefore, there's less focus.

I think with a greater focus on major account business throughout the world, I think we can do much better.

It helps our network around the world, it helps our specialisms in the UK, and I look and things and I say we can do better.

I look at our major account business.

Frankly, it's up very nicely, consistent, frankly, with what the rest of the company is doing.

So it has nothing to do with that at all.

It just has to do with continuing to make it better.

I think that's what great companies do.

I don't think you wait until there's a problem.

I think you think you could do better.

So I'm happy about that.

Secondly -- and we've recruited a lot of people to our major account business both in England and New York, which segways into your question about people and it getting frothy, if you will.

Yeah, I think what's happened in our particular case is that we are not a major player as it relates to recruits.

We don't give guarantees to people.

You come here, you get paid decently, there's lots of incentive compensation in what we do, and yeah, if frothy means that we've had recruits who were willing to join us and then at the last minute, stayed at their respective companies because they were offered more money and all sorts of wonderful packages, yeah, that's happened to us, but that's okay.

We're still, as you see, 250 is not a bad number of recruits, way up from where it was certainly two years ago when I got here, so yeah, it's frothy, but I think we're doing more than holding our own, but yeah, the environment is a little tricky, I don't want to get into the details, but I think we're doing great.

Joe, just one follow-U is there much of a difference between the competition for producers versus product line specialists in that business?

I think that the product line specialist is a little -- let me put it in the right way.

Producers, I think there's a great deal of competition because it gets to be very money-oriented.

It gets to be very up front, I'll do this for you, I'll give you that, and as you know, we don't do that here.

Right.

But for product specialists, it seems to be more reasonable and sane, and it has to do more with the environment and product specialist sense of contribution to the whole rather than, you know, the independence of a singular producer, John.

Great.

Thank you very much, Joe.

You're welcome.

The next question comes from Jay Cohen of Merrill Lynch.

Hey Jay

Good morning John, a couple questions.

The first is just a follow-up on that last one.

With the hiring that's going on, do you have a sense that you're bringing in some people, initially they're not producing their kind of full array of business that you'd expect that they will over time, is there sort of a near-term depression of the margins that you see that should actually get better going forward?

I would say there's a little of that, sure.

I mean, you know, in this business, I can't quantify it for you, but yeah, there's a little bit of that, but I'm not going to tell you that we hired a whole bunch of people and they're not doing any business so the expense is there and the revenue's not there, if that's what you mean.

No, I think there's a little bit of that.

We try to be judicious in the way we do these things, but I'd say a little bit, Jay, but not a lot.

Okay.

Second and related topic, there's been so some news on the trade center with silver stein and Travelers and GE and you guys in the middle of that.

Can you update us what's happen through and the potential outcome?

You're talking about the recent issues with regard to IRI and Citigroup?

Yeah, exactly.

Okay.

It's our understanding that Citigroup has filed but not served a complaint against RRI relating to whether Salomon Smith Barney, who is a 7 world trade center tenant is a loss payee on the policy covering the property.

The policy was underwritten by IRI, as some of you know, on behalf of the lesser, Silverstein properties, who is our client.

Apparently, IRI asserted that Willis didn't have the authority to issue a certificate of insurance naming Salomon Smith Barney as an additional loss payee under the policy.

We believe that Solomon had the right to be a loss payee and that we acted properly in issuing the certificate of insurance.

In any event, I don't think that really matters.

There's no question about the aggregate amount of the insurance provided by IRI.

There's no issue as far as we know that IRI wasn't bound or that 7 world trade center wasn't covered.

This issue is solely whether Citigroup had a right as loss payee to participate directly in the claims process and share the policy proceeds.

Willis, again, not named in the complaint, no claim has been made against Willis.

At Silverstein's request, we're working with the representatives of Salomon Smith Barney to resolve the dispute, but keep in mind that Willis did what it was instructed to do s therefore, it has no liability in the matter.

This is an issue, I think, between Silverstein and Citigroup.

So, you know, I don't know what else I can say.

That's really helpful, Joe.

Thanks.

You're welcome.

The next question comes from Vene Sachi of Morgan Stanley.

Good morning.

: Hey Vene, How are you doing?

Just a couple quick questions for you guys.

One is on the acquisition front, Joe, if you can give us a little bit more detail about what you're seeing in the marketplace.

You've obviously made some acquisitions internationally, but what are you seeing in the U.S.?

What I'm seeing in the U.S. is people who are saying hard market, maybe somebody will give me a lot of money and I'll sell, and who may not really be interested but, hey, if somebody can give me multiples that are extravagant, I'll take it.

Obviously that's not our kind of an acquisition.

Also seeing people who want to sell and are getting, you know, some multiples that we think are a little bit out of line, and a lot of cases are not even Integra table, if you will, which means you don't get the economies of scale.

So I think for -- seems to me that as long as the market is hard, the acquisitions, although will be there, I don't believe that they would be very efficient.

Of course unless people are willing to be partners and do something, participate over a long period of time, you know, with our stock.

So that's basically what I see.

On a related matter then, if the market remains the way it is, which it sounds like it's very competitive, you guys have debt covenants that restrict you from buying back your stock and it paying dividends.

What can we look for you guys to do in terms of your cash flow outside of paying down debt if you get to a reasonable debt to cash ratio?

I think as you see now, we have self hundred million to go, and we'll worry about that later, but our strategy is we're going to continue to grow our margins, continue to do what we're doing.

And if we don't find that making a reasonable acquisition makes economic sense against the weight of the positive results of paying down debt, then we're going to just keep our powder dry, keep paying down debt, and when our debt is paid and we have no debt and we'll continue to look through this -- through this process, continue to look for acquisitions, and when there's no place else to go, we'll have a chat amongst ourselves as to what we do next.

But I think it's premature now.

Okay.

Two quick questions.

One is, did the foreign currency affect any results either positively or negative through the quarter?

No, there was no material contribution from foreign currency.

Last question is, we've heard that E and O is Gulf becoming a bigger issue for the brokers because of what's going on in the marketplace.

Can you just give us an update as to how you guys handle your E and O reserving?

Do you do it quarterly or on a case-by-case basis?

Both.

We take -- our legal people advise us on a case-by-case basis but we do use long term actuarial.

So you set up a general reserve each quarter depending on how market conditions are and what you're seeing in the market?

Yes.

We have the actuarial pro projections of all the cases we've been developing since the company began, and also each quarter we're advised on specific cases from our legal people.

great.

Thank you very much.

Thank you.

The next question comes from Ron Franks from Salomon Smith Barney.

Hi Joe

Hello Ron .

How are you?

Alright how are you?

It's a living.

Two questions.

One, if I've got my numbers right, the North American organic growth trend this year has been 12% first quarter, 15% second and 12% again in the third.

I was wondering if you could interpret for us what seemed to be the tick back down in the organic growth.

It's the first one we've seen, period.

I wondered how significant is that and where that number may be headed going forward.

Also, the reported growth seemed to slow down even more, and I wanted to know what was involved, what the main differences were between our gang and reported -- organic and reported, and I also have a drill-down question on the people but why don't we do this one and then go to that.

No problem.

I think the thing is moving nicely.

I look more -- even though I know the progression was 12-15-12, I look more at 12 versus 7, Ron, which to me is, I think, you know, outstanding improvement.

We're slowly building the sales process, the sales culture.

I think that if there's any comment to make, I think that the comparison year over year is really what the headline is.

I think as far as the quarter is concerned, you know, some phasing here, an account there, that sort of thing, but I look at how well we're doing, our retention rates are improving in our clients, the amount of office -- the amount of accounts we're opening is improving, so I actually am -- I'm quite happy at what we're doing.

You know, you've got a 50% increase or whatever it is year over year, you know, in revenues.

I think that's pretty good, and that's pure.

I mean, other than Goldman, which is a little patch in San Francisco, that's all pure organic growth.

There's no acquisitions in there, there's no funny stuff in there, there's no, you know, big TPAs to generate lots of revenue increases.

I mean, that's pure, you know, bang them out everyday business.

So there's nothing in there that makes you think it's 12 on the way to 10 on the way to 8?

Oh, no.

All right.

Oh, absolutely not.

Okay.

And related to that, Joe, before my next question, you mentioned McSweeney with respect to North America in addition to global risk solutions.

Is the idea that he'll be the transitional head once Brian retires until you find the new person?

No.

I'm glad you asked that.

What we do is we have North America retail, Willis North America retail, which is our middle market business and our branches throughout the United States or North America, which includes Canada, who does a fine job, I might add.

That's run by Brian.

The Willis risk solutions office, which really means large accounts, is here in New York, and our large account practice is run out of New York, out of this office.

And that is what Joe McSweeney will be concentrating on, working with Mario Vitale.

Joe McSweeney has nothing to do with the middle market business that is Brian runs, and one has nothing to do with the other.

Okay.

Lastly, Joe, I wanted to see if there's something wrong with my math.

You mentioned you recruited 200 with 250 producers year-to-date and that your net increase in people was 170, about half of which were producers, which would seem to imply that you hired 250 producers but had a net gain of only 80 or so.

Am I -- have I got that right?

No, the net gain is about 100-plus.

Okay.

Then the loss of 100 or so producers that's implied by that, is that in line with your ex-peck expectations?

Was some of that deliberate?

I just want to drill down a little on the retention of people issue and how that's jibing with your expectation.

I can't give you specific percentage, Ron, on how many of that was deliberate, but when you're -- look, I'm going to be brazen for a second and say when you're asking people to work hard and to have pipelines, pipelines are not, you know, something that happens all the time in this business.

People traditionally have not gotten up.

I think most people would agree with me.

And opened new accounts and worked on prospect lists.

That just doesn't happen.

We're asking people to do that.

And a lot of people don't want to do that, especially people who don't want to build bigger books and grow.

You know, a lot of this business is rearranging the furniture.

You know, you bring your book over, you maintain your book, you know, we want growth.

And so we're -- there's no question that our work ethic and what we're asking our people to do is much different than what other people are being asked to do, which we think, over time, will build a sales culture that we want.

I'm picking the number out, Ron, don't hold me to this, but maybe 20%, you know, are people that, you know, we obviously didn't want to lose.

The recruiting issues out there are hot and heavy.

There are people out there who are offering a lot of money to people, and a lot of people are lured by that kind of thing, as I said, with large guarantees.

So I would say 80% of it is the transition effect of a sales culture which is always harder, which is something that I think by and large even our industry competitors will tell you doesn't exist, which we're trying to build.

Okay.

Thanks a lot, Joe.

You're welcome.

The next question comes from Charlie Gates of Credit Suisse First.

Boston

Good morning.

My first question, in your introductory remarks, I believe you said that -- something to the effect the third quarter of a lesser consequence than others.

Was that simply because there's a lesser level of earnings there?

Yeah, I mean, just the nature of our business, you know, we go first quarter, fourth quarter, second and third.

I mean, it's just a quarter where traditionally there's been less earnings than usual.

I mean, you look at the silly sickcality of the business, it's the third quarter which has less activity going on.

That's what I meant.

Second question, is one ingredient to Ron Franks question the fact that interest rates are lower today than they were a year ago with regard to the growth in revenue?

No, Charlie, that hasn't had a big impact.

Our interest has grown a little less but it has grown marginally because of our hedging program.

My third and final question you have created whatever was endurance and you have -- creating access.

Have you rethought your thoughts with regard to building a Bermuda company?

Absolutely not.

Our model stays the same, Charlie.

We are a true broker, and we will not -- we have not contemplated, we will not, we don't anticipate putting any money into any kind of underwriting or taking any balance sheet risk whatsoever.

Thank you.

You're welcome.

The next question comes from Joanne Smith from UBS Warburg.

Good morning, Joe.

Hi, Joanne.

How are you doing?

I'm good.

I have a couple of questions.

One is probably -- you're not going to answer.

I was wondering if you can give us the E and O reserve sitting on the balance sheet, which I'm sure you're not going to answer that question but I thought I'd ask anyway.

Good shot.

And second is, in terms of the market and in terms of response by the clients, we all are very much aware of what's going on in terms of corporate spending and corporate budgets, and I was just wondering if you're getting any pushback from your clients in terms of these that you're get -- the commissions that you're getting from insurance placements and given the amount of work that it takes to get a placement, actually completed, if you would expect that margins could come under a little bit of pressure next year as your clients feel more and more reluctant in their willingness to let you participate in a strong rating environment that exists right now.

And I have a follow-up.

I would say, Joanne, that first of all, I want to go back to your E and O question.

I'm not going to answer you specifically, but it's really not an issue here.

I just want you to know that.

Without specifically answering your question, but I just want to get that in.

Secondly, I get pretty involved with our accounts, as our people know.

I talked to -- I don't know -- in my travels, 10, 20, 30 accounts a week.

When I travel around to offices, I have lunches, dinners, breakfasts with accounts, what's going on, what do you think, how do you feel, are we giving you good service, whatever.

And I have to tell you, I'm trying to look back when a client has said to me, you're charging too much.

I think they appreciate the hard work that we -- especially in our model, the hard work that we give them and the service that we give them.

I'm sure that there's an account out there, you know, or two that might be given some pushback but it is hardly discernible, and I really haven't seen it, and I'm not talking now from a distance, Joanne.

I mean, I'm pretty involved.

Just as a follow-up, in terms of fees, how successful have you been in terms of raising fees to your fee-based clients and what type of average increase are you getting ?

We started the process at the end of last year, frankly, and at a time when rates were going up dramatically, especially war risk and all that sort of stuff, and I would say that on balance, on a year-to-date basis, we've gotten about 10 to 15% increase in our fees.

And without a lot of furor, without a lot of ran rancor.

I think we do a good job.

And we've got to remember in a lot of cases, I remind our people as I do our clients when I go and talk to them that our fees hadn't gone up, you know, for years during of the soft market, and that obviously it takes longer to place.

We have global access, which is one of our strengths, our people work very hard to, the terms and conditions are not done in an hour these days.

All that is harder work, and I think it has to do with feeling good about the value you provide and the self-esteem with which you provide it.

And I think our people have done a great job, and so my answer is, 10 to 15%.

Okay.

And lastly, just one last issue and that is, I'm just trying to figure out if the slower organic growth that you reported in the third quarter versus second quarter is reflective of the way that the business kind of flows.

I know you talked that there's a lot less activity in the third quarter versus some of the other quarters, or all of the other quarters in the year, but I'm looking specifically to the global specialties business.

Is that a business that typically renews heavily in the fourth and the first quarter, and so the significant rate increases that we've seen in that market are less reflected in the third quarter because there's less activity there?

Well, I think that the fact that you grow at 20% is hardly, you know, anything to slouch at.

I mean, that's for openers.

I'm pretty proud of that performance.

I don't see anybody else growing at that level.

Secondly, organically, again, without acquisitions and pure -- I think that's pretty good.

The second part of your question, inside our global businesses is things like reinsurance, which are typically not third quarter renewal times.

You know, that's a first quarter renewal type of time.

Other specialists are more October, November-ish types of renewal periods, so yeah, I think it's a little bit of the third quarter being what I said earlier, Joanne, where we have lofts renewals coming -- lots of renewals coming in, but I would be quick to add, you know, when you get to a certain level like 20% and you're doing it the way we're doing it, I think that's pretty good.

So I don't look at it as slowing.

I mean, there's a point in time, you know, when you continue to steadily grow at 20% as we are with that, that's pretty good.

If you look at our entire group business which is 17% versus 13% across the board, given what I said about the quarter, I think that's even better.

No argument here.

Thanks, Joe.

You're welcome.

The next question comes from Michael Smith from Bear Sterns.

Good morning, Joe.

You mentioned that your salaries and benefits are now down to about 50% of revenue.

They had been about 55% of revenue.

Is that correct?

54 a year ago and hovering around 50 now.

Okay.

The total G and A ratio has only gone down by about 3.5 percentage points, which would say the other G and A expenses are growing faster than revenues.

Is there a time frame when we can expect that to end?

Well, I think that ingredient in there is incentives.

Okay.

And the incentives, as you know, Michael, go up as the performance continues to go up.

Our incentive compensation programs are based upon revenue growth, EBIT growth, new account growth and retention.

And the incentives are not included in the salaries and benefits?

They are, yes.

Oh, they are.

But what I'm saying is, if I separate out the salaries and benefits, it looks like the other G and A, other than salaries and benefits, are growing faster than revenues, and I'm actually wondering what is causing that and when that ends.

Systems is in there, but it's very little.

I mean, biggest component of that is systems cost.

Okay.

All right.

If I look at the estimates for the first fourth quarter that get you to $1.60, it looks to me like you're going to step up your revenue growth in the fourth quarter to about 24% and do it with a pretax margin of 32%.

Are those reasonable assumptions?

I don't -- I wouldn't say that, no.

Okay.

Then it would sound like $1.60 $1.60 might be a little bit of a stretch this year.

I'm not going to comment on that.

Okay.

Thank you very much.

Appreciate it.

You're welcome.

The next question comes from Hugh of J.P. Morgan.

Good morning.

: Good morning, Hugh

Quick question then let you guys jump off here.

With the raising to 78% for Jaspers, or Willis GmbH, does that make any change, Tom, to kind of the numbers that kind of run through here since it was already a majority-owned by the second quarter?

Makes no difference to the top line numbers, obviously going forward that smaller amount coming out in the minority interest line.

Okay.

And one of the numbers questions, Tom, the tax rate down around 30%, I know we had been all thinking of something around 37 or so.

Was there anything usual in the quarter or is this just stepping up?

Can you go through that?

Early on in the year, if you recall, we had that -- [ inaudible ] With 36% for those two quarters, obviously you have to estimate what the year end rate is going to be, and our current estimate is that will be 35 to 35.5 for the year-end. 35.5 for the nine months and then when you take out the higher tax charges for the first two quarters, that gives you -- (inaudible)

Okay.

So but for next year, we'd still be looking at something probably slightly above that 35.5?

I think obviously it depends on the jurisdiction where your profit falls, but I'm assuming that we'll get to year-end, it will be in the 35 to 35.5% rate, and I would expect that to be maintained.

okay.

Perfect.

And then the two acquisitions in Sweden, are you willing to share kind of the potential total revenue volume associated with those acquisitions?

I would say that without getting into the gory details, they were modest.

You know, they weren't big acquisitions.

Okay.

And then the last question is, we look at everything on a revenue to expense differential, and in the third quarter, this was kind of the lowest revenue to expense differential.

Was there anything usual like running through the quarter expense wise?

You've talked a lot about systems.

Was there any timing issues or anything that we should be stripping out or thinking about as we go forward?

No, it was just, as I said, investment in the systems, the people, the training.

Our training expense, which was nonexistent a year ago, is obviously not only higher, it's dc it wasn't exist at existent.

That 6% spread, I think, is very healthy on an organic basis, and I said at the end of the quarter last year that we were going to invest in systems, people and training, and that's exactly what we did.

I told you our embedded expenses are not higher.

I think our head count is not -- is pretty much under control.

I think we're growing and improving quarter by quarter, and that's what we're doing.

Great.

I appreciate it.

Thanks a lot.

Okay.

The next question comes from Brian Meredith of Bank of America securities.

Good morning.

Good morning.

Couple quick questions, Joe.

One, could you tell us what do you think the impact of the terrorism bill that's been proposed out there is going to have on the major accounts market?

Do you think price willing start coming down here, people using less self-insurance?

And then my second question relates more to the head count, things we were talking about.

It's clear that your growth in head count here is coming from producers and then you've been kind of scaling back your back office is looking for more efficiencies what insurances can we have that that's not going to create some service issues going forward, and what are you doing, what are you implementing, what are you looking at on a day-to-day basis to make sure that doesn't hurt things?

The second part of your question, I said earlier when I talked about the modest rise in the head count from a support point of view that that was due to the fact that although our people are working much harder, we do try to redesign our business instead of just throw people at it, so I think that redesign evokes efficiencies, and what it also does is to give us the ability to obviously keep a nice healthy control of our head count increase.

And by the way, we track our service weekly.

We have standards, metrics about how this stuff is tracked, but everything that that we do, claims processing, policy deliveries, I mean, it is tracked very, very closely.

So I would say that that's the reason none of our service standards have gone down.

As it relates to the terrorism bill, I don't think that it has anything to do with because there is now supply, that the rates will be lower.

I think more people will get insurance.

And the more people that get insurance, irrespective of the rate, the better off I think the world will be and the better off we will be for having had access to it.

Because right now, they don't get any, and if they do get it, it's very, very expensive, so the fact that more people is sort of a volume deal will have access to it at a rate, whatever that rate may be, I think is the good news.

Great.

Thanks, Joe.

Appreciate it.

: Thank you.

The next question comes from Steven Laas, from Lincoln (inaudible).

Good morning.

Hi Steven, How are you doing?

I'm well, thank you.

Good.

Quick question first.

Do you have what shareholders' equity was at the end of September?

Yes.

It was $935 million, Steve.

Great.

Thank you.

Second, Joe, would you be able to quantify what portion of the organic growth was rate versus new accounts?

Yeah, it's still running at 50/50.

Okay.

Great.

And given your commentary on the rate environment going into next year, what type of organic revenue growth do you model for next year that you'll be able to do?

Without getting real specific, I feel comfortable with double digits .

Obviously I think the 10 to 15% range.

Okay.

Great.

And my last question, is it possible to quantify what amount of the new producers are coming from -- or being done within each segment or at least conceptually, or are you highing more in North America relative to international, something along those lines?

I think we're hiring -- see, in North America, it's much more producer-oriented business, even though producers have teams, than in the rest of the world where they work in teams.

So it's definitional.

Okay.

But from a pure producer point of view, I'd say North America.

Okay.

That's all I have.

Thank you.

Thank you.

Once again, to ask a question, please press star 1 now.

At this time, I have no further questions from the field, sir.

Okay.

Appreciate it.

Thank you, everybody.

This concludes the Willis investor relations third quarter earnings conference call.

All participants may disconnect at this time.

Thank you for participating, and have a great day.