Willis Towers Watson PLC (WTW) 2003 Q2 法說會逐字稿

Good morning and thank you for standing by.

Welcome to the Willis 2003 second quarter earnings conference call.

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

This call is being recorded.

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

I would like to introduce your host for today's call, Kerry Calaiaro, Director of Investor Relations.

Ma'am, you may begin.

Thank you and good morning, and welcome to our earnings conference call and Web cast at willis.com for the second quarter.

Our call today is hosted by Joe Plumeri, Willis Group Holding's Chairman and Chief Executive Officer.

This teleconference call will be available by replay starting at 10:00 a.m. today, Eastern daylight time, and ending at 5:00 p.m. on August 7th.

To access the audio replay, please call 800-841-4360 within the US or 402-280-9930 from outside the US, or by accessing the Web site.

If you have any questions after the call, please feel free to 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 that term is defined by the Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks and uncertainties.

It could cause actual results to differ materially from historical results or those anticipated.

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

Due to the adoption of the new regulation G, where we use non-GAAP financial measures, we have included reconciliations, the most directly comparable GAAP measures as a supplement to our earnings release.

This can also be found on our Web site.

I would now like to turn the call over to Joe.

Good morning, everybody.

I want to also reiterate that with me is Tom Colraine, the Chief Financial Officer of our company;

Richard Bucknall who is the Chief Operating Officer; and also Mario Vitale who is the Chairman of Willis North America.

The first thing I want to do is to acknowledge the great effort of our associates all over the world.

Our results, I think, are more indicative and symbolic of the great effort and the great work, great teamwork, the one flag effort that we live by on a daily basis, where people are working together all over the world for the same purpose, and that's to make Willis the greatest insurance broker in the world.

So these numbers, even though I'm the one talking about them, have really been achieved by our great people around the world.

We are very pleased with our results, obviously, in the second quarter and throughout the first half of the year.

We reported our 14th consecutive quarter record operating results as we continued to build our track record on a very sound financial and business model.

Our adjusted net income on a diluted share basis was $0.49, up $0.14 from the $0.35 of the second quarter of last year, and our reported revenues grew 20% to 492 million in the quarter.

I want to make a reference about the 18% revenue growth on organic basis, because I think it's important.

The 18%, we think is fantastic.

What we think is more fantastic is how that happened.

As you know, as I've been saying all along, that we're building a company that will endure for a long time or under any market circumstances, hard, soft, it doesn't matter.

And the fact that 13% of the 18% was based upon underlying growth, selling more products, opening accounts than you lose, the kinds of things great sales organizations do is really, I think, the story behind the 18%.

And only getting 5% out of rate growth basically suggests that if you have a flat rate environment, you'd be getting a 13% revenue growth from our company.

And versus what I've seen already out there, that's almost the top of the class by itself, naked.

And that's great, because that's what we hoped to do here.

That doesn't happen by chance.

That happens because that's what we do here in building a sales culture, and you've been hearing me reiterate that quarter after quarter after quarter.

For the first half, the organic revenue growth was 18% also with 10% new business, 8% rate.

So that's been pretty consistent.

And for the first six months of 2002, the organic revenue growth was also 8%; that's consistent.

But, however, the net business component was 10%, and the rate was eight.

Meaning that the growth in new accounts and pipelines, the quest to open three accounts for everyone we lose, to sell multiple products to our clients is what you see manifesting itself there pretty much.

That comes from our sales culture taking hold, our pipeline management taking hold, our recruiting efforts taking hold.

We're recruiting a great deal of people all over the world, but just not anybody.

We're recruiting people that want to become part of our company, that want to become excited about our company, that want to be shareholders of our company.

So that is what all that means.

We'll be glad to get into detail with you later, but it's important that we're seeing manifestations of the things that we have been talking about.

As far as rates are concerned, I'll just make a comment, I could talk about this later on.

The rates are -- if you ask me what country, you ask me what time of day, you ask me what line, and I'll tell you what the rates are doing, but generally speaking, the rates are not roaring like they did a year or year and a half ago, whatever the case was, those were unusual spikes.

But generally speaking, the rates are moderated, but still we would categorized on the hard side still doing business, and still we believe it's a great time to be a broker.

But it doesn't really matter because we're building our company to build a sales culture, winning new business on all the kinds of things that I've talked about.

Our adjusted operating margin was 28% in the second quarter, versus 27% last year, and 32% through the first half of 2003 versus 30% a year ago.

Remember that our strongest revenue quarters are generally the first and the fourth, while expenses are more evenly distributed.

So while we're building a great business, we're building one that will perform under all market circumstances.

So the sales part of the company, the stuff that we've been hammering away at that we talked about every day, the principles of sales, sell more things to more people, pick up the phone, call people, we're in sales business, I think you're starting to see the manifestations of that.

As it relates to capital, which is sort of like the next thing we always talk about, we talk about our margins growing, the difference between the growth and the revenue and the growth in the expense end, we look at those margins as being the manifestation, the cash flow in a company that wants to build its cash flow, not only because we wanted to reduce our debt, which we think we've done a good job at doing.

Our debt to capital now is around the 32% range from where it used to be when we all arrived here, which was about 80%, but that's part of what we were doing to build our margins here.

Over the past several years, we've diligently enhanced the cash flow through those improved performances.

Last year, we generated close to 300 million in free cash flow and generated over 200 million in the first half of 2003.

I'd remind everybody that's versus about 140 million a year ago.

So it's a substantial increase, again, all due, not by accident, but by methodically growing our revenue first and foremost and then watching as a lot of that comes to the bottom line.

We've made substantial debt repayments far ahead of schedule.

Initiated a quarterly dividend this past February, less than two years following an initial public offering of our stock.

The Board of Directors approved two actions which we think are very beneficial to our shareholders, remembering our model, shareholders come first, we run this company for the benefit of the shareholders, and we want to use this capital, this excess capital, that we have, put it to good use, and it's number one in our model of shareholders.

It makes sense that we give the shareholders a raise.

So the quarterly cash dividend, the common stock has been increased 30% to 16 and a quarter cent per share.

That's an annual rate of $0.65 per share.

We had good use of the cash and very attractive, especially under the new US tax laws.

The board also approved a plan to purchase up to $100 million of stock, just as the opportunity when appropriate to be able to repurchase our shares when it is desirable.

So that is a program that we can put in motion anytime we think it's appropriate.

We obviously have other options to support excess capital, as well.

Keep in mind that our acquisition strategy is still very much in play.

We're very excited, have been for a long time, about our pipeline and acquisitions.

So we have ever intention to make acquisitions.

Again, use of our capital, when we find the acquisitions are appropriate, and that, importantly, they're appropriately priced.

That we have been consistent about talking about all the time.

And obviously we intend to make further reductions of our debt, but, you know, with our debt capitalization ratio being where it is, we think it's a pretty sound spot, you know, for us, so we still have that available to us as well.

So we've gotten ourselves in a position, enviably, at least for us, we have lots of options, and we're starting to avail ourselves of those options, whether they be debt repayment, dividend, repurchase stock, re-investment in the company, all those sorts of things, and I might also add as it relates to the debt.

We're probably looking at an opportunity, let's say, in the next six months to refinance that debt which we haven't done since the leverage buyout at much higher rates.

So we look forward to making that happen.

So this is exciting for us to have the options, and we have the options because I think we put ourselves in place to do that.

Let me take you through some of the other financials from a revenue point of view.

The reported revenues grew 20% to 492 million in the quarter, rose 21% to over 1 billion through the first half of the year.

The organic revenue growth, excluding the effect of foreign exchange acquisitions, disposals, and all that was 18% in the second quarter, steady with the first quarter.

Let me talk about North America.

I am absolutely thrilled, ecstatic about what's going on in North America .

I think Mario Vitale and his team are doing an outstanding job.

The total revenues 172 million in the second quarter, the organic revenue growth was 14% in the quarter.

There are enormous opportunities that we are taking advantage of in North America, successful new business gains and large accounts practices, the innovative solutions continue to differentiate us across-the-board.

Our margins in North America are growing nicely.

We're hiring a lot of good people, both regional executives, local, branch or CEOs, that we call them.

We're hiring recruits across the board, not just the two main competitors, but being very, very aggressive.

We're being very aggressive about opening new accounts.

We've added practice leaders.

In the past, there were some practices that we thought we could do a better job in like DNO (ph) financial institutions, et cetera.

We filled those gaps.

We look forward to doing more business there.

As a matter of fact, we are, so I couldn't be more pleased with the growth of North America.

And I will also tell you that if I look back at the last seven quarters in North America, there's been seven double-digit growth quarters in a row, for an average of 15% growth per quarter.

When I look back again at our competitors, I don't know that anybody just in North America has done that well that consistently, and we still think we're building our business in a growth mode.

This is all organic.

There are no acquisitions in there.

So I'm really ecstatic about what's going on in North America.

They're doing a terrific job.

Our global businesses have been doing a terrific job for 175 years.

It's amazing that this show is still a hit.

As it is, after all these years, Richard Bucknall, my colleague, runs that business, we're doing terrific things in there.

It's up 24% in the quarter, our organic growth was up 20 in the quarter, the performances across the board, whether they be reinsurance, aerospace, we just named the new head of aerospace, Andre Clerc; just very important people in the aerospace business probably would consider him one of the foremost, I think, people and personalities in the aviation business.

I'm not sure in the past we could have attracted somebody like that, and we're very ecstatic about that.

We're building our practices in fine arts, marine aerospace, reinsurance, adding a lot of people across the board to reinforce our global business and also reinforce that business in North America.

So the global business is doing its job and continuing to do well.

It's margins continue to expand.

It continues to grow, and we're very proud of it.

We're also very proud internationally.

A lot of things to be proud about.

Our international business is up -- organic revenue growth was up 18% in the quarter, $75 million, and we're getting a lot of solid growth from lots of different countries.

This is what's really terrific.

Iberia, Spain is doing terrific job.

Italy is doing a terrific job.

Australia is doing a great job.

We've had major business wins across the board.

It's great to see "Good Morning Willis," which is our morning newspaper, which posts all the wins on a daily basis on our people all over the world that are really excited and enthused and anticipate looking for those wins on a daily basis.

Germany, which you know, we consolidated into our P&L and own 100% of now, is doing very well.

We are attracting some very, very good people from the competition in Germany.

And I might make mention of the fact that our associate, Gras Savoye, who we own 33% of, continues to do well also.

Sometimes I forget to mention our colleagues in France.

We work very, very closely with them.

Their revenues are increasing nicely.

Their margins are increasing nicely.

So from an international point of view, which used to be lots of different countries that kind of did their own thing as a result of purchases and minority purchases and things like that all over the world, you know, I will tell you, it's really coming together, and we had not seen yet, as well as those numbers sound, the full impact of what can be done internationally, or for that matter, the full impact of what can be done in North America as well.

So from a broad perspective, from a perspective of the strategic planning of this company, which is to grow our sales, make sure that the shareholder is taken care of first, make sure we build our capital through margin expansion, by growing our revenue, watching the way we spend money so that we can put capital in use, if you look at all those things and the strategic points that I just mentioned, I don't know that there's a greater quarter that manifests all of that stuff than in the second quarter.

I'm going to turn now the call over to Tom Colraine who will take you through the rest of the numbers.

Thank you, Joe.

The net income as reported under US was $80 million or $0.47 per diluted share compared with a loss of $7 million and, or $0.05 per share a year ago.

The accounting loss on the GAAP from 2002 resulted entirely from the quarterly mark-to-market adjustments that we got recognized on the performance options at the end of that year.

Excluding non-cash compensation for performance of these stock options and a gain or loss on disposal of operations, the adjusted net income was $82 million, up from $59 million reported last year.

Therefore, adjusted net income per diluted share was $0.49, up 40% from the $0.35 had in the second quarter last year.

Under operating expenses, G&A expenses was 18% through the second quarter.

These expenses were 70% of total revenues, from 72% last year.

Organic expense excluding the effect of foreign exchange acquisition was 14% in the second quarter.

On an organic basis, we still see a nice spread between revenue growth and expense, and, therefore, the margin continues to increase.

Salary benefits were 53% of revenues for the second quarter, relatively in line with a year ago on a 12-month basis to even out the seasonality it is fairly steady at around 51%.

We're quite pleased with that.

It's very reasonable considering our recruitment efforts and the somewhat higher pension expense, about $5 million more than 2002 in the quarter.

Most of our control spending is producer-related and revenue generating, recruiting, training, performances-based compensation.

Other expenses were relatively flat over last year and the growth in revenue, as I said, more than outpaced expense growth.

Foreign exchange, the net impact of foreign exchange movements in the second quarter was zero, and it was $0.03 per share for the first half of 2003.

At current rates of exchange, we expect an impact in the remainder of 2003 compared to 2002 to be immaterial.

To round off the non-cash compensation, performance, stock options, a non-cash compensation charge for these options was recorded in the amount of $5 million pre-tax in the second quarter, compared to and $78 million in the same quarter a year ago.

Because, at that point, as I said, they we have the market-to-market based on the share price.

As of the end of the year 2002, all the performance criteria for these options were met to the ultimate charge, and I'd fix that about $281 million.

The quarterly charge represents amortization based upon debt and schedules and no longer on the market-to-market component.

On a cumulative basis through the end of June, the company has recognized $251 million, or approximately 89% of the total estimated charge, a remaining estimate charged $30 million, that we recognized quarterly for 2004 in 2004 in accordance with the debts and schedules.

As to the question of whether or not to expense stock options, we don't believe this is significant issue.

We are not considering expensing them at this time, and we'll wait for the guidance on FAS-B from the SEC.

However, had the cost of both time and performance options been expensed on a fair-value basis for the first six months, adjusted net income will be reduced by approximately $5 million pretax or $0.2 per share after tax.

About the same as it would have been in the same period last year.

The underlying tax rate, that is excluding the tax effect of performance options, acquisitions and disposals, was up to 35% in the second quarter, actually it may to approximately 34% for the full year.

Going to capitalization and liquidity, the (inaudible) total long-term debt was down to $490 million, down 28% since last year.

Debtholder's equity was over $1 billion, $1.52b dollars at the end of June, resulting in a gross debt to capitalization ratio of 32%.

If all of the freely available cash of $178 million was used to pay down debt, the resulting debt to capitalization ratio was $0.23.

The increase in the cash dividend mentioned by Joe earlier, up to $0.55 per share on an annual rate is very comfortably covered by available cash.

And any funds required to stock purchase program were from normal cash balances and operating cash flow.

I now turn the back to Joe.

Thank you.

Thanks a lot, Tom.

I just want to reiterate some of the comments that I made with regard to rates, and again, in the Q&A we'll be going to talk more about this, because lots of people always ask me about pressure on commissions and, you know, what's going on there, et cetera.

First of all, the way the game is played is that people try to reduce your commissions and we try to make sure they don't.

This happens all the time.

So I guess it's kind of funny when I see large numbers of people say, you know, there's pressure on commissions.

There's always pressure on commissions.

I would say at the end of the day that if you ask me if we're winning or we're losing, I would tell you there's nothing changed.

I can't tell you that there's any effect on our commissions whatsoever.

I'm quite happy with our resiliency.

I'm quite happy with our ability to be able to do that.

There are many opinions out there.

The state of the insurance market and the duration of the current pricing cycle, as I said before, some rates on some very large complex property, and energy placements have declined, the global carriers are always looking to maintain pricing discipline, especially since, you know, the loss ratios are not where they needed to be, and they're looking for rate increases in certain classes and depends upon where you are, what the line is.

Many clients continue to see rate increases, especially for casualty line.

So from a global vantage, some markets have lagged the US in rate increases and have further to go to approach appropriate rate levels, but generally speaking, I guess my tag line is that it's not the roaring, hard market and enormous spikes that we saw a year or so ago, but we think that the rates across the board are certainly moderated, but still trying to - in an upward position.

And again we'll talk more about that, if you like.

As far as our outlook is concerned, I said from the beginning we're building a great company for growth.

In all market environments, hard or soft.

If you run a good business, it shouldn't matter.

The way we look at it is that - and we talk about this to our colleagues all the time, is that we should stop talking about hard markets and soft markets and appreciate the fact that there are a couple things that are going on here.

Number one, our clients always need what we do.

Here's never a time when they say they don't need it or they don't want it.

The issue is who are they going to buy it from and how much are they going to pay?

And as long as that's the case and as long as the market share out there is still about 90% not Willis clients, we think that is an enormous opportunity and we get excited about that every day.

So we're lucky that some businesses don't have markets.

And I've told our people that all the time.

We have a market, whether it's hard or soft, the fact is, our people need what we do and if we get out there and talk to enough people, which is our price line, our sales culture, and sell them the kinds of things we can sell them based upon their needs we're going to do terrific.

And I think you see the manifestation of all of that taking place.

We're halfway through the year, very pleased with the progress we've made.

We're confident that we can grow on an adjusted net income basis.

We said 25% or better when we started talking about this at the beginning of the year.

In fact, the current range I guess of the estimates on a FirstCall basis are around 214 to 223.

I will tell you I'm very comfortable with that range.

So that I think is going well.

We expect our organic revenue growth, as we also said at the beginning of the year, at 15% or better.

I am very obviously sticking to that.

We're very, very excited about that.

We can probably put a circle around the "or better" part, and our long-term goal is to grow these earnings by 15% or better each year in all market environments.

That's why I tried to spend some time trying to get you to understand and appreciate that that's what we're executing on a day in and day out basis and why we're so ecstatic with these numbers -- are just not numbers but they're references to a real strategy in that place.

We're deploying the assets very, very nicely.

I said before, we have lots of options.

We've reassessed the common dividend payout, in light of the recent change in tax law land, more favorable, a view towards cash dividends, which is what brought about the increase, and a little bit better cash flow than what we started the year with.

And that was good then.

The buy back program gives us simply another arrow in our quiver and we're always looking at acquisitions.

We're very proud of the fact that if you look at the numbers, we've had ten successive quarters of double-digit growth, ten successive quarters of double-digit revenue growth.

As a matter of fact, if you look at the average over those quarters, it's about 16% growth in revenue over those quarters.

Some hard, some not so hard, some not so hard as others.

I mean, it doesn't matter.

That's what we're trying to do here, and those margins have grown in each one of those quarters on a relative basis, quarter over quarter from high teens to the 30% plus range, and we've increased the cash flow if you track those quarters every quarter as well.

So I guess it's accurate to say it's a good day at Willis, and I want to reiterate before I go into questions and answers that this would not happen without very hard work from our associates all over the world.

I want to thank them and can grand jury congratulate them again.

We're building a great company request with great people.

Be very glad to answer any questions that you may have.

Thank you.

At this time, if you would like to ask a question, please press "*1".

You will be announced prior to asking your question.

To withdraw your question, please press "*2".

Once again, to ask a question, please press "*1".

Our first question is from John Falkind from Fox-Pitt, Kelton

Good morning, everyone.

A couple quick questions.

In terms of the North American business, can you give a little more color on the growth between the large account and regional business and in the regional business where you're seeing the best geographic growth?

We're seeing the growth all over the place, John.

I mean, I said all along that that business is a fledgling business.

You need to understand Willis bought Corroon & Black in 1990 and for the better part of the decade of the 90's, Corroon & Black had operated as Corroon & Black even though it was owned by Willis.

I told you that.

So as a result we didn't have a lot of coordination and a lot of effort of people cooperating around the world, and I don't think that there was a lot of direction as it relates to sales.

When you ask me where the leverage is, our major account business is huge leverage.

Our middle of market business is huge leverage.

When you look at where we're located, where our market share is, we're simply taking advantage now.

What you're seeing happening is taking advantage of our ability to grow the market share all over the place.

So I can't tell you it's necessarily in Chicago, although it is.

Or New York, although it is.

Or the West Coast, although it is.

It's just -- or Florida, although it is.

It's across the board and it's in all categories of business.

I made mention earlier about our D&O business.

We have a terrific gentleman by the name of Tom Bailey (ph) who joined us several months ago.

I thought that business was a mainstay.

For example, John owns insurance brokerage.

Everybody buys D&O.

And they should be owning it from us.

I never thought we did as good a job as we did in that and that's picking up dramatically in an area where rates are still going up.

So I'm very pleased with all that.

Mario, do you have anything you want to add to that.

No, John, I'd certainly agree.

We see opportunities just about in every area, and despite our absolutely terrific performance, we see some of the initiatives that we've launched in Willis North America, new leadership in several regions, new CO's as Joe has pointed out.

New recruits that we're recruiting all around the country and an aggressive sales culture that we're not putting through not only on a business basis in middle market and large accounts, but as Joe has pointed out in specially practices area, specifically D&O, employee benefits and environmental, which we are launching very aggressive attacks at.

And in addition, as Joe has mentioned, a very aggressive new large account strategy is being washed out right across North America as we speak, gaining greater market share in those areas

Great.

Thanks, guys.

Thanks, John.

Our next question is from Ron Frank of Smith Barney.

Good morning.

Joe, I'm not surprised that rates have less of a beneficial impact this year than last year on your growth obviously, but I guess I'm a little surprised that in absolute terms, rates haven't helped you more over the last six months in terms of that single-digit contribution to your organic growth.

I would think last year for sure your average rate increases that you saw on your book, the book you broker, that is, must have been running at least twice that and given the weighting of your revenues toward commission, I was wondering what I'm missing in that analysis that would lead me to expect that rates would have over the past year or so given you a bigger lift than they did.

I think it's just a manifestation of better underlying growth in the business in terms of growing accounts.

You know, we -- if you look at our business, Ron, we don't have the market share that Marsh and Aeon does.

We should be taking better advantage of opening more accounts versus what we lose and better advantage of doing more business with the accounts we have.

So I think rather than looking at it that way, you should be looking at it from the point of view that our underlying growth in our business is so much more sound that it's less reliant upon the growth of the rates.

You're looking at a global company that as part of its core strategy has to be able to grow market share.

I don't know what the market share has grown, but I got to tell you because it's tough to gauge that stuff, but I think that's what you're seeing the manifestations of.

So it's more of doing a better job in that than looking at it from a less of an impact in rates.

I understand that, Joe.

I guess I just -- you know, the rate impact is basically a passive thing.

In other words, regardless of what's going on in new business, rates will do what they do.

So that's what was behind my question.

I just would have ordinarily thought it would have been more icing on top of that underlying new business cake, if you will.

Ron, Tom here.

If you think of rate slash (inaudible) in America up an average 20% to 30%, clearly you have changes in the client buying power.

So we do advise our clients that according (ph) to some higher prices people will buy less.

And so therefore what we're seeing is last year the proportion of our revenue growth that came from the rate environment was 8%, which would seem plausible, and this year it's down to 5% contribution.

But as you rightly said, what the rates do, they will do (inaudible).

OK.

Thanks very much.

What's important, Ron, is that we're growing our new account business to our loss business, which happens in this business for all sorts of reasons, as you know, greater than two to one.

And that's a fantastic figure, and we're going from what was an average of two products to three products per clients a year or so ago to better than four or five per client, and that's what you're seeing.

OK, Joe, also, follow-up on that point.

With respect to your various option plans, both the time and performance and the ordinary options you would have issued post IPO, stock plans, are there any bullet vests out there with regard to large producers that might be of concern in terms of, you know, golden handcuffs or handshakes falling off or things like that?

Not other than what you already know, which is the original EPP shares that people have asked me about that go to the end of 2004, but other than that, what you're aware of, other than that, no.

And the vast majority of that is vested, right?

No.

Well, a lot of it, yeah.

The majority of it is vested.

I would also say that if you remember, we gave a year ago or so those people the ability to sell stock up to what they were vested.

So they've had the ability to sell stock all throughout.

So this is not a question of you got to wait until a certain date and then everybody get in line and leave the theater.

So for the last year or more, more than a year, about 15 months, they've had the ability to sell, if they've chosen to, for what they've vested, on a cumulative basis, I might add.

So that's been available to them all along.

So no, there's no bullet date where everybody says, you know, we've got the ability to sell the stock and get out of here.

That has been taken care of.

Last one, I promise.

Are the new business wins coming from any particular -- I'm not asking you to even name them, but are they concentrated in terms of what most competitors they're coming from or are they fair list dispersed?

I think they're fairly dispersed.

Thanks again.

Thank you.

Our next question is from Hugo Warns of J.P. Morgan.

You may ask your question.

Good morning.

Hello?

Yes, Hugh.

Great, hi, guys.

Quick question, numbers question, Tom.

If I look at the non-cash comp expense -- and I appreciate the guidance here -- you're looking at $27 million for all of '03, and then 16 million going into '04, and the vesting schedule that we had, if we keep it fixed at 2867, I'm coming up with a higher number in '04.

Is there something wrong with my calculation or is there an adjustment that's being made?

No.

Maybe just something in the earnings.

What number are you coming up with?

I am coming up with something closer to almost $23 million for '04.

No.

The numbers I gave in total are correct, Hugh.

There is a little bit of a tail after '04 for people who joined in 1999 and the early part of 2000.

It may be that.

But it's very modest.

So would the 16 million be fairly evenly distributed?

Yes.

OK.

So what we saw, you're going to have a little bit of acceleration in the back half of this year because you've only booked what, $11 million year to date for '03?

$13 million year to date before tax.

Right.

OK.

There may be some in the tax as well.

The other thing is, Hugh,, I know you like to get your models just right.

This number is about as relevant as the weather (inaudible).

Right.

I just wanted to know if I was overshooting you on it.

Another question for you, too.

If I look at the share repurchase and increasing the dividend, I think these are all going to play out very well with our client base, but one of the questions I had for you is you specifically say that you're going to look at from time to time in the open market, or through negotiated trades with persons who are not affiliates of the company.

So is that specifically to prevents you from buying back from KKR?

There is nothing legally that would prevent us from doing that, but clearly we and indeed our biggest shareholder are interested in orderly markets.

So the KKR sales up to now have been at the request of the chairman to increase the liquidity in the stock, so I think you can take that we will conduct any purchases from any shareholders in accordance with the very best practices in the market, Hugh.

So they would not be excluded?

That's what I was wondering.

I don't think you can read any messages into that.

Obviously, we're going to do the right thing.

The thing you have to look at there is that we have a program that's been approved, and if it's appropriate, we'll use it.

OK.

When you see all the words kind of piling around, I just want to make sure it wasn't being part of it.

Don't lose the real message here.

All right.

That's fine.

I just wanted to double check.

The last question I have is for Mario.

Mario, if I look at the North America business, can you give us a rough breakout of North America?

I know you haven't provided it in the past but it sounds like we have some shifting business mix that we we'll have to kind of watch as we move forward.

Can you kind of set a framework for where North America is right now in terms of your regional businesses versus your large accounts business, and perhaps even trying to grow other segments, kind of where we are today so we can start to get a rough sense?

Yes, I can.

We are growing both our middle market and our large account markets simultaneously and aggressively.

What we are doing is we're launching an effort to take our large accounts operation, which we call WRS, Willis Risk Solutions, and to break out our specialty people in each one of our branch operations in major cities so we can simultaneously aggressively keep separate and robust pipelines in each areas with dedicated specialists in each area driving the brokers in both of those areas and adding specialists in each one of the practice groups to support that.

And we are very, very bullish on both market segments, and we see lots of opportunities for Willis in both those areas, and we're very bullish on it.

I'm going to try to pin you down.

You can tell me no.

If you look at Willis Risk Solutions today, I know it's young, roughly as percentages of kind of where North America is in total, how big of a piece of the pie is that?

I'm sorry.

Would you repeat the question?

Sure.

How big a piece of the pie is Willis Risk Solutions of the overall North America business today on a rough basis?

From a recruiting standpoint you mean?

No, from a revenue standpoint.

From a revenue standpoint, it's roughly about 7% market share, which is kind of consistent with where we view ourselves in a market area.

Both areas we see tremendous opportunities and we think we can grow.

Our recruiting efforts are equally distributed in both those areas, too.

So from our viewpoint, again, we see opportunities in both areas.

Okay.

Just last question on that Willis Risk Solution side, how many people have you kind of assigned over to that from an effort from your producer standpoint?

I'm trying to get a sense for the commitment you are making?

Sure.

In our Risk Solutions area, we actually have several hundred people totally dedicated to growing that market segment alone.

Producers, Jim.

You talk about several hundred.

We have literally thousands, but those people are dedicated to building the North American major account practice.

Great.

Thank you very much.

I appreciate it.

Okay.

Our next question is from Brian Meredith of Banc of America Securities.

You have may ask your question.

Great.

Thank you.

Good morning, Joe.

Couple questions here.

One, could you give us some added detail of the reinsurance booking operations, and what was the growth like in that business in the quarter?

We don't break out the specific growth in that business, but I'll tell you that it continues to grow very nicely.

I've said almost every one of these calls, Brian, that I was very proud of our reinsurance business.

I will tell you, it's one of the highest margin businesses we have in this company, and I can't remember a quarter when the growth rate of reinsurance hasn't outpaced the gross rate of the company.

It's just very good.

It was very good for many, many years in Europe, and it was very, very good for many years internationally.

And over this last three years, North America has come on very, very strong, which is almost, again, a carbon copy of what we're doing in this place in turns of our leverage.

So without being specific about though growth rates or margins, I will just tell you they have continued across the board to behave spectacularly.

Great.

Thanks.

Next question.

As rates begin to moderate here, particularly in the US, are you seeing any of your clients increase their demand or look to buy more insurance here?

Yeah.

If you're asking are the retention rates dropping, they are buying more insurance because the rates -- yeah, you're seeing a little bit of that, but you're not seeing a mad rush toward people retaining more or less, if you will, because the rates are coming down.

You don't have -- from the point of view of what we're saying -- people making a dash to the door because rates are coming down.

It's not that kind of a drop.

It's been more moderate.

It depends upon the lines and where you're talking about.

So, no, I wouldn't say that it's so definitive and you can see it.

I think it's pretty orderly.

Great.

And the last question.

Any impact from profit sharing commissions in the quarter?

No.

They're pretty flat.

Great.

Thanks.

Thank you.

Our next question is from Lisa Hinz of Alliance Capital.

You may ask your question.

Yeah, hi.

Hi, Lisa.

I've got to go back to this.

Just on your acquisitions versus disposals and how it impacted your income, was there any waiting toward asset versus disposal?

You'll have to repeat that.

I couldn't hear.

I'm sorry?

I couldn't hear the question.

Oh, I'm sorry.

Yeah, in acquisitions and disposals and the effect on profits, was that sort of net acquisitions or net disposals?

Net acquisitions, pretty much.

Okay.

Thank you so much.

Thank you.

Our next question is from Nick Persos of Sandler O'Neill.

You have may ask your question.

Yes.

Good morning.

Just a question first on the M&A environment in the US versus Europe, does one seem more competitive or not versus the other.

And the second question on the rating agency discussions as to timing, that they might be looking at any rating adjustments.

Yeah.

I think that North America is more competitive simply because there's more of them.

There are a lot more 10 million-plus insurance brokers in North America than you find in the rest of the world.

What you find in the rest of the world are smaller companies, two, 3 million, 4 million, real family-owned businesses that are very small and that, I might add, are very specialized.

So I think what you see is the competition being very competitive in North America.

I do see that there are more people talking about their businesses and their future, and actually I find it very exciting on our part because you're looking at lots of these businesses being family-owned businesses, they're looking for a company that can give them the same local feel that they've had all along but yet have an international or global resource.

And when you look at Willis, you've got to understand our strategy is to deliver locally through local relationships our fabulous global resources, and when you're looking at a local company, that is appealing to them.

So I'd say on the one hand, there's more of them in North America.

It's certainly more competitive from that point of view, but I also see sort of a little break in the action in terms of people being very sanguine toward what we have to say.

That doesn't mean to say that in Europe and the rest of the world we're still not pursuing a lot of these smaller businesses.

As it relates to your second question and our attempt to increase our ratings to in investment grade, one of the things that we hope to get done soon is to get investment grade.

We think we should have the investment grade already, but I have opinions about that subject.

I mean, our cash, our debt to capitalization is fabulous.

I'm hopeful, and we're doing everything we possibly can to get that done and get that done as soon as possible and get on with the refinancing, but I think we'll do the refinancing possibly one way or the other.

We've got a lot of options at our disposal.

Tom, do you want to add anything to that?

No.

I think that's fine.

Great.

Thank you.

As a reminder, if you would like to ask a question, please press "*1".

And our next question is from Adam Klauber of Cochran, Caronia.

You may ask your question.

Good morning, Joe.

Hi, Adam, how are you doing?

Great.

It seems like one of the keys of your growth has been the ability to add top quality people in key areas, such as D&O, reinsurance, some of your regional CEOs.

Are there several areas that you would like to add to bring in a top person that could really kick-start a segment for you?

I think that there's no one area.

If your question is pick a couple areas that if you had these areas filled with top people, you could really take off.

Right.

I think what you basically have here - and I'm not being theatrical -- is you have a 175-year company that's three years old.

It's 175 years of experience, but it's only three years old.

So what you find is people starting to join and becoming part of something that has got a lot of experience and a lot of tradition but has the energy and the excitement of a three-year-old, and you start seeing people joining us, frankly, all over the place.

I don't mean that arrogantly, but when you got a good story, they want to hear it; when you got a nice house, they want to live in it.

And I think that's what's going on.

We're reinforcing each one of our areas on almost a daily basis.

Our recruiting effort is part of -- you get up in the morning and you shave, you get up in the morning here and recruit.

You get up in the morning and have a cup of coffee or a cup of tea.

Here, you get up in the morning and sell something.

And if we're not moving the ball constantly, we're not having a good day.

And that's what we do here, and that's what you're seeing.

Great.

Also as far as your non-expansion compensation expense growth, as the organization has been growing, at what level can you control that expense growth?

Obviously, we look at everything in terms of incremental expenses.

We watch every dollar we spend to date and every dollar we want to spend going forward.

We're very comfortable about the controlled expenses that have been taking place so far, which really means we're going forward.

We just keep a tight lid on it.

Clearly, you can see the market continuing to grow.

It's not growing quite as fast as it was, but it's growing.

And every month, we see more opportunities to do a little bit better.

I don't think Tom is giving himself enough credit.

If you look at the last 12 months, you got 18% consistent revenue growth, 51% salary-to-benefit (ph), and you're recruiting, bringing in a lot of people, and that 51% stayed strong at that number with that kind of revenue growth.

I'm sorry, gang, that's outstanding.

That's really good.

I mean that.

It's terrific.

If you look at our embedded cost -- which your question is -- it's outside the compline.

Our embedded cost -- which means entertainment, travel, and all that kind of stuff -- we watch those lines very, very carefully.

And on a related base, year over year for almost three years, those lines have been flat.

As a matter of fact, they're down.

So when you look and see where the increases are coming from, it's in salary and benefits, which reflects, you know, our aggressiveness with regard to recruiting and things of that nature.

And if you took away some of the things that plague a lot of other places like more insurance costs and all that stuff, the embedded costs -- which is the real running the business day-to-day of using expenses, not wasting money, et cetera -- the last three years, not "I would say," but "is" flat.

Great.

Thank you.

You're welcome.

At this time, we are showing there are no further questions.

Thank you very much, everybody.

Have a good day.