Willis Towers Watson PLC (WTW) 2003 Q3 法說會逐字稿

Good morning.

Welcome to Willis’ 2003 third quarter earnings conference call.

I'd like to remind all parties, when the call begins, you will be in a listen-only mode until the question and answer segment of today's call.

During that time, if you wish to ask a question, you can press star one to ask a question or star two to withdraw your question.

When we begin, I'll be introducing Kerry Calaiaro, director of investor relations.

Please continue to hold.

Thank you for holding.

Welcome to the Willis 2003 third quarter conference call.

You will be in a listen-only mode until the question and answer segment of today's call.

This call is being recorded.

If you have objections, you may disconnect.

I would like to introduce Kerry Calaiaro, director of investor relations.

You may begin.

Thank you.

Good morning.

Welcome to our earnings conference call and webcast at Willis.com for the third quarter.

Our call today is hosted by Joe Plumeri, Willis Group Holdings Chairman and CEO.

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 November 6.

To access the audio replay, please call 888-282-0029 within the U.S. or 402-998-0514 from outside the U.S. or by accessing the website.

If you have questions, call me directly.,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 as defined by the Securities Litigation Reform Act of 1995.

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

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

Due to the adoption of regulation G, where we use nonGAAP financial measures we have included reconciliations for the most directly comparable GAAP measures as a supplement to our earnings release which also may be found on our website.

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

Thank you, Kerry.

Welcome, everybody.

Thanks for joining our call.

As usual, I have a few of my colleagues with me.

Tom Colraine, CFO, Richard Bucknall, COO, Mario Vitale, Chairman of North America and will take questions at the end of this call that you’d like to ask.

Once again, we are very proud of our results.

These things don't happen without our people and our people's contribution.

We think we have great people here at Willis.

So as we go through the calls and we go through these numbers, keep in mind that I think, in large measure, if not all measure, it is the result of having a great deal of people, having a great deal of pride with a great deal of direction.

What we do here is, we try to run a very good business in all environments.

We think we're building a great business, and we think we're doing it all over our business units.

In this particular case, as has been the case almost every quarter, and this is our 15th consecutive record quarter, that everyone of our business units contributed, every one of them.

I can't think of a time when a business unit did not contribute to the success and the results of our company.

Our business model -- I want to give you some highlights that I think are very, very important to the quarter and some highlights important to the kinds of things we're doing to give you some texture around which to build.

Our business model, we think, is sound.

It is the same business model that we introduced three years ago.

As boring as it sounds, it has not changed.

It's the first and foremost to grow our revenue and grow our revenue first and foremost.

That's what we do here.

We sell insurance.

We're insurance brokers.

We hope to be great insurance brokers.

We work on that everyday.

Our main line of business is to grow our top line through core brokerage business and sell insurance.

While we're doing that, we maintain disciplined expenses.

That means, spend less than we make.

If we do that, our margins will expand all of the time.

You bring those revenues to the bottom line, you keep growing them every year and do it as a team.

That's what we do, what we set out to do three years ago.

That's what we'll continue to do.

Our core business is growing our revenue organically.

That's what we're going to do to the benefit of our clients and our shareholders.

As a result of that, our adjusted net income per share was 37 cents.

It is up 32% from the 28 cents of the third quarter of last year.

Our revenue grew 16% to 452 million in the quarter.

We're very, very proud of that.

Because, as I said, the whole idea is to continue to grow our revenue.

We should be able to do that as long as people need to buy insurance.

That's the way we look at it, and we look at ourselves in a position to be able to provide that to people.

We are very excited, which I think is an indication of our sales culture, that while our organic revenue grew 16%, approximately 13% of that came from new business and 3% came from rate environment.

I think that's as good an indication of what we're doing here in this company as anything.

The whole idea when we say no matter what the rate environment is, is to grow our business, retain our clients, do more business with our clients, and get new ones.

That should affect the amount of underlying business that we do on a day in, day out basis, irrespective of rate.

We're very proud of that.

We track that.

We announce that.

The reason we do is because we celebrate that.

That's what we do.

That's why we make such a big deal out of it.

Just to give you an idea of the progress that's been made with regard to the growth of the sales culture, the maturation of the sales culture, is that a year ago that number was 9% with 8% coming from rate.

Now it's 13% from underlying growth and three on a rate basis.

For the nine months of 2003, organic revenue growth was 17% with approximately 13 coming from new business and 4% from rate.

So we look at that as a measurement as to the direction of our sales culture because it's sort of our score card in how well we're doing in building the sales culture.

We thought we would share that with you.

We are trying to build a great client service environment and recruit producers and teams at a steady, reasonable pace.

You ought to know that the pace at which we are recruiting is about the same pace as it was a year ago.

We don't believe that one year you hire a lot of people and two years later you hire a lot of people and you wait for those people to produce the next year and you put the expense on and you take the expense off and you do that routine.

We believe in the steady approach.

We're going to recruit people that want to become part of our culture, want to become part of something that's exciting, which is to offer our clients global resources on a local basis, which we call global.

That's what we do.

With a lot of people that want to do that, we see no reason why there shouldn't be a steady stream of those people who want to do it that replace the people who maybe don't want to work as hard.

When you look at our run rates, we're still -- last year we recruited about 350 people.

We'll recruit about 350 people this year, all being very selective of quality people, you know, who want to join us.

That's running at a steady pace.

I also will tell you that as we look at our margin -- remember, I told you the idea is to grow the top line, spend less than you make, which will affect your margins.

That should continue to grow if you do that well.

Our projected operating margin was 23% in the third quarter, up from 21% last year.

Understand that this quarter -- I know most of you know this -- is the latest quarter of the year for us.

You grow your margins 200 basis points and grow your revenue 16% in what is considered to be a light quarter.

It may be historically a light quarter.

We at Willis don't look at light or heavy, we think our clients need our help all the time.

The quarter doesn't know it's light.

Let's put it that way.

We're proud of that.

Our margin was 29% through the first nine months of 2003, up from 27% through September last year.

So you got that 200 basis point expansion.

I make reference to the expenses which, as you know, we watch all the time.

That's different than cutting costs because, Lord knows, we've made investments in training and systems and all that stuff.

It;’s just good day-to-day operating discipline and vigilance.

To give you an idea of how that works, which is, again, supported our margins.

If you look at our salary and benefit to revenue percentage over the last couple of years, it's, basically, been flat, at about 50, 51%.

If you look at our G&A to revenue, you're over year, 2001 was 74%.

On a year-to-date basis it is 69.

When you're expanding your revenue at these numbers and you're keeping -- and your G&A has gone down, I think that's great discipline on the part of our people because when you want to be great, as we do, you do things a little bit different than everybody else.

That’s allowed our margin to expand significantly over the years.

If you lock back at 2000, our margins were -- EBITDA is 19%.

Then we were 26%.

Then we were 30% last year.

They're running year-to-date 31%, all because of those disciplines, which we put in place three years ago, and nothing has changed.

It might look boring.

That's what we do.

We work on getting better at doing the same things rather than changing the play on a weekly basis, and everybody knows, you know, what that is.

So we're really proud of that.

I thought I would break out all of that for you in a way that may be a little bit more understandable.

We're really proud of the fact that at the end of the quarter, our debt to capital was 28%.

Three years ago it was 80, if I included the preference shares.

It's now down to 28%.

Tom will get into what we actually did during the quarter, but, again, we're very, very proud of that.

The end of last year it was 40%.

So, you know, we're making progress and checking off all the boxes that we need to check off against our game plan, which is, I think, working very, very well and, again, very, very proud of.

So, you know, we are constantly looking at the deployment of our capital.

We obviously made a couple of dividends -- declared dividends, then wasted (ph), in the last quarter.

We're, obviously, always vigilant about doing that now that we have invited that into the equation.

We're always looking at reinvesting our money wisely so we continue to grow this company.

Acquisitions continue to be too expensive for us.

That's not our core business.

Our core business is not growing this business by acquiring people.

Our core business is selling insurance.

The acquisitions are strategic.

It makes no sense to make them if they don't make sense economically because we grow our business in a different way.

I just think we're so excited about our future, we remain excited about our opportunities to buyback our stock.

We certainly have the cash to do that.

We're looking at that on an on going basis.

We did not buy any stock in the last quarter.

There were a lot of issues we are looking at.

We remain enthusiastic about that possibility because of our comfort with the future of our company.

I also want to talk about something else that happened that was outstanding and exciting.

This is exciting.

I know I'm prone to excitement.

There are a lot of exciting things going on here.

In September Standard & Poor raised our debt rating to investment grade, something, again, that we're very, very proud of.

Three years ago, whatever the lowest rung was, we were there.

Again, one of our goals was to, in a steady fashion, focused fashion, is to get us to where we are.

We think we can continue to enhance that.

We've come a long way from the LDO in 1998 and the IPO in 2001.

When we had our second quarter earnings call, I told you that we should be investment grade.

We thought all along we should be investment grade, that we would like to refinance the debt by the end of the year.

We've begun that process.

Tom will get into that.

We expect the facilities to be in place by year end with annual interest savings of 15 to 20 million range.

So that's rolling along in place, and we're checking that box as well.

Let me talk a little bit about the revenue, the 16% growth, 452 million in the quarter and 20% to a billion five through the first nine months of the year.

The organic growth was 16% in the third quarter, 17% through the nine months.

I think most importantly each business unit has generated mid-teen organic revenue growth through the nine months, every one of them.

That's outstanding performance.

There's nothing that we do that doesn't generate revenues in the teens for the first nine months.

All of the hobbies that we had that didn't do that are no longer with us.

Again, part of the core strategy, which is to get everybody to contribute.

This is a global distribution system.

We all work together under one flag.

That's outstanding.

In North America, I really couldn't be more proud as I am of each one of our units.

The revenues in the third quarter are 71 million, up 10% on a reported basis, 15% on an organic revenue basis and 15% year-to-date.

That's outstanding.

I'm looking at Mario as I say that.

All of my colleagues who are listening, that's just outstanding.

We had contribution from middle market large accounts, specialty practices, executive risk, employee benefits, construction, health care, new business, including fortune 500 companies.

This is an aggressive company.

We are going after business.

That's what we do.

We are recruiting people.

I couldn't be more proud of what's going on in North America.

A great job from all of my colleagues here.

Our global business, this sounds boring, I’m looking at Richard Bucknall as I say this, but once again, they are making a contribution as they have for 175 years and represent the bull work, as I've always said, of our business.

Our revenues were 217 million in the quarter, up 20% on a reported basis.

Organically was up 17% in the quarter, 19% year-to-date.

It's interesting as I talk about North America, which is really a fledgling business that goes back only 13 years and a global business goes back a long time.

Now, everybody continues to contribute, which just goes to show it doesn't matter how long you've been here, what matters is how enthusiastic you are about what you're doing and the leadership we have.

The good performance throughout all of our global business,specialisms, re-insurance, our retail business in the UK, large accounts, we continue to leverage the U.S.-based capabilities.

What's really interesting about that is that when we blend North American retail with the specialisms and then I’ll look at international, you have to understand that we view international and international branches and retail and the retail branches as great distribution mechanisms for our manufacturing plants which, basically, are our businesses in London and our great capability we have all over the world.

We measure our ability by virtue of differentiating ourselves by being able to distribute and place our products throughout the world.

If we don't do that, along with local service, then we don't differentiate ourselves.

It is a big measurement.

Our international area, which is also fledgling, that's less than ten years old because of the minority interest purchases that we made in the last ten years.

It was up 21% on a reported basis.

Organic was 12% in the quarter, 18% on a year-to-date basis.

Great performance from Italy, Spain, Latin America, Australia, South Africa.

Great team work along all lines, especially the global markets.

I want to give you a flavor of what we're doing, a sense of what the quarter represented, aside from the numbers.

I think the quarter represented a continuing move toward our goal, which is to be a great global broker.

I would like Tom to go into some of the specifics.

I'll come back in a couple minutes.

Tom.

Thank you.

Joe.

Net income is reported under U.S. dollars as $99 million, or 59 cents per diluted share, compared with $31 million, or 19 cents per share, a year ago.

Excluding the noncash compensation for performance base stock options on a related one-time tax benefit arising from a change in UK tax legislation and again a loss in [corporate] operations, adjusted net income was $62 million, up 35% from $46 million reported last year.

Therefore, on a fair, like-for-like comparison, adjusted net income per diluted share was 37 cents, up 32% from 20-cents in the third quarter last year.

On operating expenses, G&A expenses rose 13% during the third quarter.

They're up 16% for the nine months.

Organic expense growth was also 13% for the quarter and 14% year-to-date.

Benefits were 56% of revenues in our smallest quarter.

On a 12-month basis it is steady at 51%.

Most of our new spending is producer related on revenue generating, recruiting, training and incentive based compensation.

We also continue to invest in our business systems.

Adjusted operating income rose 27% to $104 million in the third quarter.

As a percentage of total revenues, the margin was 23%, up from 21% a year ago.

The nine months of adjusted operating income rose 29% to $435 million.

The adjusted operating margin was 29%, also up 2% from the 27% in 2002.

We have steadily and consistently improved our margins over several years now, quarter on quarter, year on year, as Joe said earlier.

On foreign exchange, the net impact on foreign exchange in the third quarter was nothing and 3 cents for the first nine months, that all took place in the first quarter.

Our current rates of exchange, we expect the impact on the remainder of 2003 to be immaterial.

Noncash compensation for performance stock options, remember, this is not relevant to the operation of our business, a noncash compensation charge for performance based stock options was recorded for $4 million pretax in the third quarter, compared to $18 million in the same quarter a year ago.

At the end of last year, our performance criteria for these options were met.

The ultimate charge is fixed at about $277 million.

The quarterly charge represents amortization based on vesting schedules and no longer have a mark-to-mark component.

On an accumulative basis, as of September 30, 2003, the company has recognized $255 million, with approximately 92% of the total estimated charge.

The remaining estimated charge of $22 million will be recognized quarterly through the end of 2004.

However, on the expensing stock options, we estimate that had the cost of both kind of performance options been expensed to the fair value business during the nine months, adjusted net income would have been reduced by approximate by $7 million.

On taxes, as anticipated in our earlier disclosures and SEC, filings we recognized a one-time income tax benefit arising from changes to UK tax legislation regarding the taxation of employee stock options.

This moves the tax of UK-based performance operations in line with the IRS treatment in the U.S.

Noncash compensation amounted to $23 million in respect of U.K. performance options had been expensive trying to do it without any income tax benefit recognized.

Accordingly, an income tax benefit of $37 million, a one-time benefit, and a corresponding deferred tax asset has been recognized in the third quarter of 2003.

The underlying tax rate, that is excluding the tax effective performance options, acquisitions and disposals, was, again, 35% in the third quarter.

Capitalization and liquidity, at the quarter end, long-term debt was $448 million, down 32% since last year.

We paid down $42 million of debt in the third quarter.

Equity was approximately 1,149,000,000, after (inaudible), resulting in a debt to capitalization ratio of 28% compared to 40% at the year end.

We continue to generate impressive free cash flow, and immediately available cash at September 30 was $160 million, providing tremendous flexibility to support the company.

Debt is net of immediately available cash was $288 million, which would give a net debt to cap figure of approximately 20%.

We're working on the refinancing and we’re expecting that to be in place by the year end.

I will turn the call back to Joe.

Thanks, Tom.

I want to make a comment about market conditions.

We believe that what we're seeing, and the markets are saying and demonstrating through the results, that there's no strong case for price reductions.

The probability of the insurance industry has not yet reached the stage where one would expect significant capital inflows.

We're generally seeing, as we did last quarter, discipline pricing in most areas and on average, prices are still rising.

There is a little bit of deceleration in the raising of prices and property which has been the case over the last couple of quarters.

Generally speaking, in casualty and specialty products, et cetera, the prices are still rising as we see it.

We think we'll continue to do so at least through next year.

There have been no major catastrophes.

If one, unfortunately, and, God forbid, would occur, the markets could harden even in the property areas significantly.

It is that fragile.

It is more the aim as it relates to conditions.

Nothing new to report there.

It is certainly steady.

I just want to give a couple of comments about the outlook and how we feel about that and reiterate a few things.

I said from the beginning that we are building a great company.

In a lot of cases that sounds like promotion, but that's what we're doing here.

We really believe that as long as people need insurance, there's no reason why we shouldn't sell more every year, every quarter.

That's the way we view this business.

We feel that we have an opportunity because people need to buy insurance.

We don't have to create a need.

It's there.

The question is, who do you buy it from?

How much do you pay?

How much do you buy?

In a sales culture, that's a great set of circumstances.

As long as they need that, it doesn't matter if the environment is hard or soft.

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

We keep telling ourselves that.

It is in our model all the time.

Especially when you are growing our market share like we are.

Our market share is not as high as some of our competitors.

As we grow our market share, we sell more things to more people, and we introduce our capability to more people.

When the market share grows, it doesn't matter whether that's a soft growth or a hard growth.

It doesn't matter because it's a new dollar to us, whether it is a soft one or hard one.

As a result, we feel very excited about that proposition in terms of growing our market share.

That's exciting for us.

We've made a lot of progress in that regard.

I don't really know what that percentage is, but we made a lot of progress given our numbers.

It is very difficult to calculate it.

We said at the beginning of the year that we could grow adjusted net income per diluted share by 25% or better in 2003.

In fact, the current range of estimates, which is 215 to 224, which represents over 30% growth, I suggested -- I was comfortable with, and we are still comfortable with that range.

We also said at that time we expect the organic revenue growth to be at least 15% for the full year.

Needless to say, with 17% through the first nine months, we expect to exceed that growth rate for the year.

Our long-term goal, to reiterate it, is to grow our earnings by 15% or better each year in all market environments and that's what we will do.

In conclusion, I reiterate what I said before.

The business hasn't changed.

The model hasn't changed.

We come here and grind it out everyday.

Everybody knows what we've got to do.

It is a simple story, very consistent.

Our core business is selling insurance.

It's going to continue to be to sell insurance.

When everybody knows where you're going and everybody is on the same page, working as a team, it's amazing how great people can make great companies.

That's what we're intending to do.

We appreciate you listening.

We will be very happy to take any questions that you might have.

If you would like to ask a question, please press star and one on your touchtone phone.

Our first question comes from Ron Frank.

Go ahead.

Good morning.

Joe, can I ask you to repeat the earnings specific comment you made vis-a-vis the earnings guidance.

I didn't catch it.

Tthe earnings guidance was, there was a range out there, Ron, of 215 to approximately 224.

I said in the last call that I was comfortable with that range and just reiterated that we are still comfortable with that range.

Okay.

Thanks.

On new business it was about 80% of the organic growth, that’s up from 70ish in the last few quarters.

You've been able to supplement the lesser rate wind at your back with the new business production.

I was wondering if you could characterize the new business production for us, specifically in terms of -- is new business, as opposed to rates, something we should expect to be sensitive in a soft market versus a hard one, or is this more a function of just, you know, what's going on in the culture and the relative ease of growing if you are not one of the giants currently, that kind of thing.

I'm just trying to get a feel for your comfort level or confidence level that you can maintain that new business growth rate in a soft market as opposed to a hard one, once we're in a soft market.

You asked a lot of questions.

Let me tell you, first of all, I think we're a giant, a budding one.

I don't concede giant --

I'm not touching that one, Joe.

I just want to get the record straight.

Secondly, we look at that, Ron, as you know, that distinction between underlying growth and rate simply because it is a measure for us to see how well we're doing.

You can go out and have organic revenue growth because rate is there and never move the needle.

The whole idea in any market environment is to keep the clients you have, do more with the clients you have, and open new ones.

That's it.

I don't care whether you're selling posters or insurance.

That's what you've got to do.

If you don't measure that, you're conning yourself.

All of our people are measured that way.

I'm measured that way.

That's why we keep looking at that number.

I don't think it's a hard or soft phenomenon.

I think it is a phenomenon with this culture.

I think it happens to be moving that way, less because of a hard/soft issue, but more from the point of view of the maturity of the sales culture, not from a hard/soft point of view

Two other quick ones, if I may.

One is, I know third quarter is a small quarter.

The year-over-year margin expansion of 200 basis point widened again on a consecutive quarter basis.

It was wider than the second quarter.

I was wondering if we should attach any significance to that from a prospective point of view.

And finally, regarding having facilities in place for the re-fi (ph), naively I would think it would just be a matter of going out with a debt offering at a timing of your choosing.

What am I missing in terms of what steps need to be in place?

I'll answer the first part.

I don't think you read anything into the margin expansion, other than it is good margin expansion.

We do that.

Nothing unusual happened to suggest that that widening takes place.

We're starting to get up in the stratosphere her, and I think the question I would get is, can you sustain your growth.

I get that from everybody.

I said yes and we're doing that.

I attach no significance to the fact that we just continue to do better what we always set out to do.

When you're doing it with these levels of margins, I think it is a reinforcement of the model on what we do everyday.

I'll let Tom talk about the facility.

Thank you, Ron.

It is just a question of going through the process.

If I was a bank, I would lend us lots of money immediately.

But I'm not.

So I'm going to borrow the money from a lot of different banks.

It is a question of working through the process.

I would expect things to be in place comfortably by the year end.

It is just a matter going through the process with the banks and terming it out at one place or another?

Exactly.

Thanks very much.

Terry Shu (ph), go ahead.

Hi.

I have a couple of questions.

First on the new business growth.

Joe, if you could describe how much of it has to come from sort of new producers.

What is the relationship in terms of hiring and productivity?

I assume it is a combination of both.

At what rate are you hiring producers?

Most of the revenue growth is internal, organic, our people growing the business.

A very small percentage of that growth -- I won't give you the number, but when we're hiring, we have approximate 2500 plus producers in this company.

When you're hiring at the rate of about 10% new ones every year, and a lot of them are replacing the ones that think our sales culture is too hard, and -- that are not working at the level of pipeline growth and accountability and all that sort of stuff.

A lot of that is replacing people who have not been very productive.

So it takes time for that to take place.

When you put all of that in the mix and you net all of that out, it is very small.

We have not really seen the effects of that yet.

I’m going to tell you the majority, the significant majority of that growth has come through our producer that are here.

We call them client advocates, who are in touch with their clients and are simply doing a better job of finding solutions to client needs

Are most of them people who had been with the old Willis and Corroon, or a lot of them new hires since the company transformed?

I didn't hear the first part.

Were a lot of the producers, is it really legacy producers from the old predecessor companies, or a lot of them new hires?

a lot of the producers with us, if you want me to define producers with us?

Is that what you mean?

Right.

There are people that -- the majority of which have been with us a long time that we have found are doing more business.

You create an environment --

So a lot of it is just the new culture and sort of rejuvenated excitement?

Yeah.

When you are in a people business and sales business, a lot of that has to do with more of an enthusiastic environment, how you are accountable, whether you want to step up to the plate, all the kinds things that are representative in a real case of a sales call.

You have been able to do this without necessarily spending a lot of money.

In fact, you've had one of the most impressive margin expansion.

If you look at a competitor that had grown through acquisitions, every year there is a ton of technology spending for platforms.

I looked at your cash flow over the last couple of years.

You haven't had to do that.

Is it fair to say good claim service is not really necessarily dependent upon all these hundreds of millions of tech spending.

I don't know what they are.

One of your competitors has been spending that

I can't comment on our competitors.

I will say, though, it is not accurate to say we haven't spent money on systems.

As a matter of fact, I think we have spent an agreeable amount of money on systems, not enormously or agregiously high.

We think we spend appropriately to build a global platform.

We are in the process of building a global platform, called “Global Service Platform,” which is a platform upon which everybody will be operating in the next two years

Right.

I don't have a benchmark, other than to compare you with some of the competitors.

I don't know what to say.

Our margins are not what they are because we don't spend money, I guess which is the crux of your question.

We do spend money.

We simply don't spend it on things we don't need to spend it on.

I don't know what else to say.

We don't waste money.

I'm trying to directly answer your question, but it’s very important because itt goes to how you continue to grow margins

It is imperically proven through your results today, what you say has shown through your results.

In terms of competing with, “the bigger giants,” are you sort of on par now in terms of being able to service big global accounts, national accounts so you can compete head to head with all of them?

There isn't anything that these other people can do that this company can’t do better.

I'm going to repeat that.

There isn't anything that they can do -- I'm not going to say that we can't do.

That we can't do better.

I'll answer that.

I mean, this place is impressive.

The issue has just been energy, direction, and telling the world we're here.

If they don't know we're here yet, they're finding out.

So you definitely have the full global platform for client servicing for any Fortune 500 account?

Absolutely.

We can service in every country in the world where humanity exists.

We have enough technology and we are improving on that technology to do what we need to do.

We're very proud.

Any particular practice, any specialty, anything that our client needs, we can do, not as good, better, than our competitors.

Well, the giants have had some problems of penetrating the middle market more and doing well there.

I assume that, as you said, you have strength cross the board so you're doing equally well across every segment, correct?

Absolutely.

Then last question.

Can you comment on -- you had alluded to share repurchases and such.

You're generating a lot of cash because your margins are so good.

If you look at your cash flow, it's very, very strong.

I gather it's continued debt paydown, and then, perhaps, if you see acquisition opportunities, but a lot of it, possibly, will, on an on going basis, go for share repurchases if you don't see other opportunities?

As I said before, obviously on a net basis, as you heard Tom say, we're down to 20% debt to capital.

We're very proud of our ability to be able do that, which comes from the margin discussion.

We remain enthusiastic about our ability to be able to buy our stock back.

We think we're going to continue to do well.

That remains a very significant option to us.

We're always looking for acquisitions.

The acquisitions, different than some of the other competitors, if not our core business.

Until we find that very strategic and very economically feasible, we going to go that route.

You can draw your own con conclusions

You alluded you thought acquisitions were expensive.

Can you elaborate on that point?

Because as you said, there's certain other smaller players growing through acquisitions.

We have models we look at.

We look to see how accretive they are to us.

We look to see at the accretion against the strategy and where they happen to be located and how important it is for us strategically.

Again, when -- look at it this way.

When you don't have to make acquisitions to grow your top line or to grow your earnings, you look at acquisitions differently.

We have done this without making acquisitions.

That's what we do.

Generally --

Just let me finish the thought.

So as a result, I don't have to overpay for companies because it's not what we do.

It's not necessary to do it.

So, therefore, we don't have to overpay in an environment that I think is a little rich.

Okay.

Thank you so much.

Thank you.

Brian Meredith, go ahead.

Yeah.

Most of my questions have been answered.

Just a couple.

Joe, could you talk a little about where you're getting your market gains right now?

It appears some of the larger carriers continue to have fairly substantial organic revenue growth, obviously including yourself or some smaller regional firms, having a tougher time.

Is it that you have better technology in servicing capability, or are there other things going into it?

I can't speak for the other people, Brian.

It is tough to compare yourself to somebody else.

I don't want to do that.

All we do is concentrate on our own business.

I will tell you that if you look at major market accounts or large accounts, whether they be international, UK, or in North America, we seem to be doing very, very well when pitted against our competitors.

Middle market, we continue to make advances in middle market, especially in North America.

So I would say it is across-the-board.

I can't tell you why others have not grown organically as well.

Okay.

Any movements in commission rates or fee rates this quarter up or down?

No.

Okay.

Great.

No different than the quarter before.

Okay.

I guess the last question, you said acquisitions were a little expensive right now.

What is the appetite for acquisitions?

You made a couple small ones in the second quarter.

Do we expect that to continue?

Any potential large ones on the horizon?

Do you have the capability of doing a large one?

If there were, I wouldn't tell you.

The pin stripes I wear are Italian.

I don't want to wear the big ones.

I really mean what I said.

We're always looking at situations.

But this isn't a situation where we got to do it.

We don't want M&A to be bigger than the sales department.

Because M&A is not ourcore business.

We are not pressed into doing these things.

We will do them when the time comes.

We think there will be a time when they are cheaper than they are now.

We are perfectly content to continue doing what we are doing.

We enjoy doing that.

We still have that arrow in our quiver.

We have that card to play.

It is very exciting.

We put it in that perspective.

Why haven't we seen more share repurchase then?

Because, you know, we got lots of things that we look at.

There are lots of things that we always consider from this point of view.

As I said earlier, I think with looking at our upgrade and looking at refinancing and, you know, everything in its right time, we will do what we have to do.

We think we're doing great.

We think we've got a great future.

I think we remain very enthusiastic about the possibilities.

As you know, at the end of the last quarter, I told you the board approved $100 million of shares buyback.

We are very thankful and comfortable with that.

We look forward to the possibility of using that.

Great.

Thanks, Joe.

J. F. Trimbley (ph), go ahead.

Good morning.

Mr. Plumeri, could you repeat the revenue figure and growth figures for the North American segment and international segment?

I can't.

North America, the revenues were $171 million, up 10% on a reported basis, 15% organic.

International revenues were $64 million, up 21% reported and 12% organic.

Thank you.

Adam Klauber, go ahead.

Good morning, Joe.

How are you doing, Adam?

Very good, thank you.

Can you give us an idea in the North America, how much of growth is coming from the middle market versus the Fortune 2000 business?

If you take the 15% growth and you break it out, I would say that it is almost half from each.

It is not a cut -- we look at that carefully.

One of the things we're very enthusiastic about is because our business is fledgling in North America, and it is, a thirteen year business is fledgling.

It has not been until the last three years that we've begun to put all the elements together.

Even though Willis bought Corroon & Black in 1990, it wasn't until recently that everybody has worked together and gone the same direction.

So when I look at that breakout, it’s virtually half of that growth from middle markets, half from major accounts.

We’re doing that, you have to understand that we're coming from way far back in terms of the major accounts that we're doing business with so that we're very excited about our share growth because it is insulated from whatever the rates are.

Not only but it's fate, but it doesn’t matter, because every new dollar we put on, which is why the market share is very important to us, is a new dollar.

As long as we're doing it efficiently against our margin base and our model, it is exciting.

So I think it's half and half.

I think it will continue to grow that way.

There will be a point in time when maybe one will be a little bit more than the other, but right now it's been right on down the middle.

It's going well.

Thank you.

Next year we're expecting some of the London insurance markets such as aviation and marine to become more challenging.

How do you think that will impact your business?

I think our revenues will continue to grow double digit next year, as it relates to the impact.

I'm going to make a comment.

I will let my colleague, Richard Bucknall, talk about that.

At the beginning of every year you try to understand what rates are about.

Every time we do that, they never seem this turn out that way.

The world is so crazy.

You never know.

Richard constantly reminds me we thought marine rates would be at certain levels the beginning of the year, and they turned out to be different.

Aviation rates would be at a different level and they turned out to be different.

All we know is we can grow, I think, our revenue double digit.

That's what we hone in on.

Richard, you can talk about the specific London markets.

The two areas you refer to, marine and aerospace.

I'll touch on that aerospace, a number of underwriters have pulled out of the market in the last few months, which is probably stabilized the market.

So the anticipated fall off in rates probably hasn't been as significant as you thought a few months ago.

Marine market has been very flat.

I think the signs are that will remain flat.

The only comment I would make in relation to the changes in the market, for all the changes that occur, they create both a challenge and an opportunity in that you'll find the patents will change and clients will buy at a different level of different retentions.

I think we will continue to look at the opportunities.

Thank you very much.

Hugh Warns, go ahead.

Good morning, everybody.

Hi, Hugh.

One quick question.

Tom, for you on the debt side, is there any penalties or accelerated cost when you would re-fi (ph) the current facility?

If we take out the remaining part of our existing senior bank facility in the fourth quarter, it would probably cost us 2 or $3 million to rate the existing swap that’s in place, Hugh.

Joe, you talked about a savings of 15 to $20 million.

That would not be netting out this two to three?

No.

That ignores that two to three, 15 to $20 million savings against the current run rate.

Okay.

Perfect.

We just got to build in some of this for the quarter.

Joe, is Mario available?

He's here.

How are you?

Good.

How about yourself?

Good.

I was pleasantly surprised at the growth in North America.

Can you give us color about areas you still see opportunities or areas where you're starting to hit on here?

Sure.

As Joe has mentioned, we saw really solid contribution in both middle market and large accounts, particularly excited about our specialty practices.

We're really starting to see our investment in executive risk, you know, D&O and employee benefits and other specialty areas really payoff.

They're really growing rapidly, tremendous opportunities for our production force and stronger capabilities allowing us to expand in areas we haven't been before.

We continue to make investments in other specialty practices, most recently in the M&A area which we think is going to be a stronger growing area and very good for us down the road.

Okay.

And then I guess the -- I think that's probably it.

Okay.

I'll probably pop off and let somebody else jump on.

I think everything looks great.

I mean, the growth continues to emerge here.

It is clearly we're seeing that people want alternatives.

Keep up the great work.

Remember, we're not an alternative.

No.

Look, that's how it started.

Clients are knocking to you guys.

Clearly, there is a demand for what you're bringing.

We've been telling people that this is a different model and we're going to continue to do what we're doing.

We are excited about our business and coming to work everyday

Awesome.

Thanks, guys.

Nick Pirsos, go ahead

Could you give us your view of the pricing landscape by geography, U.S. by nonU.S. and second, by account size, small versus large.

Well, that's a subject of a white paper.

We'll try to give you an overview.

As I said before, we think that the market is very stable to up.

The only thing we found decelerating was the rate of the growth of prices and property.

That's, basically, a general setting everything up, specialisms, specialties up, et cetera.

If there's anything specific in the world where that doesn't exist or it's much harder than that, Richard, is there anyplace that's worth noting?

This is a generalization.

I think it is impossible to -- it is a white paper to answer the whole question.

It is probably true that the rates in North America are and the big European economies are probably harder and more stable than some of the more far away places, Latin America and Asia.

That's the only generalization I would add.

Thank you.

Steven Labbe, go ahead.

Hello, Steven.

Hello.

Good morning.

Congratulations.

Thank you.

First, I just want to make sure I'm using numbers that are apples to apples.

Did I hear you say you recruited 350 year-to-date?

If so, are those mostly producers?

If so, does that compare to the 2500 plus or so producer count you shared with us?

Yes.

It is part of the 2500 plus.

It is 350 is the number, 350 is the same rate.

It is about 270 on a nine month basis.

So therefore, on a yearly basis we're running at the same clip.

The 270 is what, Joe?

Sorry.

Year-to-date.

We're running at 350 clip for the year.

Oh, okay.

The same 350 area that we grew at last year, Steven.

Great.

What portion of your, in the income statement, of your G&A, would you say is variable to incorporate both salary and benefits but also costs associated with business that you put -- that you sell?

10 to 15%

Of the aggregate?

Yes.

As you know, just adding a little color to that, the more valuable -- we try to incorporate when you are building a performance-based culture.

Performance mean you do more, you make more.

We incorporated that, as you know, a couple years ago in our AIP programs, annual incentive programs, and we hope to do more creative things like that.

In a lot of cases there's no ceilings.

If there is no performance, there is a variation of the way that works.

That's become a very important part.

I think three years ago that was very little portion of that number.

So that's a good thing.

Great.

Last one, is there any prospective tax benefit to the change in UK legislation that benefited you this quarter?

Very small.

As you can see, the numbers in relation to performance have become very small.

It is really a one-time benefit, Steven.

As far as tax rate for '04, 35% is still a good number?

35% is a good number.

I have said earlier it's possible, depending on the geographic mix of the profits earlier in the year, it is possible the rates could go down a little. 35 is a good number for now

Great.

Thank you.

Thank you.

Jay Cohen, go ahead.

Yeah.

Just a quick one.

The fiduciary investment income was down year-over-year.

What's behind that given that rates have bottomed?

We, of course, have a long-term hedging program in place, Jay.

So we don't get the peeks or the troughs that would tend to be moderated.

Okay.

Thanks a lot.

Muneesh Puri (ph), go ahead

I would like to clarify two or three things.

You said double digit revenue growth next year -- I'm assuming that's organic.

Yes.

Second is, have you quantified the benefit from the refinancing?

I think that we said we should get a savings of 15 to 20 million.

Okay.

And, obviously, you have the buyback left over.

Great.

That's all I had.

Thank you.

Any other questions?

Yes.

Hugh Warns, go ahead.

Hey, just a silly follow up.

When I was looking at international, you mention it is 21%.

I'm showing 64 million for the quarter, right?

Yes.

Did you recast anything in the third quarter of '02 to change it?

It was showing 54 back there.

54 to 64.

I don't know what that is, Hugh.

We'll look into that.

No problem.

It was a small quarter for them and obviously highly affected by changes.

That's all.

The tax rate, you are comfortable still with the 35 tax rate for the full year?

Yes.

We're coming into a big quarter, depending on the geographic mix.

That might make it down a little.

With the international, Hugh, I think it is a currency issue.

Hugh Warns No problem.

Thanks.

We have one more question from Joe Siluti (ph).

Hi.

My question is, the savings coming from the refinancing, that is entirely due to rate reduction versus an expected debt paydown during next year?

Yes.

What is the basis points you think you're going to save?

We don't want to give away our negotiating position with the banks.

That is in the broad range of 15 to $20 million.

That's what we can do.

Okay.

Thank you.

No further questions.

Thank you very much, everybody.

Have a good day.