Willis Towers Watson PLC (WTW) 2004 Q4 法說會逐字稿

Welcome to the Willis fourth-quarter 2004 earnings release conference call.

At this time all participants are in a listen only mode.

After the presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

If anyone has any objections you may disconnect at this time.

I'd like to turn the call over to Ms. Kerry Calaiaro, Investor Relations Director.

Ma'am, you may begin.

Good morning.

Welcome to our earnings conference call and webcast at Willis.com for the fourth quarter of 2004.

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

The teleconference call will be available by replay starting at 10:00 AM today Eastern time and ending February 25, 2005.

To access the audio replay, please call 866-480-3544 within the U.S., or 203-369-1548 from outside the U.S., or by accessing the website.

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 that 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 Regulation G where we use non-GAAP financial measures, we have included reconciliations to the most directly comparable GAAP measures as a supplement to our earnings release which can also be found on our website.

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

Good morning everybody.

As usual I'm here with Tom Colraine, the CFO and Co-COO;

Richard Bucknall, Co-COO; and Mario Vitale, who is the CEO of North America.

I want to review the fourth-quarter results and the year with you and then obviously at the end we will take as many questions as you want to ask. 2004 was, to say unprecedented, is probably an understatement for the industry and for Willis.

But I think when I talk about Willis certainly the word that comes to my mind is leadership.

As it relates to all of the things that are going on in our industry, we've taken a leadership position and feel very, very good about the things that we have done.

And when you look back on the year which certainly was tumultuous, certainly historic, certainly cultural and industry changing, to have increased our earnings 14 percent over that period of time, we're very, very proud of that record.

We removed contingents in North America completely.

After I spoke to all of you on October 21st, we had more costs involved, as you've already recognized, for legal fees that wouldn't be there and investigative fees, and regulatory fees and all sorts of things that represented hopefully one time efforts.

But nonetheless, we took advantage of recruiting because we had an opportunity and a window of people that wanted to join us that was unprecedented in this Company.

And still to have earned 14 percent growth over the year, we think was an outstanding performance.

Over the past 3 years we've taken many steps to build a model which appears today to be a model that a lot of our competitors are going toward.

And I think that's a great indication and great testimony of the leadership that we've taken.

I think our model has become more fashionable today and I'll talk about that later on.

This past October we announced the abolition of contingent commissions, and our new approach was embodied by our client Bill of Rights, which is an outline of what clients should expect from us.

I think this whole discussion has to do with an expectation that clients have, what value are you going to provide and what is it you're going to charge me for what you provide.

That has got to be the benchmark that this Company strives for over time because at the end of the day everybody's got to be able to profoundly be able to describe its value and to put to that value a price that people pay.

If we do that well we're going to grow our business.

When we talk about disclosure, we think in this industry that disclosure goes both ways.

Not only do you disclose what you make but you've got to disclose what you do as well.

I think in both of those cases it's a perfect opportunity for us and this industry to be able to do both.

The transparency, what it means for clients, the insurance marketplace and Willis has well been defined by us.

As of January 15th this entire Company has been fully transparent, whether you're in Germany or whether you're in the United States or whether you're in Great Britain, this Company is fully transparent.

And as we go forward we will sophisticate our systems more and more so that that transparency is much easier to deal with and much clearer for our clients to understand but we wanted to be quick to get out there and to show that our hearts and our spirit was in the right place.

We have trained 8000 people in what value is about, what transparency is about and what we call the Willis client experience.

We will make sure by virtue of this value that our clients fully understand what we do for them anywhere in the world and what we get paid for doing so.

As far as I'm aware, we're the only broker on a worldwide global basis that has done that and that is a very important transition for what we think is a very, very bright future but a very important step to take.

The future is about the right way to do business and we fully believe that this is the right way to do business.

The soft market is again a highlight, as I talked to you at the end of the second quarter I told you that the market was not a pending soft market but it was soft.

And it has gotten soft as I have told you it was going to get soft.

It has gotten soft so much so that it's fallen off the cliff actually, especially in the fourth quarter.

We had rapid transition from a hard to soft insurance marking price and rate impact on our revenue growth has swung from neutral in the fourth quarter -- or the first quarter of 2004 to a -4 percent in the fourth quarter.

But in spite of this we grew revenues 3 percent organically in the quarter and 4 percent for the year excluding contingence.

If you take the new business growth in the fourth quarter which was 7 percent and new business against the backdrop of the rate impact of a -4, we thought that that was a pretty good result given everything that was going on.

Now some of that 7 percent was an overlap from the third quarter but we still think it was very, very strong without getting full credit for the people that we've recruited and the new accounts that we have opened that have not manifested itself in that quarter.

So we think that everything being considered that we are very, very happy with the not only that result but the direction that those results give us a great deal of hope for in terms of the future.

I think there's even more positive things than that as we go forward.

In the recruitment front, we've been hiring steadily over the past three years as we have grown the Company and built the sales culture.

The pace of hiring did accelerate in the fourth quarter.

It accelerated in the fourth quarters simply because we had a decision to make.

We had a parade of people that were excited about joining our Company and when you have a parade you can either watch it go by or you can get in front of it.

And what we'd decided to do is get in front of it.

There was a window of opportunity for us and we said to ourselves, you know, should we take advantage of that window of opportunity which is going to mean a great deal for us in the future or are we going to pass on it?

So we decided not to pass on it.

For those of you who are concerned that by virtue of the recruitment activity we still -- maybe we've changed our philosophy about the way we pay, and the guarantees and all that stuff -- we haven't done that at all.

As a matter of fact, the net growth in the recruitment is less; it's probably almost 5 percent than the year before which was 6 and the year before that which was 7.

It's the quality of the people that we're seeing joining us which is the difference in that so-called parade that I mentioned.

And that is the reason why you see that recruitment number go a little bit higher.

We have not changed our philosophy; we have simply gotten to the point where we're very, very excited and very heartened that a lot of people are sharing our enthusiasm and our optimism for the future.

And we been able to strengthen therefore almost about every region and practice especially in North America.

The Northeast, the West, the Midwest and in our employee benefits and executive risk packages practices.

So I wanted to make sure we put that in perspective and told you about the decision that we made.

On the new business development front we made inroads into the Fortune 500 accounts over the past year.

We do business with about 25 percent of these companies and were also seeing a market increase in requests for proposals, RFPs (ph), the volume has tripled since last year and are winning a bigger share of these than in the past.

Many of these RFPs are for renewals that will take place later in 2005 or 2006.

It does seem that many larger clients in particular are starting the process of seeing what's available in the marketplace.

It may also be the case that larger clients are going back to having two or more brokers to fill their needs rather than putting all their eggs in one basket.

This makes sense for many companies and we feel we're in a great position to be an additional egg, if not a couple more eggs, if you will and that's what we're seeing over the course of the last couple of months.

I want to go back to make sure that net new business of 7 percent in the core were up from 6 percent and the third quarter, I think is a pretty meaningful number.

And again, it's without the full thrust of a lot of the new business development themes and recruiting themes that I am making reference to.

We have some incremental net new business that carries over but as I said not much.

Last week the Board approved a 15 percent increase in the quarterly dividend to 86 cents.

We take that as a vote of confidence in our model and the opportunities for success.

We think we're building a great model and we think that as a highlight film that those were a lot of very special, very extraordinary things that took place in the year that has set up the future of our business and we're going to enjoy participating in.

I want to get into some of the financial highlights with reference especially to the fourth quarter and the year and the reflection of those highlights that impact the loss of volume that we saw and our profit based contingent commissions, the softening insurance market and higher expenses related to the legal, investigative and regulatory compliance, as I said earlier.

In addition, the incremental salaries and the benefit expense for recruiting and retention.

The contingent commissions declined 14 million in the fourth quarter to 25 million and totaled 75 million for the full year.

Relatively flat over 2003.

We abolished these commissions in October and actually returned checks in North America in the quarter.

I said on my call in October these commissions will go away and they went anyway.

I don't know of anybody else that did that, but it was a stand that we took for the reasons I mentioned earlier in terms of feeling good about our business and our value proposition.

Our adjusted net income per share for the fourth quarter was 63 cents, down 10 percent from 70 cents last year.

For the full year adjusted earnings per share were 260, up 14 percent, as I said earlier from 228 last year.

The adjusted operating margin was 28 percent in the quarter, down almost 5 percent from last year.

That sounds like a big decrease, remember 2 percent of that drop came from the contingents that declined, and the others came from, as I said, these extra expenses that were extraordinary or decisions that we took to make sure we participated and positioned ourselves for the future so that they were decisions that were made productively and proactively rather than because we had changed our method of doing business or because we had changed our direction or philosophy.

I'll leave Tom with the rest of the numbers in a bit but let me take you through some of the business units.

At North America the total revenues were 198 million in the fourth quarter and 680 million for the year, so that would have been in North America's case because we gave the contingents up about 10 million in the quarter.

Organic revenue growth in the quarter excluding contingent commissions was zero and 4 percent for the year.

A lot of the accounts in the fourth quarter were waiting on decisions based upon a lot of things that were taking place in the fourth quarter.

So I think that zero had a lot to do with that.

Mario can talk about that if you like in the Q&A.

We talked about recruitment picking up the pace in hiring in North America.

And the new client development we are very pleased with.

The new business wins in the quarter and so far 2005.

As a matter of fact last week we picked up 24 pieces of business that were new accounts to this Company, just last week alone, most of which -- all of which in North America and from our major competitors.

Our global business continues to do well despite the softening of the market.

The total revenues were 269 million in the fourth quarter, 1.2 billion for the year.

Organic growth excluding contingents was 3 percent for the quarter and the year.

And in the past few years we have announced several acquisitions to strengthen our middle and large account capabilities including Coyle Hamilton which made us the largest insurance broker in Ireland.

And Jefferies and Opus in England.

And we continue to look for opportunities globally for acquisitions and that pace should continue at the pace that we experienced last year.

On an international basis again, we couldn't be more pleased with the retail parts of our business that represent our distribution.

Internationally the total revenues were 121 million in the fourth quarter, 433 million for the year.

Organic revenue growth excluding contingents was 7 percent for the quarter and 9 percent for the year.

Internationals had a great year.

We're assimilating most major associate companies over the past year or so like Germany, Italy, Iberia, Denmark; continue to work closely with the rest of the companies to deleverage our specialty strengths as well as our global network.

And as I said we couldn't be more pleased with what is happening on an international basis.

Let me turn it over to Tom Colraine who will take you through the rest of the numbers.

Tom?

Thank you Joe.

I won't go through every line item on the income statement as you all got the release.

But highlights.

Adjusted net income for the year was 13 percent at $437 million compared to 386 million for the year 2003.

Adjusted net income from diluted share sales, 10 percent to 63 (ph) cents for the fourth quarter against 70 cents a year ago and for the year it rose 14 percent to $2.60 compared to $2.28 last year.

Foreign exchange movement had a -1 percent impact on recorded earnings per share in the quarter compared to last year and zero impact on reported earnings through the twelve months.

General and administrative expense grew 10 (ph) percent during the fourth quarter compared to the same period in 2003 and excluding the impact of foreign exchange and acquisitions and disposals, it was 7 percent accounting expense costs.

There was almost $10 million in extra legal, compliance, regulatory and other related cost in the quarter.

The balance was in extra salary and benefits.

Salary and benefits were 53 (ph) percent of revenues for the fourth quarter and 52 percent for the full year 2004.

This is up from 50 percent a year ago and reflects expenses for recruitment and retention.

Adjusted operating income sales 15 percent to $ 165 million in the fourth quarter of 2004 and as a percentage of total revenues, the adjusted operating margin was 28.1 percent in the quarter, (indiscernible) percent from a ago.

For the year adjusted operating income rose 7 percent to $666 (ph) million and the adjusted operating margin was 29.3 percent, (indiscernible) from a year ago.

On taxes, excluding amortization of intangibles and the exclusion of operations and the performance (ph) related, the stock options especially the one-off tax adjustment in 2003 changed in (indiscernible).

The underlying effective rate for 2004 was up 3 (ph) percent compared to 24 (ph) percent in 2003.

Capitalization and liquidity, long-term debt at the year end was $450 million, up 23 percent from 370 million last year as we were then in the process of paying off the existing debt and putting our new credit facility in place.

Total stockholders' equity at the quarter ended at approximately $1.4 billion, and the capitalization ratio or total long-term debt to total long-term debt and stockholders' equity was a comfortable 24 percent at the quarter end.

During the quarter stock buyback activity was very modest.

The Company (indiscernible) buyback of 9.3 million shares for $339 million.

Our average shares -- average diluted shares in the quarter were 106 million sequentially with the impact of the buyback and option exercises and 168 million for the year.

I would estimate that the share count would remain about the same in 2005 as it was in 2004 and unless we ramp up the buyback activity going forward.

In addition to the stock buyback, we used $115 million for dividends during the year in $127 million for acquisitions.

There was approximately at the year end $222 million of immediate available cash providing significant financial flexibility to support the cash needs of the Company.

We recorded two more acquisitions in the fourth quarter bringing our 2004 total to 10 completed transactions with annualized revenues of approximately $155 million.

And now I will turn the call back to Joe.

Thanks Tom.

I guess I want to conclude by making a couple of points and reinforcing a couple of others.

Despite a declining rate environment and extraordinary challenges facing the global insurance industry we were able to continue growing in 2004 and expanded revenue on an underlying basis by 4 percent for the year.

During this unprecedented year in the industry which generated we think much-needed self-examination and change, Willis led the industry in reform becoming an even better insurance broker and solidifying our leadership position.

We're in a transition period as we build for the future and certainly it is an uncertain period but we're very, very optimistic about the position that we're in.

The whole idea of value is a business and a notion that any industry and any company has to finally figure out, what is it you do, and what is that you charge for what you do?

And if clients think that there is value there, our business is a growing concern throughout the globe on a fully transparent basis.

We know the 71 million in contingents are going away and we can't tell exactly when we will make some of it up.

It will take a lot of great work.

But we're confident in that review.

As we look full our commission base and we look through our fees, we are discussing all of the things that make up commissions and all of the things that make up fees and look for greater opportunities in market share.

And we believe that with the be review of commissions, with the review of fees and in a lot cases when people talk about value we thought in a lot of cases we didn't charge enough for what we did.

And so that gave impetus to a review of our value proposition as well as what we charge and we're very confident about that.

So if you take increase in market share which we believe is occurring, and we take a look at and review our commissions and we review our fees and everything that generates revenue in this Company including cross-selling and retention of accounts which have put a big focus on for 2005 and the years to come, we feel that we are positioned better than most for the challenge and we will keep you informed of our efforts as the year progresses.

Good people, as we said before, are attracted to us and we're investing in them.

And the talent that we have which we think retention is a big deal.

We have, believe the finest people in this business and it's important to retain them during this period.

And you see a reflection in our numbers that I mentioned earlier both through recruitment and retention.

The first important issue is to keep what you've got.

The second issue is to get more from what you got.

And the third is to get new ones and we're trying very hard in that order to do all of those things and I think you see a quarter which reflects all of that.

We stepped up the pace in acquisitions in 2004, and we'd like this like this to continue.

But if we can't get the right partners at the right price we will have the flexibility to deploy capital in other directions as we mentioned before.

We know how to look after expenses and we know how to spend money wisely.

That has not changed in this Company.

We are in fully complete control of the way we spend our money.

If you look at our ratios over the course of the last four years you will find our ratios are very much in line with what we've always experienced in the past.

Our salary and benefits percentage to revenue has been rather flat over the last three years, when I got here it was 57 percent now it's down to 52 percent, slightly up from last year.

But we watch them very, very closely and our G&A to revenues were 81 percent when I got here, it's now down to 69, relatively flat to a year ago.

We watch these things closely but we're going to do the kinds of things that are necessary to make sure we secure our future.

We have a strong and well-established culture of compliance and so we have already been through some of the challenges that others have yet to face.

Our model, as I said earlier, is now I think fashionable; our expense discipline, you hear people talking about expense discipline, we've been talking about it four years.

It seems to be the rage.

We do that all the time, every day.

We talk about that issue.

And it will never, ever get out of control with this Company.

We centralized all of our financial controls four years ago.

We centralized and adopted a general counsel policy on a global basis four years ago.

We centralized our audit function four years ago.

We created the Willis exposure model which became our excellence model almost four years ago and our one flag team approach to everybody working together so our clients get all of us -- which becomes the greatest piece of the value proposition going forward, we did four years ago.

All of these things we feel now puts us in a wonderful position to take advantage of the future, to take care of our clients and the new ones that will hopefully join us.

We will be very, very glad to take any questions that you have at this time.

(OPERATOR INSTRUCTIONS) Stan Johnson of Citadel.

Joe, could you -- lots of questions here, but let me just pick one.

The foreign exchange issue in the quarter cost you revenue and (indiscernible) had benefited in the last couple of quarters.

Could you explain the reversal given the general --?

It was really a function of what happened in 2003 to 2004.

It ended 2003 where the dollar weakened very quickly towards the end of the year.

The impact was to reduce the revenue down to expenses and no (ph) functional costs of the overseas business units, particularly Willis Ltd.

It was a complete wash at the operating income EBITDA level because of our natural hedges.

In 2004 there was a bit of the weakening towards the end of the year, but far smaller than in 2003.

So if currency stays flat from here, what's the likely impact throughout '05 then?

2005 will probably stay flat from here and it will probably have a very modest impact -- (indiscernible) at the bottom line.

Probably slightly negative at the bottom line but really in the 1 to 2 cent range.

Thank you.

Charles Gates of CSFB.

I guess my first question, you said on the second page of your news release that you referred to incremental salaries and benefits expense specific to retention.

Could you elaborate on that issue?

Who are you potentially losing staff to?

We're not losing anybody.

The retention doesn't mean you're necessarily losing people.

We wanted to shore up a lot of the things.

Our own people not because they were walking out the door -- we weren't losing anybody.

As a matter fact, our retention is very good.

We just wanted to make sure that as we go forward in a very competitive environment that we made sure our people in the midst of recruiting and in the midst of looking elsewhere for talent that they didn't forget that we appreciated their effort.

If you look over the last four years, one of the reasons that we had done well with our expense base etc., is we had people in this place that had not received salary increases for four years because our disposition has always been keeping salaries on a rather flat basis and paying as people earned them in bonuses, to get to a model that's more oriented to a sales oriented culture.

And we felt that over a four-year period of time that we'd gotten out of whack with a lot of these issues so we brought those in line and made those adjustments.

And so that's what we mean by retention.

It was not an expression of "oh my God, we've got to get to the door because everybody's blowing out of here".

It was a conscious decision that we made again that positions us very well for the future.

My second question.

One of you in your prepared remarks made reference to I believe in the quarter $10 million of extra legal expenses.

Is that the full amount of the impact on this quarter from a dollars and cents standpoint of Spitzer?

It's not all legal expenses but it's a bundle of expenses in the legal and compliance and related front that are because of the -- are the result of the investigations and everything else (indiscernible) including the need to comply with Sarbanes-Oxley for instance, it cost us $1 million or so and so on.

Did you guys put up a reserve similar to what Aon did yesterday specific to this whole situation?

And if so, how much is that?

No we did not, Charlie put up a reserve.

We found no reason to put up a reserve.

We haven't had discussions with the Attorney General that would suggest that we should put up a reserve.

My third and final question.

I believe, Joe, you indicated in your prepared remarks that you had thought that commercial lines property casualty casually insurance pricing to "had fallen off a cliff in the fourth quarter".

Could you elaborate on that?

Seemingly your comments today similar to what you had post-second quarter?

Yes, when I said post second quarter, I think I made the remark and I'm paraphrasing, Charlie, that I had read a lot about the pending soft market.

And I said it's not pending; we're in a soft market.

Despite what people have said about rates staying firm and underwriting discipline and all that stuff, that hasn't happened.

The rates have continued to fall.

And they have fallen in the Property & Casualty market anywhere between 10 and 30 percent over that period, beginning very strongly in the third quarter as we spoke about the second then, and continuing to drop in the fourth.

And that continues to happen.

So you would see pricing falling on the order of 10 to 30 percent?

I see over the last six months in different places around the world that happening.

That has happened.

How do you see that evolving?

I promise, that's my last question from here.

I can't tell you what the insurers will do, but there is definitely in a soft mode and haven't seen anything that will correct that.

It may stabilize, but the fact remains that it has been down in the property area that amount.

Thank you.

Jay Cohen of Merrill Lynch.

Two questions.

The first is the acquisitions that were made in '04, can you give us some sense of what revenues from those acquisitions will be in '05, if you made no more acquisitions?

(indiscernible) those acquisitions would be 155 million next year.

But about half of that would have come in 2004, Jay.

That is helpful.

Then the other one, you may have given this before and I apologize.

If you could just talk about the contingent commissions that were earned in the first, second, and third quarter of '04, that would be helpful.

In the press release, we put the -- in the release, we laid out the contingent commissions volumes for the quarter.

So at $21 million --.

Oh, I see it.

That is great, thanks.

Lee Cooperman of Omega Advisors.

As you see things presently, assuming no major change in the price of our stock, no major change in the environment, how would you see using your prodigious free cash flow in '05, in terms of dividend increases or stock repurchase or acquisitions or debt retirement?

This is a generalization.

We have a great cash position, as you see, despite the fact that we spent a lot of money on stock buyback, despite the fact that we spent money on acquisitions, despite the fact that we paid dividends and increased the dividend, we have a great position.

We think that all of the levers of the disposable abilities that we have for capital are there.

There's a great deal of uncertainty that obviously fills the air in 2005.

But we'll see how the world unfolds.

We are very interested in making acquisitions.

It appears that the pricing is a little bit better.

That's the reason why we embarked on the acquisitions that we did.

We find that there may be opportunities that exist so we can use our capital in that regard.

Obviously because of the uncertainty, we didn't buy any stock in the fourth quarter but that was more related to uncertainty and seeing what was available to us with other means of disposing of our capital in the best way that our shareholders can benefit.

We feel that we're in a really good position to kind of view all of the things that are available to us and we're going to take advantage of them.

I think I said a year or two ago that all of the levers of the use of capital which would be positive effects of this Company whether they be buybacks, whether they be dividends, pending of dividends, acquisitions, and all of the things that go with it, we have done.

We have pulled all of those triggers.

And I think used our capital very, very well and are in a great position this year to do that as we view the current events and what transpires.

Lastly, I fully respect what you've done, you've done an outstanding job.

I was trying to get a sense of how you would prioritize things going forward do want to kind of keep your cards --?

I think keeping our powder dry right now because of the uncertainty is probably the best thing for us to do but I think we have a very good view from the seat that we're in to see what happens and then take advantage of it because we have such a good capital position.

Thank you very much.

Jon Balkind Fox-Pitt.

Good morning everyone.

A few questions on the expense side.

Could you break down -- you have the 10 million of legal and Sarbanes and regulatory cost.

Could you break down the remainder because I assume sort of straight G&A outside of that was flat year-over-year.

How much was going toward new hires in the quarter and how much was going toward retention which I also assume is somewhat one-time-ish?

And then second question, in terms of the people you've put on in the quarter could you talk about numbers and then break it down by producers, street brokers and managers and what you are saying in terms of the pipeline of business those people brought versus what was discussed during the due diligence process?

I think you need to join the Company.

You need to work with Tom Colraine, Jon.

Seriously, I'm not going to break all of those down but I'll try to give you some direction.

The areas that have to do with legal and regulatory and investigative and all that sort of stuff obviously has to do with what's going on in the business.

It has nothing whatsoever to do with a sudden surge in legal issues outside of the things that you read about.

You can look at that as a non-recurring issue depending upon when all of this stuff is settled out.

And that is a pretty significant number.

As it relates to retention, as I mentioned earlier, it had to do with taking care of our people, some of that has to do with a non-recurring issue.

A lot of it -- some of it has to do with ongoing.

All I can tell you is that the salary and benefits, as I mentioned earlier, to revenues were 52 percent in 2004.

That's versus 50 percent in 2003, versus 50 percent in 2002, versus 52 percent in 2001, versus 57 percent in 2000.

I think that's pretty good management of our salary and benefit area and does not certainly indicate runaway inflation as it relates to what we're doing.

I think it's very measured, I think we know what we're doing.

We saw opportunities that to be able to acquire outstanding people with outstanding account relationships and I underscore outstanding and we made the decision to do that.

But we haven't changed the way we pay or the circumstances under which we pay, the levels are just higher because they are (indiscernible).

We don't make guarantees anymore.

We've never made them and we still don't make them, we don't do that stuff.

You've got to understand that measurements and in the recruiting area the best number I could give you which I tried to give you some help on earlier, is our net new producer hires were 5 percent well within the range of what I said to everybody we would continue to do which was about 6.

So 5 was lower than last year which was 6, 6 was lower than the year before which was 7.

That's not runaway recruiting out of control.

But again it's very targeted.

It's very focused with people who have real records of bringing and having relationships with very large and numerous accounts.

As it relates to your question with regard -- and I would say that the most of them in North America and the preponderance of the RFPs and the accounts that have come to us that I mentioned, are accounts that came to us either via these people or frankly our ability to be able to get pieces of business of accounts that I mentioned earlier that are now looking for somebody else and another basket to put their eggs.

And our people that we've had here that have done an outstanding job, responsible for building this Company over the last three or four years have done an outstanding job of doing that.

So the combination of being able to get new business from the very good people that we have here plus the recruits most of which have not manifested themselves yet, I think Jon, puts us in great position.

One final thing.

Fiduciary income sort of seemed flattish year-over-year.

We've seen big bounces given the hike in short-term rates at other companies.

Anything unusual in that item?

Of course, we hedge our rate (indiscernible) quite far into the future Jon, so we don't get the (indiscernible) rates.

Thanks, Tom.

Michael Lewis of UBS.

Good morning.

A little clarification here, Joe, in this last quarter you made a comment when you gave your guidance for the full year of 260 to 265 that you were basically going to trim contingent commissions about 30 million in the fourth quarter out of a total 80 million for the full year which would have impacted earnings 12 cents.

I don't understand why you've only had a $14 million trim.

You are still booking for 25 million.

Can you explain that and should we assume that the 71 million that you booked for full year 2004 will completely disappear?

That's my first question.

I'll answer the last one first, the 71 million will disappear, that's the famous buckets one and two.

As it relates to what seems to be a greater collection, if you will, of contingents then what it was protected is that we had earned internationally contingents which we got paid for in the fourth quarter more quickly than we had projected and that's simply the reason for that.

So in essence your earnings were a lot weaker than one would have thought when you gave your guidance, right?

I'm sorry.

Your earnings are a lot weaker in the fourth quarter than would have met your guidance because your guidance was based on a 260 to 265 and that was assuming a little less than 30 million so you actually gained about 6 cents that you didn't expect?

We were at the low end of the guidance that I gave you.

I think that the positioning of how that was made up differed.

I think we did -- the rates fell more quickly then I thought they would and that was a major ingredient, made up in a little bit by the new business and so that was a little bit different then I predicted.

A lot of things went on, Michael, in November and December of last year.

I don't think anybody would call it a year that was normal.

The amount of fees that we had to pay for the regulatory compliance, investigative and all the things that went along with it, whether that goes to Spitzer investigations, to Sarbanes-Oxley, to whatever were greater than I expected.

We made a decision in those last two months with regard to the retention issue.

But I thought everything being considered in there that trying to give you some idea of where we might wind up when there was a lot of uncertainty just to give you some direction, we came pretty close.

As a matter-of-fact we were right on albeit the low end of where we were.

So I thought we did pretty good.

Going forward I guess my questions are here if we really don't know at this stage of the game what you can recoup on the contingent commission side or how you can basically change your comp to your clients because we have to see its uncertain times, I guess what we really have to depend on this time is how much penetration you can make in the North American market?

You had organic flat growth in the fourth quarter and also how much of these extra expenses are Big Ben and what can be eliminated?

I guess I'm trying to do in a long-winded way is figure out how good are those fourth-quarter margins that you've generated which seems pretty good to me?

Are they sustainable and what can you say about North American inroads and how much of those expenses can be eliminated in 2005 of those usual expenses?

You said a lot and I'd like to take you on the road with me -- that was great.

Let me kind of give you an editorial on what you're talking about. (multiple speakers) I'll take them out of order but I will give you some sense.

You are right, I can't give anybody any guidance in a year where guidance and the environment don't seem to go hand in hand.

I'm not going to do that.

But I'll make some comments that maybe give you a sense of how I feel.

Yes, 71 million is going to go away, I don't know how much we can make up.

But if anybody is going to be aggressive about reviewing our commission levels, it's going to be us.

If anybody is going to be aggressive about looking at our fees and the consistency with which we go about them, it will be us.

If anybody is going to be aggressive or is in a better position than we are about gaining market share, I don't know who that would be and I can definitely tell you it will be us.

When you've got the market share that we have on a global basis which is in the 8 to 10 percent range and you've got 90 percent of the way to go and the direction and the movement that we are taking despite the softness in the market, I like our chances to gain market share.

If you take the three ingredients that make up for the contingents which are the review of our fees and commissions, and the review of and the aggressiveness with which we approach gaining market share by virtue of our own sales culture, plus the recruits that we brought in plus the fact that there seems to be an unraveling or at least a disposal of clients to offer other brokers the opportunity, we're in there and taking advantage of that.

If you put all of that in some sausage grinder and come out the other end, I can't tell you what that will mean.

I can only tell you if it means anything good, we will be the recipient of that.

I just don't know what that will be.

As it relates to expenses I don't need to tell you what we do with expenses here.

We watch them constantly, all of us.

Not just me.

The thing will not get out of hand.

I tried to explain what put in -- what made up these things which is the reason why I spent so much time on the ratios.

But I feel that whatever the revenue growth will be in 2005, the relationship between the expense growth and the revenue growth will be those that you've become accustomed to simply because we watch it.

When we hire people, we hire recruits; we don't look at them as just additive.

We ask ourselves the question, could we manage out underperformers, are there people who haven't been performing to make up for what we're hiring in and the expense that's coming in?

When somebody wants to do something we ask the question, is this necessary.

There's a lot a bureaucracy involved in answering those questions, asking those questions but that's what we do.

So I feel pretty confident if you look at all the things that you mentioned, yes, on the one hand I can't tell you what all of that means.

But I can tell you that the opportunities within the context of what I just said makes us very optimistic as we build a great 2005 platform and a platform going into 2006 and the future.

You put on top of that the acquisitions that we've began to make, I think we're in terrific position for our future.

But I can't tell you in this year which is great transition and great uncertainty what it will mean, but I think if it means anything good, we will be a participant.

Thanks a lot, Joe.

Terry Shoe of J.P. Morgan.

I think most of the questions have been asked and Mike Lewis' question was sort of what I wanted to ask and when you say, Joe, relationship between revenue growth and G&A, let's say expense growth.

Does that mean you will again pull down expenses on a ratio basis private to maintain your profitability when you -- and taking into consideration of the loss of the contingent commissions.

Is that what is implied?

Yes, as I said, Terry, we always watch expenses here.

I tried to explain that blip in the fourth quarter and what it was for.

But the disciplines, the way we run our business, our philosophy of running our business is not changing.

And that's going to continue.

I think a lot of the questions was really trying to get at the extra expenses, the 10 million for legal and then the other component which is retention and recruiting.

How much of that is kind of underlying base increasing and how much is one-time?

And it's hard to get a good fix on that.

Right.

I can't break that down for you.

I can only explain to you what they were.

But at the end of the day, I can tell you that if you look at the ratio of salary and benefits to revenues which were 52 percent.

If you're looking at some idea of what they might be in 2005 I can tell you we're going to try real hard to maintain that discipline in that area.

If they are up 1 percent it's because of the recruiting opportunities that we had.

But they are certainly not going to surge to 55 or 54 -- I mean we're going to watch that very, very closely.

So that gives you an idea of the underlying, Terry.

This is taking into consideration of the loss of contingents, of course.

Because when you talk about revenues, you are not then backing out contingents, you're just talking about how all of the Willis employees now live in the new environment, is that a fair comment?

I'm not sure I understood you.

Say that again please.

By definition when you have an erosion of the top line because of the loss of commissions, the 71 million, it makes it tougher to main maintain ratios.

So I am inferring from what you said that you have taken that into account when you talk about ratios, you already have taken into account the --?

I understand.

Yes we have.

So that everyone will share in the fact that it's just a little bit less revenue to work with until you can somehow work to restructure your compensation and fees and such, that is my question.

That's accurate.

The legal and compliance you had said that until most of it goes away I assume though the 10 million that Tom cited for the fourth quarter is more of a non-recurring nature, is that correct?

Yes.

That would be right.

You can't be absolutely sure -- there are a lot of things out there but certainly in a normal environment I would imagine most of that would not be there.

The Sarbanes-Oxley even though it's a huge amount, the extra $1 million I gather you've budgeted for it all along because it's nothing new.

However, just more maybe more stuff came out -- it just cost a little more?

No, in fact, the million dollars is still the expense for the full (ph) year and the last item only (indiscernible).

We had a pretty good compliance and total structure to start with so we were able to do most of the work in house and certainly everything (indiscernible) toward the end of what is costing (technical difficulty) accounting.

Thank you.

Jay Gelb of Prudential Equity Group.

I want to touch base on the other two buckets of the revenues that had some aspects of contingent commissions that were paid by the insurance companies, the 80 million.

Can you give us a sense of how those fees are being restructured so that you can retain those?

That is an ongoing conversation about how we're going to get paid for those fees.

So far I can't give you anything definitive, I'll let my colleague Richard Bucknall follow-up with anything or any color he wants to add because he's been in the middle of these discussions.

Basically we've been told by the carriers that they would love to find ways to compensate us for the fees, the services that we performed which are mainly in London, as you know, because of the way the market operates in London.

We just haven't come to anything conclusive yet so that I can share with you how that will necessarily happen.

But the conversations have been positive.

As you know our competitors have advanced a couple of proposals neither of which have been adopted.

We've taken a stance that each one of the relationships we have is different, each one of the services we have is different, and Richard Bucknall has been in the forefront of those discussions.

Richard if you want to help them on that a little bit?

Yes.

The purchase of work in London which we Joe refers to and I think it's common knowledge that in the London market the brokers have to do more work in relation to the premium in relation to policy production in terms of claims processing.

So there has been a lot of discussion going on.

Our focus has been on two areas; one is the implementation of the transparency in the Bill of Rights, the retention of the trust and confidence of our plans which we refer to as actually critical.

We've also as Joe has said, put quite a lot of work in relation to consistency of commission levels and made some progress there.

In terms of some of the market facilities that we had in binders and so forth, we've had a look at all of those.

We've restructured a number of them.

We've changed our disclosure statements relating to them and that work is ongoing.

And then in relation to the fees or services, we are part of the debate and that debate is ongoing.

And I don't think they are as today as Joe has indicated, that there has been no resolution.

It's all part of the overall debate relating to the reform and the operational nature of the market.

We were the first brokers to transact to the (indiscernible) platform so whatever changes, we want to be at the forefront of those.

Thanks.

I actually had one more question, to switch gears.

If you look at the Marsh settlement with the New York Attorney General's office, do you think you'd need to make any other changes than you haven't already made to your business practices?

If I look at the stipulations that Marsh made and all of the things they stipulated to me and to say the things they were going to do we have done for the last three or four years.

The only other thing I wanted to follow up on is the wholesaling operation, Stewart Smith.

Do you think you need to make any changes there based on potential conflict of interest?

No, we look at the potential for conflicts in all of our businesses.

We have very strict compliance procedures and adhere very, very closely to that.

Conflict is something that we look at all the time not just in our wholesale area but across the board.

So there's no need to decouple that business or any other strategic changes?

No.

We look at, again, as we look at conflicts all the time and we see things as they go along and we make those decisions.

But that's not something that we simply or strictly look at from a wholesale point of view.

That's something we do all over the Company, Jay.

Ron Frank of Smith Barney.

I have a couple of things.

A lot of questions have been answered.

Joe, it sounded like your answer to one of Charlie's questions that you haven't encountered anything like what sometimes happens in the way of retaliatory poaching from Marsh or others from whom you've gained personnel.

Is that a fair inference?

That's fair.

Second, have your internal investigations vis-à-vis all the regulatory probes pretty much been wound up at this point?

Some companies have made comments like AIG that they've finished up and they're satisfied and they know what's happened and so on?

Well, the comments that I made back in October about bid rigging at the time, remain the same.

We have found absolutely no evidence of either one of those things.

I did mention it at the time but you get a one-off here or a straight memo there I said that then, Ron, and that continues to be the case.

Finally, you mentioned as you did in the third quarter the issue of a slightly higher than normal rollover of new business activity from third to fourth quarter.

Was that material to the 6 percent net new business growth we saw in the third and the 7 in the fourth -- was it more than a percentage point for example or was it fairly --?

I don't know.

It's very tough to track that.

I did suggest that maybe some of these 7 spilled over from the third quarter.

But I don't think it was meaningful enough to suggest that the new business wasn't strong.

Okay.

Thanks very much.

Thank you very much everybody, have a great day.

Thank you very much for being here.

Bye-bye.

Thank you and this concludes today's call.