Willis Towers Watson PLC (WTW) 2005 Q2 法說會逐字稿

Good morning.

Thank you for all for holding.

At this time all parties will be in a listen-only mode until the question-and-answer portion of today's call.

The call is being recorded.

If anyone has an objection you may disconnect your line at this time.

I would now like to turn the call over to Miss Kerry Calaiaro, Investor Relations Director.

You may begin.

Thank you and good morning.

Welcome to our earnings conference call and webcast at Willis.com for the second quarter 2005.

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

A replay of the call will be available through August 11th by calling 800-294-3086 or 402-220-9766 outside the U.S. or by accessing the web site.

If you have any af -- questions after the call, you may call me directly at 212-837-0880.

As we begin our call, let me remind you that we make make certain statements relating to future results which are forward-looking statements as that term is defined by the Private 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.

I'll now the call over to Joe.

Thank you, Kerry.

Welcome everybody.

Thank you for joining us today.

I have with me Tom Colraine, who's co-COO and CFO of our Company;

Richard Bucknall. co-COO and CEO of our Global Businesses;

Mario Vitale, the CEO of North American;

Sarah Turvill, the CEO of our International Operation.

We're going to review our second quarter results, what we're seeing in revenue line and various hiring trends and other things that are going on in the marketplace and they are many, update you on your capital management strategies with our senior notes offering and our buyback and then kind of walk you through our current view of 2005.

And then as is normally the fashion, we'll answer any questions that you may have at the end.

I guess the best way to talk about this quarter and to talk about what's going on in the world of insurance brokerage is to quote the first line from The Tale of Two Cities: It's the best of times and the worst of times.

The best of times simply because I think from our point of view, we are inher -- enhancing our market share, which is what we set out to do all along as there has been transitions in our industry.

Our main focus is through our organic growth, through our sales culture, through our client advocacy, through our recruiting, take advantage of those opportunities and enhance our market share.

And I think that's what we see is going on for Willis.

Growing our revenue, retraining clients, gaining new ones and continue to recruit great talent.

Organic revenue growth this quarter was 4 percent, up from 2 percent in the first quarter in the face of -- and these are the worst of times things -- a declining -- a continuing decline in insurance premiums, transparency, which is difficult to do when you're doing it the first time around.

And we're working through that.

And a very competitive pricing environment.

And I might add crazy competition for people on top of that.

So what you have from the challenge point of view is a perfect storm, which I think is the worst of times, but the best of times is is the fact that Willis is handling it quite well.

I'm very proud of our revenue growth which at the end of the day is the real health of our company.

We're very encouraged by the 6 percent organic revenue growth in North America, especially, since that's where we put our recruiting effort as you know over the last five or six months.

We're seeing some traction from the new business development, retention and recruiting efforts and a little later I'm going to let Mario talk to you about that.

Global organic revenue growth improved to 4 percent as we see early signs of recruitment and also some early signs of -- of London market remuneration migrating to brokerage.

That's the famous London Market Association and the things we've been dealing with as it relates to about fees for services and how we might get paid for that.

And we see the possibility of being paid through increased brokerage and we can talk about that if you want.

We went to the capital markets with 600 million of senior debt.

This replaces our 450 million bank credit facility and gave us additional cash of 150 million to put to use.

Obviously, this gives us a lot more flexibility going forward on a -- on a permanent basis we're very, very happy about that.

The board approved an increase in the buyback authorization, which is something we've told you that we think is the best use of cash and we're very aggressive about that to 500 million.

And we purchased about 150 million in the quarter.

And as you all know, during June I completed the sale of 1.6 million shares of common stock under my 10-B51 trading plan.

I've since terminated this plan and will not sell 750,000 shares in 2006 as anticipated under the plan.

The whole idea behind doing this was to diversify.

I feel comfortable that I've done that.

I feel even more comfortable that this Company has a great future and I will not sell any more shares in 2005 or 2006 and currently hold about 3 million shares in options.

Let me talk a little bit about the financial results.

The adjusted net income was $0.47 a share in in the second quarter compared with $0.55 per diluted share a year ago.

You ought to know that most of that decline was from lost contingents, Stewart Smith and a net hiring.

All of those things were choices we made.

You got to differentiate between the choices we made which were the result of that decline versus the ongoing way we run business.

We chose to get rid of contingents.

We chose to sell Stewart Smith and we chose to continue to hire people because we find we have an opportunity out there.

Total reported revenue for the quarter ended June 30, 2005, increased 3 percent to 549 million.

Our organic revenue growth excluding contingent commissions and market remuneration was 4 percent in the second quarter comprised approximately 6 percent in net new business and a negative 2 percent impact from declining insurance premium rates.

I would add that the negative 2 percent rate impact stable from the first quarter reflects declining rates that are being tempered a bit by increases in up front commission rates so that's a -- so that's a net number.

I'll leave Tom to the rest of the numbers in a little bit.

But I'm going to ask Mario Vitale, who runs North America, Richard runs our global businesses and Sarah our international, to talk individually about their businesses.

I might add that these people, along with my other colleagues in this Company, comprise a great team that this company has.

And I wanted to give you a little bit more of an opportunity to hear from them and listen to how enthusiastic they are about the business.

Mario?

Good morning -- good morning, everyone.

Total revenues for North America were 172 million in the second quarter and organic revenue growth in tradition of these was up 6 to 7.

The net new business was sequentially higher in the first quarter [INAUDIBLE - poor quality] pacing the negative rate impact.

Domestic was good in the second quarter versus the first and -- and -- and that over -- over the fourth quarter of '04.

So it's definitely a good trend.

Retention rates on renewals strong.

That that is up substantially over prior.

There's good growth everywhere both geographically and in our major business segments, large accounts, middle market and private client.

Our specialty businesses and practice groups, particularly health care and executive risks, are expanding more rapidly than the average and we're pleased with their progress.

Our new operations that we started last year are making an impact.

Particularly Denver, Las Vegas, Boston and Memphis to mention a few.

Our RP activity is strong and steady with Willis winning more than its fair share.

While it's far to early to tell, what this means long term we're seeing good signs and good movement of business.

Of course the -- the headwind is strong.

In fact that CIAB study survey which came out recently showed that the average rate decline was over 9 percent in the second quarter in commercial lines, and the the most significant rate decreases were in commercial property and especially large accounts.

Offsetting some of this we still see some positive movement in commissions as I said earlier strong new business and strong retention rate and our value proposition selling to clients is showing good results in both new and renewal business.

Also, we're -- placed a high priority on recruitment in North America.

It's still a very high priority for us.

We all need good people.

We're very particular about that.

We're hiring strategically both in geographic areas where we need to increase our -- our [INAUDIBLE] as well as in market segments and s -- and strategically in -- in technical lines of business.

Particularly in the second quarter we added strong new recruits in San Diego, Los Angeles, Dallas, Atlanta, Pittsburgh, Omaha, Portland, New York and San Francisco.

Basically we like what we see in our strategy, in our execution and our investments are beginning to show good results.

Thanks Mario.

Richard?

Good morning.

Total revenues in the global businesses were $277 million in the second quarter.

Organic revenue growth in brokerage and fees was 4 percent.

We are operating in a highly competitive environment.

We have soft rates in virtually every sector we operate in.

We face competition for accounts.

We face competition for people.

And we face a degree of fee competition that we haven't experienced before.

For the most part we're winning in those compe -- those -- those competitive environments.

In our very important reinsurance sector, there's a trend towards greater group buying and higher retentions.

As Joe mentioned, in terms of the issue of fees for services thee was foremost uniform resistance through that concept and we've seen some migration -- all the markets derived income to higher commission levels and that's reflected in the -- the -- the brokerage and fees normally.

In terms of individual performances we've seen very good performance in our financial lines area within global markets as well as our niche units within our global specialty areas.

We've recruited a large team specializing in real estate within the United Kingdom.

We've got -- we've incurred the costs already.

The real benefits of those will begin to flow through in 2006.

We made a number of acquisitions in the retail sector in 2004 and early 2005.

The biggest of which were Coyle Hamilton Opus.

We're pleased with the progress we've made in integrating those acquisitions..

We turn to the challenges and issues that we face in terms of the transparency that we began operating from the 15th of January.

There is growing confidence in the manner in which we deal with those issues and growing success as the way in which we articulate the services we provide.

Thank you.

Sarah?

Thank you, Joe.

Good morning.

Revenues in international were $100 million for the quarter.

Our organic growth in brokerage and fees was 3 percent and that was in the face of considerable rate headwind.

As my colleagues have said the rate environment continues to soften substantially.

In many cases we're experiencing reductions of 10 or 15 percent or even more.

We've seen very good performance in many areas, particularly in Latin America and in Asia.

And from a territorial point of view, our operations in Spain and in South Africa stand out particularly.

Increasingly, we're finding opportunities to recruit excellent new talent around the world and we're pursuing those oppor -- op -- opportunities vigorously.

Of note, we are very pleased that's we've made two senior new hires recently.

A new head of Asia, who we recruited for March, and a new international sales leader who's going to join us from Ale (ph).

Thanks, Sarah.

Tom?

Thank you, Joe.

Net income for the quarter was $190 million compared to $96 million for the second quarter in 2004.

Net income per diluted share was $0.72 for the second quarter from $0.57 a year ago.

More importantly, however, adjusted net income per share was $0.47 compared to $0.55 a year ago.

Included in the reported results was a pre-tax gain on a disposal of operation, simply for Stewart Smith, $78 million or $0.25 a share after tax.

We've provided supplemental information in relation to Stewart Smith's operation 2004 and the first quarter of 2005 and they are included.

Foreign exchange movements reduced reported earnings per share by $0.01 in the quarter compared to last year.

Our current estimate as the foreign exchange movement will cost us $0.04 in the last two quarters.

It is gradually costing us more U.S. dollars to cover our sterling expenses as our hedging program gradually unwinds.

Currency expenses.

We've had a lot of requests and I mean a lot of requests, some bordering on excess, for certain information to be disclosed and report that everyone is happy with the substantial [INAUDIBLE - accent] disclosures in the release [INAUDIBLE] with a relation to families and benefits and other expenses. [INAUDIBLE,] salaries and benefits of $390 million in the quarter and represented about $0.56 for the revenues compared to 52 percent of revenues last year. 2 percent of the increase in the quarter was due to lower contingent commission and other market remuneration.

About 2 percent of the increase was due to incremental hires.

Net of the savings was realized in the quarter from our 2005 head count reduction.

Excluding severance, salaries and benefits was at 59 percent of revenues through the first half of the year and I should see that rising a little for the full year considering lost contingents and net investment hirings.

Other operating expenses were relatively flat compared to the second quarter of 2004 and year-to-date.

The effective tax rate was 33 percent and we think too is about right going forward.

Turning to operating income.

We have set out a detailed table in the release that sets our RPU of adjusted operating income and margins.

Adjusted operating income fell 15 percent to $128 million in the second quarter of 2005 and as a percentage of total revenues, the adjusted operating margin was 23.3 percent in the quarter down from 28.2 percent a year ago.

A decline of about 5 percentage points.

While 3 percent of the decline came from elimination of contingents and other market increased pension costs.

On capitalization of liquidity the [INAUDIBLE] was pretty -- was pretty busy by our standards. [INAUDIBLE] 2 -- 2005, long-term debt was 450 million and total stockholders equity approximately $1.4 billion.

On July 1st, 2005, the Company completed a $600 million senior notes offering buying the 350 million 10-year notes at five-and five-eighths percent and $250 million 5-year notes of five-and-one-eighths percent.

Proceeds from the offerings were used to repay the existing 450 million bank facility and general corporate processes including an additional pension contribution of $50 million to reduce the pension deficit.

We're very pleased at having this new source of capital for giving us even more flexibility for the future even if it cost us a little more.

The analyzed interest expense with the new debt is approximately $36 -- three six -- million.

Pro forma for the new senior notes, the capitalization ratio of total long-term debt to total long-term debt and stockholders equity was 30 -- three zero -- percent at June 30th, 2005.

During the second quarter we repurchased 4.4 million shares for $152 million under the current $500 million authorization which was increased from $300 million by the board of directors yesterday.

In addition, we used $35 million for dividends and $3 million for acquisitions during the quarter and there was approximately $67 million of immediately available cash at June 30th, 2005.

Thank you.

Thank you, everybody, I appreciate it.

Let me just kind of wrap up here by saying a few things that I think are very important.

Obviously we're very enthused about the fact that we have a great company.

We have great professionals, we have the right model, the models been in place I might add for quite some time along with our culture.

So it's really important during these very uncertain times to first protect the franchise that we have, and it's a great one, invest in the franchise so we could grow it and do the kinds of things that are over the long term are in the best interests of this Company.

And I emphasize long-term because when you go through challenging times, which is softening markets, I don't know how long the softening market is going to last.

I don't know how long the pricing competition's going to last.

And when I say pricing competition, I mean real crazy pricing competition.

We see competitors out there pricing things well under what we think are profitable levels, and we're not -- and we're not going to play that game.

And so as a result, there's going to be opportunities that we're going to pass on on a sort term bass so that on a long term basis, again, we protect our franchise and pre -- protect what we're doing.

There's a talent competition out there either from people that everybody's familiar with or people that are new.

And when you get into that kind of a -- a crazy irrational kind of an environment, people are going to make short=term decisions that make no sense.

We're not going to do that.

We're going to do whatever we have to do to protect our people, defend our position, and if that means making some decisions on a long-term basis that may not be so good on a short-term basis, we're going to do that because we have great people.

What's happening out there is -- is we have a way of life, the way of life that has to do with working hard, being accountable, growing the top line, watching what we spend, being very professional.

So there's some people out there that represent insurance terrorists who are doing things that we think are a little bit irrational that are not going to change our way of life and because we're building something over the long term.

Those are the challenges that are going on.

And then when you throw the loss of contingents on top of that and transparency, you have to be able to say how are you doing this and how are you running a business that's going to effect you over a long term because what you've got is so good.

And here are the kinds of things that we're obviously doing about that.

We have a business where we've been talking about Glogol (ph) and one flag and client advocacy, things that you've been listening to that are part of our organic sales culture and growth of our sales culture for quite some time and we're going to continue to add to that.

This place is all about execution over a long-term basis by adding to the things we already have in place.

And we're not going to let the short term effects of those things impact our long-term view.

We're going to recruit simply we ca -- because we've found that we have an ability to attract good people and good people want to come here.

So as long as that's the case and as long as that increases the leverage that we have and -- and long as it fulfills our strategic plan of building in places around the world that will enhance our position, we're going to continue to do that even though it might effect the expense line in salary and benefits as Tom has talked about, we're going to do that because that's in the best long-term interest of the Company because there's a real opportunity to do that now.

Retaining our talented people is very, very important as I said in -- in the face of this irrationality.

And in retaining our people, that might cost us a little bit, but we're going to do that simply because when we get through this period, we understand that the best thing for us to do is to get through it with our people in hand because we don't have plants, we don't have buildings.

What we have is assets as our people and the best thing we can do is invest in them and we're proud.

These revenue numbers that you're seeing so far are the best that we've seen in the quarter in the industry is reason for that.

Is because the Willis people are very good and we're going to retain our talented people and we're going to continue to invest and improve our productivity and efficiency.

There are many practices that we are engaged with that we think can do better.

Practices in terms of various businesses that we are in.

We are in businesses that are fledgling to us like our personal lines business.

We could do a better job in lots of other practices across the board that we're going to invest some money in because we think it's the right time to do that.

Building our large global accounts business and coordinating that effort around the world makes a lot of sense for us to do.

Investing in technology so that we're more efficient so that the current model which includes the placement of business, client advocacy, which we're going to make a big deal out of over the next couple of years at -- even more than we have which is the intellectual consulting advice that we do to our clients as well as our service requires as the thread that holds all that together the ability to be efficient through technology, which will also cause savings we think over a period of time in the next couple years or so and also establish for ourselves other processing hubs around the world which will also lead to that efficiency.

And, obviously we're going to continue to use the money that we have because we think the best use of it today is, aside from these things, is the use of our capital in buying back our stock.

So all of the things that we are doing we are doing from a position of strength but in the face of the challenges that we see out there, we see us facing those challenges by looking at them, not on a short-term basis but over a long-term basis to continue to do the right thing for -- for Willis, which we think is the best insurance brokerage franchise in the world.

We're confident that as we do these things we'll -- we'll be stronger and more resilient for a model that will over the long term be the supreme insurance brokerage model.

We'll be very, very happy to answer any questions that you have.

Thank you.

We will now begin the question-and-answer portion of today's call. [OPERATOR INSTRUCTIONS] Our first question comes from Charles Gates with Credit Suisse First Boston.

You may ask your question, sir.

Good morning.

Hi, Charlie, how you doing?

Good thank you and yourself?

Good thanks.

I -- I ha -- I have two questions.

The one question -- first question was I believe in your prepared opening remarks you made reference to what you had observed was an increase in up front commission rates.

If you could elaborate on what you meant by that and then speak to this insurance terrorists that are doing irrational things.

That was my second question.

I thought that would get your attention.

I'll take the second one first because the first was garbled, I didn't hear it.

Maybe somebody else did..

Oh, I'm sorry.

It was -- what you meant by the comments or increase in up front commission rates.

Could you elaborate on what that was and -- and how it impacted this quarter?

I'm sorry if it was garbled.

That's okay.

No problem.

It's -- it's my technology here.

As it relates to the terrorism, you've got a lot of people out there new and old that are looking to recruit talent, are looking to hold on to business and are spending a lot of money and, I think, are doing irrational things.

When you don't have a value of bottom line or margin and you're just out there flailing away trying to hold on to accounts which means you might underprice or you're recruiting talent which means you're paying a lot of money because you don't have a frame of reference or have value of margins, bottom line, and all the kinds of things which we hold dear there, I made a frame of reference - you know, terrorists.

And it's just irrational when you go through those times.

It's important to understand that you either choose to do -- to -- to respond to that or you choose not to respond to that and sometimes it [INAUDIBLE] economic effects and those are challenging until such time as that -- as that evens out.

As it relates to the -- the commissions, we're -- we're finding that our commission protocols that we talked about before simply get your commissions in line for the value that -- that we're -- we're giving seems to be manifesting itself a little bit better.

As I talked on the last call, we looked in ter -- all over the world what we are charging and a lot of cases it was very uneven.

Some cases we were charging what we should and a lot of cases we were charging much less than we should.

And we're try -- we're getting all of that sort of in hand.

I made reference in the London market that we are getting more commissions and brokerage there and that begins to clarify itself.

And so what you're seeing, I think, is a little bit more clarification in terms of commission rates that are where we think they ought to be.

That is going in the right direction, it is certainly not there yet.

We have not made arrangements totally with all the carriers with which we do business, nor have we totally clarified what's going on in London.

But directionally, our -- our commissions are starting to clarify by itself.

Even more so than what we experienced in the first quarter, Charlie.

Is Integrow (ph) an example of an insurance terrorist?

I'm -- I'm sorry?

Is Integrow, the company that -- there was an article in the paper last week that said that this Integrow hired three people out of Willis.

Would that be an example of an insurance terrorist?

I -- I'm not going to get into names.

You can -- you can decide for yourself what that's all about.

Suffice it to say that you've got a lot of people out there, new and old that for whatever reasons they're doing whatever they have to do and I'm not going to tell them how to run a business.

I'm simply suggesting that the atmosphere out there, from new and old, is irrational.

Thank you.

Dan Johnson with Citadel Investment Group.

Your line is open.

Thank you very much.

Couple questions if you could please.

Can you tell me where we stand with the remaining buyback authorization at the end of the quarter?

Yes, there's $300 million of authorization and I'm [INAUDIBLE] we bought back $152 million and so that was being used up.

I think we -- we -- we said the last time that was going to be [INAUDIBLE].

The example is be the rule the board of directors decided yesterday to raise the $300 million limit, $500 million down.

Okay, I'm sorry, I wasn't able to catch all that.

So, you've used half of the 300 and the you have another 200 on top of the remaining?

Or you have 200 remaining?

Another 212.

We had 150 still outstanding from the authorization before yesterday and we added another 200 to that authorization.

Okay -- okay, so you got about 350.

Fine.

In e -- in essence there we have 350 left.

Thank you.

In terms of the impacts of the new hires, do you -- do you think it's had much of a impact in the organic numbers in the quarter, in other words have these folks been able to come over, get started and actually bring business on to the books in a kind of a three to six month time frame?

No, I -- I -- I think that it takes a good year to fully -- or more, a year to 18 months to fully manifest what a recruit can do.

I think you're seeing some effects of that.

We did some recruiting as you remember in the fourth quarter of last year.

But other than some effects of the recruiting, I think you see full manifestations of recruiting a year to 18 months out.

Okay.

Great.

Two last ones.

In terms of legal expense drag, I saw the overall operating expenses looked rather flat year-over-year.

I'm assuming you've got a few more lawyers in the office these days than before.

Can you put your -- put some parameters around what you'd consider to be maybe above normal regulatory/legal expenses?

Well there's always too many lawyers, Dan.

We all know that.

Having said that, yes, it was flat.

We're very proud of that.

I mean, again, I'm making the differentiation between choices we make in that line, in that salary and benefit line which has to do with growing a long-term business and we said we're not bashful about spending money to do that.

But the discretionary spend is flat, actually it's flat to down.

I think you're still going to see through the course of this year some increased expense as it relates to legal fees because there's still tail on a lot of the issues in various states that we've been involved in that are issues and some of the other issues that, again, represent tails.

So I think that the legal fees will remain high during the course of this year.

Next year, I think we'll start to see relief from that and you'll start to see them go down to -- hopefully, you'll start to see them go down to normal levels there.

Can you put any -- any sense of numbers around that?

No, I can't do that.

I can only tell you that this year I think they'll remain high and then next year I look forward to normalcy.

Then the last question is on the -- the London other market renum -- remun -- renumeration model, can you tell us a little bit about where you are in -- in talking with your clients about this and possibly how your efforts to collect this compensation differ from what others are -- are doing in the marketplace?

And thank you very much.

I think what we -- what we're trying to do as -- as we've said is -- is keep it very simple and simply migrate the income to brokerage or commissions.

Anything that we do -- anything and everything that we do is disclosed and justified to our clients and that's really the overriding issue.

There is some reference in the market to a framework proposal notwithstanding how that is ultimately concluded.

The issue is -- is the in -- individual discussions and negotiations we have with -- with the individual markets.

And we're just taking those as we come.

Did you sense that that's widely -- this is what everyone's doing now, bri -- basically bringing forward what they're being paid and what they have been paid to their clients in a -- in a fairly transparent manner?

I don't think there is a uniform approach at all to that.

I think we have -- we are probably leading the charge in that respect.

And as I -- as I said -- and -- and we've -- we've noted on this call. there's some -- some challenges in that respect particularly in terms of disclosing income to someone who might be many thousand of miles away.

And we going to justify that.

That -- that's the challenge in itself.

But that's what we're doing and that's our approach.

Thank you very much.

Thank you.

Jon Balkind with Fox Pit.

You may ask your question.

Good morning, everyone.

Hi, Jon.

How you doing?

Doing pretty well, Joe, thanks.

Couple questions on organic.

You mentioned that you're sort of trying to set commission rates globally so they're in line with -- with what you and your clients think you should make.

So, if you break down organic growth both, I guess, across the three businesses, how much do you think is unit driven and how much do you think is commission rate changes driven?

And then second question just to delve into the fee pricing pressure issue that I -- I think both you and Richard referenced, how much of that is being driven by the brokers themselves because obviously you have some more new competitors and how much of that is being driven by clients?

The first question how much is unit driven, how much is commission driven.

I would say that even though the commission protocols are starting to clarify themselves, I wouldn't call that in full bloom.

I think they're clarifying themselves to getting better.

I would say most of it is unit driven.

I would say most of it's new business and opening a lot of accounts and retaining a lot of accounts.

I don't think why I can fully say, and I'm looking around the room as I'm talking and my colleagues are shaking their head,.

I think this is purely organic growth coming from opening accounts and retaining accounts.

I don't think the commissions that hopefully you will see manifest themselves won't manifest themselves and that'll probably happen next year when everything is in full bloom, You want to give me the second part of your question again, please?

Sure.

In terms of the fee competition pressure, I guess amongst the brokers, is that a function of the brokers fighting for market share and the fact that you've got some wounded competitors or is that partly a function of clients putting pressure on broker fees because historically the fees have not been either well disclosed or substantiated.

I would say that it's a bit of both but if you want to tilt it one way or the other I'd say it was the brokers.

Okay.

Thank you very much, Joe.

Thank you.

Ron Frank with Smith Barney.

You may ask your question.

Good morning.

Hi, Ron.

How you doing?

Okay. how are you?

Fine, thank you.

I have a question, Joe, I -- I also noticed of course that you used the word irrational more often with respect to some of the competition both on price and in terms of -- for people.

My question is that it seems to me you wouldn't know it really to look at the numbers.

As you mentioned you actually have been able to keep commission income moving up to a degree where it's offsetting the rate or -- or keeping the rate drag from accelerating.

It was steady at about 2 percent.

Your net new business production on a -- on a year-over-year basis was better than first quarter.

And so, my question is should we be inferring from this that this irrational competition on pricing for people is still relatively spotty rather than widespread or that there's still an impact coming in terms of its effect on the numbers?

I'm -- I'm just trying to put the two together.

No.

That -- that's a -- that's a good question.

I'm simply trying -- I think we have done a good job.

But as this unfolds and competitors try to hold on to their business, Ron, and new competitors try to get new business, I can sense that this irrationality will continue and if that continues, it could have an effect on us both in terms of the competition for business and for people.

And we're going to do everything we possibly can to make sure that we protect our franchise and I wanted to give you guys the heads up that we're going to do that.

Because, obviously, when you have numbers like this it's good business.

We have great people.

I mean, I've seen other people's results and not even close to this.

And I don't mean that in a -- in a condescending way.

I mean it from the -- more in the fact that I'm proud and enthusiastic about what we got.

But I'm trying to tell you it's out there.

And what's out there requires we do what we do we're going to do it.

Because it's all about the growth over the years not about what happens this year.

Okay.

That's what I mean.

Okay.

That's very helpful color, thanks.

Our next question comes from Matthew Roswell with Legg Mason.

You may ask your question.

Hi, it's actually Meyer Shields.

Hi, how you doing?

I'm well.

How are you?

I'm fine, thank you.

If you saw the ir -- irrational -- or rationality with regards to the brokers a lot, but not yet with regards to the carriers and I was wondering if you could talk about rate trends a bit?

Well, I -- I -- I think the -- the -- the irrationality so far has come from the -- the brokerage community.

I think the softening rates continue.

I'm not going to cast an opinion about whether those rates and softening are justified or not.

I'll leave that up to them.

But, I'm -- I'm more -- the view is more clear from the competition and what we see going on with competitors.

And so I make my -- my frame of reference to competition rather than I do to carriers.

Is there any change from the first quarter in terms of the magnitude of softening or which lines it's showing up in?

What was the last part of that??

Lines.

We've heard a lot really in the first quarter about how there is a lot of resolve in reinsurance pricing and I'm wondering whether you've -- you're seeing that still being the case?

Hi, it's Grahame Millwater speaking.

On the reinsurance side, I mean that I have to say that I think the reinsurance market has been more disciplined.

And it has been [INAUDIBLE - audio faded away] quite softening to this point.

But we haven't seen the degree of softening that we've seen in direct markets.

So from the point of -- point of view of reinsurance I think there's still this fairly disciplined approach by the markets and I see that continuing.

That was Grahame Millwater who is the chairman of re -- of Willis Re.

Okay.

One last question if I can.

In the London markets when all of the dust settles in terms of figuring out the new model, is it still your plan to provide all of the services that you had in the past just being paid more explicitly for them or are you looking at maybe providing fewer services?

No, we're going to provide the services we have to and must for our clients.

I mean we're -- we're in the business of -- of -- as I said placing business, client advocacy and service.

And our clients come first and we're going to do that.

I've always said, ever since October 21st, that we get pay fees for these services and I think we should be remunerated for them.

I always felt that way.

That's never changed.

But if your -- your question is is are we going to continue to do this?

Yes, that's what we do.

And we -- is our hope that if we do it well one way or the other we should be paid for those services and that's what we think will happen over time.

We should do them.

That is our responsibility.

It will continue to be our responsibility.

We will continue to do them well and our future plans suggest that we're going to do them better and better than we always had.

And if we provide that well -- value, we will get paid one way or the other and that's what we plan to do.

Okay.

Thank you very much.

Thank you.

Jay Gelb with Lehman Brother you may ask your question.

Hi, Jay.

Thanks and good morning, Joe.

First I just wanted to touch base on on the movement of business between brokers, Joe.

Do you see that coming over mostly piece meal or whole accounts when you -- you bring teams over?

That's usually piece meal.

It -- it's -- it's really rare, Jay, that when somebody says they just won the XYZ account that the whole account comes.

Because especially in -- in -- for these larger accounts, it's -- they're pretty -- that's pretty big.

So you're really getting pieces of that come over.

And a lot of what we have done is won -- win pieces of business.

We've won lots of pieces of business.

What's great about that is that we've never had relationships with these accounts before.

So having winning a piece of business gets a relationship with them.

It gives us an opportunity on a close-in basis to show them what we can do.

And that -- and that's really good for us.

So I -- I would say that almost all occasions, not every, but almost all occasions when accounts move, they move in piece meal, not en mass.

And -- and -- and usually, I might add, that all renewals don't happen for all lines all at the same time.

Okay that's helpful, thanks.

And then separately on the comp and benefits ratio, can you give us a sense of when that may stop rising?

It'll stop rising when we start to see good quality [INAUDIBLE].

It may class out sometime next year, but it's the kind of thing you tend to see in -- at least six months at a time, Jay.

I mean, obviously we -- we invest in people when we think it's going to benefit us for the longer term.

So far, we're very pleased in what we see.

And we'll see benefits come into next year and beyond.

Okay so maybe [INAUDIBLE] next year.

And then when you hire people are you accruing all the up front costs of bringing them over at -- at the time they come over?

Yes, that's up front costs tend to fairly modest and they -- they -- they -- they're expensed when they -- when they -- when they come on board.

Great, and then finally on the contingent commissions, what percentage of them do you think you can ultimately get back in the -- in the form of up front commissions?

We don't know.

Again, I'm looking at my colleagues sitting around the room and they're -- they're giving me one of the eyebrow, roll the eyes routines.

We really don't know, Jay.

I mean I've tried -- remember when -- when you -- you all asked me in the first quarter when you're going to start to see the effects of all these [INAUDIBLE] commissions and revenue growths.

You can start seeing that.

I -- I told you I didn't know.

And I really don't know if we take the 160 million we had in buckets one, two, three and four, when we're going to get back and what we're going to get back in commissions.

A lot of this is beginning to play out, as I've told you.

A lot of things clarify themselves.

Thi -- this is a very unusual year in the insurance brokerage industry.

Probably the most unusual that, in my short time, I have endured but I -- my colleagues will tell you probably the most un -- un -- unusual in theirs as well.

So when you're going through this you really don't have all the answers and my answer is not meant to be evasive we just don't know because nobody's ever seen this movie before.

But I can tell you that I -- we are all feeling better about the clarity that we see and the vision that we see for commissions and for starting to be paid on a commission basis for a lot of the contingents that we gave up.

But that's going to manifest itself for quite some time.

I can just tell you we see clarity.

Okay, thanks for the answers.

You're welcome.

Brian Meredith with Banc of America, your line is open.

Hey, good morning, Joe.

Morning.

How you doing?

I'm doing terrific thanks.

A couple quick questions here for you.

The first one, last quarter you talked about the business kind of near term being mid-margins business.

Given where the numbers were this quarter given your commentary about the irrationality in the marketplace should we be thinking kind of near-term low to mid-20s margins now?

Yes -- yes.

I -- I -- I think-- I think we have -- I've told you before we have a business that I think certainly is -- I made the statement mid-20s before.

I meant that after everything kind of settles out and contingents are gone.

We understand what's happening with commissions and there's more rationality in all of that stuff.

Yes, I think it's safe to say low to mid-20s is a -- is a pretty good number, is a starting point.

If you give me a little leeway that you never know what the [expletive] around the corner.

Absolutely.

Second que -- question.

Any kind of guidance you can give us right now as far as your budget for new hires for the rest of the year?

No.

The reason -- excuse me for saying no so abruptly.

I didn't mean that.

No meaning if you're in the business of hiring attractive talent, I think we certainly have a frame of reference as to what that should cost.

But, frankly, if that talent appears and we think it is compatible with what our model is I think you can fee -- feel very comfortable with the fact that we probably will hire those people.

I don't want to be constrained by a budget today when I see the time as being unusual.

And for example if we spent the dollars as budgeted and we find that we have another dollars worth of people who are very good I don't think we're going to say to them I'm sorry we have allocated our budget this year.

We're not going to engage or be in business together when they're very good that makes no sense.

So budget with regard to the world today and what's going on we always look at numbers.

You -- you know that, Brian, and -- and you know we look at these things closely.

But opportunities exist today and that's the reason why you see a lot of that salary and benefit line being higher on the recruits and we're going to continue to do that as long as that opportunity exists.

Great.

And la -- last question here.

With all the regulatory issues that came up late last year and early this year, there was clearly a big surge in RFPs out there.

Where do you think we are in the -- the process there?

We 25 percent of the way through, 50 percent of the way through all these kind of surge in RFPs that we've had?

I'll let Mario answer that question, Brian.

Hi, Brian.

Hi, Mario.

How are you?

Good.

Brian, I think that this is a long term event that we're seeing.

This isn't that something that's going to take place over several years.

Remember, just the thought process from a lot of these clients going out with -- with RFPs didn't even really start to take place until the middle and mostly the end of last year.

It's a long-term process.

We recently responded to an RFP that looks very favorable for us that's dated August of -- of '06 and for -- for all lines of business.

So I think it's long term.

I think you'll see it play out over the next -- the next two years.

But I think one thing that's changed forever, I believe, is the fact that whether it's the current events in the insurance business or Sarbanes-Oxley, you'll see more repeated RFPs every couple of years than we've seen that took place, let's say, in -- in the 90s and the early 2000s.

Are -- are -- are the number of RFPs still increasing or accelerating just flattened out, declining?

Steady and strong, Brian.

Steady and strong.

Terrific.

Thanks all.

Anybody else?

Adam Klauber of Cochran, Caronia you may ask your question.

Hello Adam.

Good morning, thanks.

Could you give us an idea of what percentage of increase you ha -- you've had in producers over the last nine months?

Also along with that is there a producer to support ratio and as you've added more producers are you having to add more support or service -- service personnel?

We do not have a producers support ratio.

We kind of look at some guiding numbers but we don't have hard and fast ratios.

If your first question, which came a little bit garbled, I'll answer as I thought I heard it which is what percentage increase do you have in your sales force from recruits and otherwise.

Yes, that was the question.

What -- it had been running at a steady 6 percent quarter after quarter but in the last quarter it flattened out a -- a -- a little bit which meant that we were making the adjustments between the producers we were bringing in, the productive people we were bringing in, client advocates we were bringing in and -- and the ones that were involuntarily leaving.

So, it was a -- I think more of a -- of a quality issue.

And to your other question which had to do with bringing service staff on to service the business coming in from the people we were recruiting.

Yes, to the extent that obviously it's necessary to do that because that business wasn't here, we'd certainly do that, which is the reason why we don't have necessary rate -- ratios.

We do have something called a blueprint so that we anticipate productivity and we anticipate what the margins should be for that productivity but we don't have the ratio to productivity staff as much as we have blueprints for what we expect the margin to be.

Thanks.

When you look at compensation costs they were up roughly 17 percent for the first six months.

Would you expect that number to be materi -- materially lower in 2006 compared to 2005?

And Adam, I think you -- the first thing you need to do is adjust the compensation numbers for the -- the -- the excess in the last severance costs in the first quarter.

And -- I -- I -- we would expect, again, with a big caveat of this pending on the rate in which we can bring on the people of the quality we're looking for is that we would expect that to continue -- continue to rise.

But, [INAUDIBLE]

Okay, thank you.

Our next question comes from Doug Smith with Basswood Partners.

Your line is open.

Hi, good morning.

Thank you for taking my question.

Just to clarify on your answer to Adam's question, the -- the head count growth has -- has been running at a steady 6 percent growth and then you said in the last quarter it's flattened out?

It's flattened out only from the point of view of invol -- involuntary releases which shows the effect of some of the head count reductions that we put into place that I talked about last quarter.

Okay.

So that means head count growth was --

Not -- not -- not because we have recruited less.

Okay.

And for -- for those carriers where you have reset the commission protocols, is it possible to say directionally how of the the contingency you're recouping through higher up front contingents.

No, I don't think -- I think it's too early to do that.

I -- I think that -- I feel more comfortable having the year play out, as I said before, it's -- we're only in the sixth month of -- of those negotiations both with carriers and transparency with our clients.

It's just too early to tell.

Obviously, we're -- we're looking forward to getting paid the -- the value that we provide and making up a lot of the contingents.

But I really think it's, Doug, it's just too early to tell.

Okay.

And is the -- is the resume he flow in the industry starting to slow?

You talking about the availability of talent from other companies?

Yes, under the assumption that -- that it's been nine months since this Bitzer (ph) announcement and that most people who are going to move have -- have made indications of that already?

I don't -- I don't think that you can compare what's going on today to the frenzy that occurred in the last half of the first -- of last year and the first part of this year.

But it's still at a very good pace, I think, but nothing like the frenzy that occurred.

Okay.

Thank you very much.

Thank you.

Steven Gavios of Jenison you may ask your question.

Good morning everybody.

Morning.

Kind of two questions that I wanted to -- to talk about.

First of all, as you talk about organic growth and you're taking out the historical market base remuneration, it sounds like it's kind of apples and pears because you're including the higher standard commission rates part of which would have compensate you for the lost remuneration.

So is is possible to strip that out and getting us a real apples to apples organic growth?

It's very, very difficult.

That's why we try and get as much as much information as possible.

It's normally at -- at this -- in this stage in a softening market you would expect -- you'd expect regular commissions to rise anyway.

And so you throw into the mix softening market, the fact that contingents have gone away, the fact that other brokers, in fact most of them in the world of [INAUDIBLE] had some contingents.

But essentially you've -- on open negotiations for a fair commission rate going on that we then, in case of certainly ourselves, have to justify every penny to our clients.

So it's, frankly, impossible to -- to explain dollar by dollar for this replacing [INAUDIBLE].

Okay.

And as a further question, I know you don't like to talk about competitors specifically and I respect that.

But having been very successful hiring a lot of talented people from a number of places, it seemed like the loss of the three people to Integrow was a meaningful one for you.

Can you talk about that a little bit?

Well, it depends upon your spin.

You take people from other people what are you going to do?

Say that these people were bad, and we're -- we're sorry we hired them but we want you to know we hired them?

Obviously, they were good people.

We would have rather they not go and I wish them well.

But you're always going to spin these things.

The reason you do the PR is so everybody understands that -- that this is the place to be and all that stuff and we're hiring great people and everything and so you got to put your own particular spin on it.

But I would tell you that they were here a long time, they had their reasons for leaving, I wish them well.

But when you look at the landscape of what's going on, that's why I said we're going to protect our people, our franchise and do the right things that will allow us to preserve and grow over time.

And -- and, Joe, it seems like you have done a lot to retain and protect your key people.

And they're a part -- we see that in the comp ratio as you've discussed and I'm sure for the many good reasons why talented people want to be at Willis.

What was different in this equation?

I don't know, you'd have to ask them.

I -- I -- I really don't.

I really -- I really don't know.

I can't speak for that.

I did not speak to them when they left.

But , you're talking about three people.

We have 13,000 in this company.

I -- I think we should concentrate less on the three and more on the other 1,200 -- 12,997.

Okay.

We'll leave it at that.

Thanks, Joe.

Jim Edelman with Highland Ca -- Highland Capital.

You may ask your question.

Thank you.

Just -- just to follow up a little bit on Ron Frank's question earlier.

I'm just having trouble understanding if -- if there are these terrorists out there if it's - if it's this competitive why you wouldn't have pulled back?

Why -- why would you get a 6 percent net new business growth?

Help me understand that -- that dichotomy there.

[INAUDIBLE - poor audio] I think we're good at what we do and we're doing very, very well.

I was simply trying to give you all a heads up of what's going on out there.

And in a lot of cases you got XYZ account that we're bidding on that we think is worth X and somebody thinks it's worth -- to win the business offers X minus minus.

Opportunities that we think we would have won we might lose.

And we see that kind of thing heating up.

I'm simply giving you a heads up on that.

So far we've been very, very good.

We've -- we've -- we've dropped or not competed on a lot of that business but that's because there's so much that we've won because we done a good job at what we do.

I'm simply giving you a -- a heads up.

That's why I said it's the best of world -- best times and the worst of times.

We've done very, very well.

Our client advocacy model, our sales culture, we do very well.

You can see by the numbers versus our competition, that also sug -- suggests that there is still this period of irrationality that I believe out there that's got to kind of wind its way through until we get to a point where there's more normalcy.

I was simply giving you guys a heads up on that.

Okay, thank you.

If anyone else would like to ask a question, please press star one.

Okay, thank you very much everybody, have a good day.

That does conclude today's call.

Thank you all for joining and have a great day.