Willis Towers Watson PLC (WTW) 2005 Q3 法說會逐字稿

Welcome and thank you for standing by.

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

Now, I'll turn the meeting over Ms. Kerry Calaiaro.

Thank you and good morning.

This is Kerry Calaiaro, Investor Relations.

And welcome to our earnings conference call and Webcast at willis.com for the third quarter of 2005.

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

A replay of the call will be available through November 17th by calling 866-424-3998 or 1-203-369-0851 outside the US with no pass code or by accessing the Website.

My direct line is 212-837-0880.

Welcome to call me after the call.

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

Good morning, everybody.

Thank you for joining us today.

As usual, I have an array of colleagues that will be talking to you and are available for the Q&A session.

Obviously, Tom Colraine, who's the Co-COO and Chief Financial Officer;

Richard Bucknall, Co-COO and CEO of our Global Businesses;

Mario Vitale, who's the CEO of North America;

Grahame Millwater, who's the CEO of Willis Re; and Sarah Turvill, who's responsible for international.

Before I begin, I want to acknowledge, as everybody else has appropriately done so on calls before me, acknowledge our colleagues who I think braved the various hurricanes that we've experienced over the last several weeks.

We're very, very grateful for their courage.

We're grateful for their ability to be resilient in very, very difficult times and to be there for our clients.

And I just want to publicly thank them and also publicly thank all of our colleagues around the world who gave so generously to a fund to help rebuild homes and rebuild lives in the area.

A couple of weeks ago, I celebrated my fifth year anniversary at Willis.

I'm not saying that to evoke congratulations as much as I'm saying that because I think that five year period basically allowed us to focus on some very interesting parts of our business as I look back.

First, we wanted to build a sales culture, which I think we successfully did.

Secondly, we wanted to grow market share, which I think we did.

We wanted to instill an expense discipline which basically says, you've got to spend less than you make.

And if you do that, you're going to grow your margins.

As a matter of fact, those, we thought, were all the ingredients of building a great company.

Since 1999 or actually 2000, our EBIT margin almost doubled from 16% to 29% and our operating earnings grew over five-fold from $0.45 to $2.60 last year.

And then, the world changed.

And lots of times, when things change, you've got to be mindful that the model that you used over a period of time, which was under the basis of the atmosphere or the environment that existed then, needs to be examined.

Models don't last forever.

And in that world changing, we thought we would embrace that new environment in which we operate.

And we wanted to seize the opportunities that we found before us and make smart investments.

The last year, Eva Murphy (ph) would have said was an amazing year.

Everything that could go wrong, basically went wrong.

But, if you looked at it from the point of view of it being negative or looked at it from the point of view of being something that you had to deal with in a not so positive way or unenthusiastic way, you get behind these things and they tend to become riots.

But, if you look at them as opportunities, you get ahead of them and they become a parade.

And I think that's what we chose to do.

As a matter of fact, on the earliest conference call this year, I said that I thought there was a parade going by and that we wanted to participate in that parade rather than watch it go by.

And so, as you look at the past year, we've seen certain catalysts of disruption that have been impacting Willis and others in our industry, which included all the things that you know-- the elimination of contingent commissions for global brokers, the intense regulatory scrutiny, the increased need for global transparency, client shifts and increased talent competition.

Each one of these challenges has presented choices for us.

We've chosen to respond aggressively in each of these areas in order to best position ourselves for the future.

Our spending priorities have included recruiting, as you know, which we've said for the past year we were going to do; incentive compensation, which basically is the retention of our people; our legal costs, as have many others, have skyrocketed; severance; operations and IT and the operations and IT have been to enhance our value proposition and to enhance our operating efficiency, which is where we think in the future, we'll be able to get efficiencies as we begin to rebuild our margins in the future.

Our proactive responses to all of these have been deliberate spending.

There is a big difference between deliberate spending, recruiting and retaining people, doing the things that I talked about.

These investments have led to strong organic revenue growth in the third quarter along with the short-term pressure on operating margins and earnings.

But, as I said a couple of calls ago, especially on the last call, we were going to build this company for the long-term.

We saw opportunities that existed for us and we were going to take advantage of it.

And what you see is a manifestation of that strategy working.

And we're very, very proud as a result of the things that we've done to see the organic revenue growth grow as robustly as it did.

As you know, the adjusted earnings per share for the quarter was $0.30 compared with $0.45 a year ago and were $1.61 for the nine months compared with $1.93 last year.

But, it's the organic growth and commissions and fees of 6% for the quarter that we're most proud of because it's a manifestation of the strategy that we think is working. 7% came from net new business, which is a nice firm number, and a negative 1% impact from declining rates and other market factors.

This is the best-- just so you know, this is the best organic growth we've had since the first quarter of 2004.

And the trends immerging over the past three quarters of 2005, which has been 2% growth, 4% and growth and now 6% growth, are very encouraging.

I just want to say at this point in time, there's not a progression going on that's been planned.

The 2, 4, 6 doesn't necessarily mean that the next quarter is going to be what the next progression seems to be.

Obviously, we're doing everything that we possibly can to grow our revenue, but I want to make sure everybody understands that there's no pre-planned progression here.

Drivers of revenue growth are good, net new business and higher client retention.

It's very important for all of you to know-- and I know you know this-- that we work a lot on our pipelines.

We spend a lot of time building our business.

We actually look at our ratios of new business to lost business.

We look at our retention ratios.

So, if you look at the contribution of recruits and if you look at the organic growth and you look at the retention of our business, all the things we spent a lot of time on, what you're seeing is the result of all that.

The impact of rate more than market factors has really moderated to a negative 1% this quarter.

While rates have continued to decline in the quarter, the impact has been somewhat, I think, mitigated by higher fees in commissions.

With the upheaval in the insurance industry in 2005, we proactively acted on the opportunities regarding account turnover.

And although our net investment in hiring has had a negative impact on operating margin-- again, different than what we had done over the first five years.

The world changed, so you've got to go with what the world gives you.

I think those were the right decisions.

More recently, there's been upward pressure on total compensation cost for recruits, incentive and retention of employees.

And we feel fortunate that we were able to add such talent to our team, probably quicker than we would otherwise had the events had not occurred.

But, the caliber of people has put us in a wonderful position going forward, which is exactly what we set out to do.

We're very comfortable with our pace of hiring and the results.

Through the nine months, about half of the organic revenue growth was generated by associates who joined us over the past 18 to 24 months.

The other half comes from an existing seasoned workforce, which is the result of building that sales culture that I mentioned before.

And as I'm on the subject of recruiting, obviously, because of contingents, it makes this very difficult for us to make acquisitions of companies that obviously take a lot of contingents.

So, the recruiting apparatus and the things that we're doing to focus our attention on recruits has to continue.

So, I want you to know that this is not just a recent phenomenon, that this is something that we're going to continue to do over time.

Now, you're going to ask, what's the impact of these decisions on our margin against a backdrop of loss contingent revenues, because I know when you see the announcement, you see nice revenue growth, you're seeing margin compression and obviously, that alarms people.

But, you need to know that that's done on purpose because we're building for the future.

Through the nine months of 2005, our adjusted operating margin was 23.6% compared to 29.1% operating for the same period of 2004.

Now, loss contingents make up about four points of the margin compression with the balance from the net investment hiring and retention.

As a matter of fact, our discretionary costs are down year-over-year, which means that the deliberate spending, which is the hiring, the recruiting and the retention, done for strategic purposes to affect our revenues and grow our base over time, is working.

But, the day-to-day looking at a business-- because lots of people say or would say, you're getting away from your expenses.

Absolutely not.

These are program, planned expenditures for the purpose of growing our business versus the day-to-day running of our business, watching the shop, watching the store and watching the way we spend our money.

Those things are down.

So, I mean-- and it's important that everybody understands, I think, those differences.

In fact, if I exclude all contingent commissions, the adjusted operating margin would be about 22.5% through the first nine months of 2005 compared with 24.3 in the same period of 2004.

So basically, if you're looking at how we've been faring under the new world circumstances, we're at about the 22% range, which I think after everything is said is done and all contingents are taken out, that's a pretty good place to begin our future and a good springboard for the future.

I also want you to know that our view today is that the margin for the full year could be about 22%.

Just trying to give you some help and some idea of how all of this falls out for the year.

I appreciate the fact-- if you recall, two calls ago, I told you that we were looking at somewhere in the mid 20's.

Since that time, a lot of things have taken place.

Market got much softer than we thought, for example.

A lot of things that we thought would take place in London did not take place in London.

And then, if you remember on the last call, I adjusted that from mid 20's to low to mid 20's.

And now, at this stage of the game, I feel pretty confident that I can give you a little bit more help and tell you that we'd be around the 22% range for the full year.

So, we're very confident that the decisions that we're making today will contribute to a stronger more profitable Willis in the future.

As you know, this is not a capital-intensive business and we generate a lot of cash or surplus capital.

We've not been very active in acquisitions.

The playing field isn't level for most brokers, still accepting contingent commissions, as I've said before.

We've abolished it.

And we can't offer revenue multiples on those revenues.

So, we're basically on the sidelines in the US for now, although we've made a few fill in acquisitions this year.

We'll continue to recruit.

And I just want to keep stressing that over and over again.

There's three ways to grow a business.

You grow organically.

You open more accounts than you're losing.

You sell more business to the accounts you have.

You recruit and you make acquisitions.

The fact that we can't make acquisitions means that the other two legs of the stool, we've got to get real good at.

I feel good about the fact that we were good at it.

Now, we're going to get very, very, very good at it.

We continue to deploy surplus capital in the most efficient way, which in this quarter has been to buy back stock, which is what again we said we would do.

We repurchased over four million shares for 154 million and through the nine months have repurchased close to nine million shares for 306 million under the existing 500 million buyback operation.

Before I turn the call over to Tom Colraine, you're going to see, if you haven't already, a couple of announcements that we've made.

We've always had here at Willis, or at least for the last couple of years, an Office of the Chairman, which included myself and my two Co-Chief Operating Officers, Richard Bucknall, who's in charge of the global businesses, and Tom Colraine, who's our CFO.

And what we've done is to simply make an announcement to formalize that process.

I've been asked over and over again what is your structure at Willis, where are you in case you get hit by a truck and all those sorts of things.

And I keep saying that we're in great shape because we have great people.

And I just wanted to formalize the Office of the Chairman process.

And we work very, very closely together and I'm very fortunate to have people like them that I work with day-to-day and also that are my colleagues on the partners group.

As we are formalizing that announcement, also what we did was to kind of delineate responsibilities so that Tom has more time to begin to get involved in other areas, which he already does.

But that way, we can look to these areas as it relates to our growth in our administration.

So, he'll be overlooking mergers and acquisitions, investor relations, risk management, global operations, information technology, real estate and human resources.

And to ensure that he had the ability to be able to do those things, we're also announcing that we have hired a new Chief Financial Officer, who will be reporting to Tom, so that there will be continuity in our whole financial structure in the company.

That individual is a gentleman by the name of Pat Regan, who is currently the group financial controller for Royal & Sun Alliance.

He brings 17 years of financial experience to our company, both with experience in the United Kingdom and the United States.

And he'll be joining us in a couple of months as CFO reporting to Tom.

Richard Bucknall will continue with his responsibilities in running our global businesses.

But, what we've added to that responsibility is also looking at our global processes, our global ability to be able to take what the world is today and look at the way we operate our business on a worldwide basis to see if it's consistent with what the world is today to offer the best value proposition that we can.

So, we're very pleased with these announcements.

Everything that we're doing, if you get a trend out of my opening comments, is is that the world was the way it was for the first five years and we did what we had to do to take advantage of what the world was.

And then, the world changed and we looked at each other and said, you've got to tweak the model now.

That doesn't mean to say that things like Glocal and One Flag and Client Advocacy-- that's still going to be a very, very big part of our business.

And we're going to look at businesses that we think we can grow exponentially over the next couple as years because for as well as we've done and grown our revenue, we still think we've got opportunities that abound out there.

One of them is in employee benefits.

Our employee benefits business has been very good around the world.

As a matter of fact, in the US, it's one of the fastest growing businesses that we have.

But, we've looked at that business and said on a worldwide basis, we think we can grow it a great deal.

So, with regard to that, we have hired Greg Arms, who comes from United Healthcare and before that, AIG.

Has worldwide or I could say global experience in the field.

Joined us a couple of days ago, so he's on board to grow and develop our employee benefits worldwide.

So, we're very excited about the things that we're doing.

We're very excited about where we are at this stage and every excited that we've kind of seized the opportunity and have also seized the fact that the world is what it is and now, we're going to take advantage of what the world gives us.

And so far, so good.

Tom?

Oh, it's Mario next?

Mario?

Thank you, Joe.

I appreciate it.

Reporting on North America.

Total commissions and fees in North America were 168 million in the third quarter.

Organic revenue growth in commissions and fees was 6% from net new business and increased client retention.

We're pleased with the steady progress here over the past few quarters, that being 3% in the first quarter, 6% in the second quarter and again, 6% in the third quarter.

Report on RFP activity in our large account practice has been consistent and strong throughout 2005, as well as well above the historical levels.

In fact, we're seeing as much activity in the non-RFP prospects.

Our large account practice has already exceeded its 2004 total new business level through nine months with higher than average client retention.

Overall, we're pleased, too, with the diversity of our growth from a product, industry segment and geographic perspective.

Most regional sectors across the US are performing well and we're seeing nice growth in our large account, financial institution and as Joe said, our rapidly expanding employee benefits area.

We've also made a number of key regional and office executive hires in the past year or so including Arlene Corsetti in the West, Joe Don (ph) in the South Central and Wayne Herrington in the Southeast.

And we hired new office leadership in a number of key locations including Dallas, Los Angeles, Toronto and others.

In 2005,the hurricane season has presented an unprecedented-- in many ways, there's no doubt it will leave a short-term and a long-term impact on the market.

The short-term impact will reflect higher terms, conditions and pricing in certain areas and the long-term impact will include more sophisticated cat models and more stringent capital requirements for insurance carriers.

Thank you, Joe.

Okay.

Richard Bucknall, are you there?

Yes, indeed, Joe.

Good morning.

Let me start by covering the global businesses.

Total commissions and fees were $219 million in the third quarter.

Organic revenue growth in brokeraging fees was 6% from net new business.

And we saw some continued migration of London market derived income to brokerage.

Once again, on a comparable basis, we saw steady progress throughout 2005.

Brokerage and fee growth in the first quarter was nil, 4% in the second quarter and now 6% in the third quarter.

Areas that are doing well were within Willis Re are North America and specialty units, within global markets are financial and professional services unit, and within global specialties are aerospace and niche units.

We're pleased overall that the level of fee, brokerage and fee growth in the face of continuing downward rating movement in almost every sector in which we operate and we saw continuing movement towards higher retentions amongst our reinsurance clients.

It's too early to comment on the market reaction following Hurricanes Katrina, Rita and Wilma, although we are anticipating a hardening of rates in the reinsurance arena, particularly property and the energy sector and possibly the marine area as well as property placements with exposures to natural catastrophes.

But none of these are likely to impact our revenues before the first quarter of 2006.

And in general, we're seeing a continued migration of market derived income to brokerage commission.

But obviously, that's moderated by the impacts of transparency, as well as where accounts were numerated on a fee rather than a brokerage basis.

If I can move to the international businesses, we saw total commissions and fees were $82 million in the second quarter.

Organic revenue growth in brokeraging fees was steady at 4%.

We experienced particularly good growth in Scandinavia, Russia, certain parts of Asia like Singapore and Indonesia, as well as certain parts of Latin America, such as Argentina and Venezuela.

In Asia, following the recruitment of our new Managing Director, Roger Wilkinson, we also appointed new leaders in Hong Kong and Indonesia.

In Mexico, we bought an additional 34% holding in our retail operation, taking that percentage to 85%.

We've reorganized the business and appointed a new CEO.

In Brazil, we bought an employee benefit operation, Pathos (ph), to expand our business in this important region.

In terms of the market, the reaction of local insurers to the hurricanes in most of our international operations has not been significant to date.

And at the moment, it looks as though rates are unlikely to be much more than flat year-on-year.

That comment obviously doesn’t apply to risks that are faced in the international market where we are more likely to be impacted by current market conditions.

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

Thank you, Richard.

As the third quarter is our smallest quarter, it can be more volatile.

And therefore, the nine month comparables are usually more relevant for looking forward, certainly on margins.

I'll therefore focus more on them where relevant.

For the nine months, the net income was $240 million or $1.45 per share compared to $319 million or $1.89 per share for the same period in 2004.

Adjusted net income per share was $1.61 through the first nine months compared to $1.93 for the same period a year ago.

Foreign exchange movements reduced reported earnings per share by $0.02 in the quarter compared to last year and have reduced earnings by $0.01 for the nine months.

Our current view is that foreign exchange movements could cost us about $0.03 in the fourth quarter for a full year impact of a negative $0.04.

On revenue for the nine months, total reported revenues increased 1% to $1.7 billion.

Foreign currency translation had no impact on the reported revenues and net acquisitions added 2% for the period.

Although we are confident that we'll continue to have nice organic growth in brokeraging fees in the fourth quarter of this year, we believe it is likely that reported revenue growth for the fourth quarter will be less than the reported revenue in the fourth quarter of 2004 because of negative impacts from the loss of contingents, the impact of foreign exchange and net disposals, principally Stewart Smith, in the fourth quarter.

On operating expenses, total G&A expenses through the first nine months were $1.3 billion, up 14% on a reported basis and 9% on an underlying basis adjusted for foreign exchange and net acquisitions.

Salary and benefits excluding first quarter severance charges through the first nine months were $980 million or 57.5% of revenues and could get a little higher for the full year.

Through the nine months, first nine months of 2004, salary and benefits were 51.6% of revenues and about 3% of the increase in total compensation costs through the nine months was due to lower contingent commissions and the rest is due to incremental hires net of the savings we've realized to date of our 2005 headcount reduction.

Of course, contingents don't exist to any great extent in the new world and therefore, excluding contingents is the most relevant way to look to our ratios.

In fact, excluding all contingent commissions, salary and benefits will be 58.3% through the first nine months of 2005 compared to 55.1% for the same period in 2004.

Other operating expenses for the nine months of $312 million compare to $290 million for the same period last year or 18.3% in 2005.

Excluding the first quarter 2005 non-recurring charges for claims division and legal, the expense ratio for the nine months was 16.6%, down from 17.2% in the same period in 2004.

As always, we've continued to maintain a watchful eye on these and all other expenses.

On operating margin, we have set out a table in our release that sets out our view of adjusted operating income and margin for the quarter and nine months.

I'll just review the operating margin here.

The reported and adjusted operating margin was 14.8% in the quarter, down from 22% a year ago.

As I said earlier, this is our smallest and most volatile quarter.

And for the nine months, the adjusted operating margin was 23.6%, down from 29% a year ago.

And as Joe highlighted in his opening remarks, about four points of the margin compression through the nine months came from loss contingents and the remainder came from net hiring and other costs.

We believe the margin for the full year adjusted should be about 22%.

In taxes, [inaudible] we provided for an effective tax rate of 33% on income excluding one-off items.

We now estimate the full year's effective tax rate in 2005 will be 32%, excluding the tax effects of disposals, regulated settlements and amortization.

The impact of this lower effective tax rate contributed $0.02 to earnings in the third quarter.

On the capital front, we remained active in our buyback program again during the third quarter.

We repurchased another 4.4 million shares for $154 million.

Year-to-date, we have repurchased 8.8 million shares for $306 million or an average of $34.83 under the existing $500 million buyback authorization.

We therefore have a remaining $194 million under this authorization.

At the beginning of the quarter, we completed our senior notes offering of $600 million.

The proceeds from the senior notes offering were used to repay the existing bank debt and for general corporate purposes, including additional contributions of $50 million in 2005 to our two main defined benefit pension schemes.

Our bond ratings-- our outlook have improved with Standard and Poor's where the outlook moved from negative to stable in August and Moody's, where the outlook moved from negative to stable in April.

And more recently, Fitch assigned our bonds a triple B stable rating.

A few weeks ago, we announced our new five year $300 million unsecured line of credit, up from $150 million.

This is untapped, but provides us with great flexibility for the future.

We also used $35 million of cash for dividends and $9 million for acquisitions during the quarter.

And there was approximately $185 million of cash and cash equivalence including $87 million of immediate available cash at September 30, 2005.

I will now turn the call back to Joe.

Thanks, Tom.

I just wanted to wind up by telling you that obviously, we're continuing to build the company for success in all market environments and we're very cognizant and focused on investing for the future.

Opportunistically, we want to benefit from changes in the industry and the crisis that have taken place and build up and enhance our team at Willis quicker than we, as I said before, would have otherwise, but we're really well positioned to grow our company.

The world has changed.

Contingents are gone.

Not for everyone, but they're gone for us.

And M&A opportunities are limited.

So, we must grow by the organic and recruit route.

I know I've said that now three or four times in this call.

But, when you do that, you must make investments.

And those investments, especially in Re Group, show differently through the income statement than an acquisition would, but it's the right thing to do and we're glad we began that process in earnest about a year ago.

The world has also changed in a lot of-- in other ways.

The world's gotten competitive and we must retain our employees.

We talked about that on our second quarter call.

And we must continue to invest in growth segments.

I already talked about employee benefits and Greg Arms.

We have parts of our business that we think could grow much better than they have and we want to sure those up-- professional liability, energy, private client, personal lines.

Sandra Bravo now runs that business for us, but that's a business that we basically didn't have until a year ago.

So, when you look at all the things that have taken place over that five years that I made reference to, there are really lots of opportunities that we have not really fully taken advantage of that represents this new world of opportunity and initiatives that we're investing in to make our company a better company and enhance this model of ours.

In operations and IT, we're creating a policy management system so that all of our offices in North America are on the same system and talk to each other, which is going to bring terrific efficiencies.

The efficiencies that earmarked our model in the first five years, if you will, were the efficiencies with regard to people efficiencies, watching all of our cost, doing all of the kinds of things that we're obviously going to continue to do.

But, as you look for where we can find efficiencies through delivering value all at the same time, we actually believe that technology and operations are the next wave of those efficiencies.

Small commercial account platforms, for example, gives us the ability to be able to do that technologically, save a lot of time in our branches and still be able to do what we need to do.

Claims and policy management and delivery, contract certainty, which is a big push in the UK, policy delivery-- just doing the kinds of things that create value for a client case of investment in technology.

We've been doing that.

We're going to continue to do that.

And as I said earlier, Richard Bucknall is responsible for an effort in the UK to look at our processes and to kind of restructure the way the world does business today against the backdrop of the way it was.

And a lot of those things, we think, are antiquated and the things we should be doing.

So, we really believe that the positioning of our company is a reflection upon recognizing that the world's a little bit different and what do we need to do to tweak and adjust, take advantage of that difference, get ahead of it and grow our business even more than we did before.

Next year, we will have worked our way, for example-- and you can hear, my usual enthusiasm is even greater now because I think that we're winding down a year where we would have worked through one year of transparency and training.

All of our people have been trained.

All of our people have been trained in being able to express our value so that when we tell people what we charge, we're also very quick to tell people what we do for what we charge.

So, we'll be through a whole year of that so that next year, as we begin our business, the transparency would be more familiar to our people.

And we feel very good about that.

Our acquisitions that we have made over the last five years, a lot of rollups of minority interest that we've had and some of the acquisitions that we did, Carl Hamilton (ph) in Ireland in others, will be more mature and up and running and feel very good about the contributions that they'll make.

The formalization of the recruiting process that I talked about.

The systems and operations in a lot of parts of the world will be up and running finally.

It is sort of in different stages, but will be up and running.

We have a wonderful facility in Mumbai.

We have wonderful operating facilities in Nashville and Edgewich (ph), but also in Mumbai.

We're growing that to make us even more efficient and we're very, very fortunate to have that where others are just starting those operations or don't have them.

So, we look forward to that being of great help next year.

And as I said before, we're going to grow the energy business, employee benefits business, professional liability.

Our outlook for next year is exciting.

I'm excited about the revenue growth.

I don't know what's going to happen with rates.

Richard mentioned that earlier.

It's too early to tell.

But, it really doesn't matter.

We've grown our business pretty well in an environment that's been pretty soft.

So whatever happens, we feel excited about our ability to grow our revenue.

And we fully intend to get back to growing and expanding our margins.

I can't tell you what that's going to be.

But, if you spend less than you make, the margins will grow.

We feel like we've created a pretty good base and we're going to get the margin expansion back on track next year.

So, when you look at this year as a transitionary year, one that gave us the opportunity to reflect on what we've done and where we're going, I guess if there's a theme in all of this is that we feel very good about being poised for the future of our company.

And I would be very glad, along with my colleagues, to take any questions that you have.

[OPERATOR INSTRUCTIONS]

Ken Sutherberg (sp) of Carlton Advisors (sp), you may ask your question.

Good morning, Joe.

Thanks for the background on the employee benefits business.

I have a question about the reinsurance market and specifically, your clients.

I've got to tell you-- it feels like we're all stuck in the movie Weekend At Bernie's with dead reinsurers being propped up by new capital.

So, with all the talk over time of the flight to quality and size, can you give us some indication how your reinsurance clients are viewing placing business or considering placing business at 1/1 with those companies that have significantly lost capital over the past 12 months.

Thank you.

Sure, Ken.

Grahame Millwater, are you there?

Yes, I'm here, Joe.

Grahame, could you answer that question, please?

I'll try my best.

Grahame Millwater is the Chairman and CEO of Willis Re.

I think it's a very good question against a very complicated backdrop.

Obviously, you're quite right.

Many reinsurers, particularly in Bermuda and to some extent in London, are acting very, very badly on these losses as yet, to be honest, unquantified losses, particularly in the latest Hurricane Wilma.

Obviously, we've seen capital coming in.

I'm not sure that it is replenishment capital.

Some of it is capital coming in on the basis of supposed opportunity.

I think it's still very early days in terms of seeing quite how painfully hurt some of these reinsurers are.

And I also think it's very early days actually to try and get a grip on exactly this new capital coming in.

You can see that some of the new startup operations lost the capital that's come in as being identified.

The actual structure and the underwriting talent, a lot of that's still to actually become public.

But, in terms of how to advise our clients on what capital to access, it's still very early days.

What you are going to see in terms of rating environment, as Richard pointed to earlier-- there are certain areas that we know where rates are going to spike.

Just to reiterate what Richard said-- areas of probably cat, energy, marine.

You've also got the areas outside of those direct areas which have not been directly effected where we see probably an increase being lately.

But, having spent five or six weeks traveling around the world talking to both markets and to clients, there's an awful long way to go in the next couple of weeks in terms of identifying exactly what the rating environment is going to be and exactly what the actual program structure is going to be.

Grahame, that answer is very helpful.

I guess I'm thinking about it.

If I were an insurance company considering placing coverage with a party for hopefully two to three years from a consistency standpoint and if I look at the choices I have and I see companies-- again, just statistically, you can't argue with the facts.

There are companies that have lost, I don't know, between 15 and about 40% of capital.

So, when you're sitting down with such a client, would you be saying, well, you did X amount with this company, this reinsurer last year, maybe it makes sense to pair it back a little bit?

Or again, is it too early to say?

I think it's too early to say.

And to be honest, we're also obviously very-- on those decisions, we're also very reliant upon what the rating agency is going to do as they look into these companies.

I mean, they've got far more insight and far more intelligence than we do to have those sorts of decisions.

I might disagree with that point and suggest that internal reinsurance security analysis might be more helpful, but that's a separate issue.

Grahame, just maybe one follow up question and then I'll re-queue.

When-- I guess it was a few days ago, one of the CEOs of a primary company mentioned that the aviation market, despite all the losses in that line of business this past year, rate activities looked to be on the soft side for the October and November renewals.

Do you have any visibility on whether that comment is on the mark?

I can let Richard perhaps answer more on the direct side.

I think, we're certainly not seeing any terrific turnaround in the direct aviation rates.

What we are starting to see as we come into renewal season on the reinsurance side is those reinsurance rates on the aviation side are showing signs of certainly stop sliding and possibly even to some extent, hardening.

I think on the direct side, the losses that you referred to, whilst obviously tragic, they have not, in insurable terms, been that large.

So, I think the impact is perhaps more psychological on the underwriters as a reminder of what can happen rather than necessarily impacting their current underwriting results.

Great.

Thanks very much, Joe.

Our next question comes from Tom Cholnoky of Goldman Sachs.

Good morning.

I just had a question, I guess, back to reinsurance for a second.

One of the things that I've been hearing a little bit about is that buyers of reinsurance who are faced with significantly, the potential for significantly higher renewals are trying to negotiate fees so that your effective commission that you would have seen is going to effectively decline.

So, in other words, if rates were going up 20%, your commission on that program would not necessarily go up 20%.

Can you speak to some of the potential pressures that you may be seeing in the marketplace with respect to commissions versus fees?

And then also, on the primary side, as well?

Grahame, do you want to do the reinsurance piece?

Yeah, sure.

To be honest, that is nothing new to us.

I mean, the first sign of that was Hurricane Andrew in early '90's.

I mean, this is not a new phenomenon.

And to some extent, we saw it placed on the World Trade Center, too.

And the good news is, you couldn't start a new phenomena.

We're very good on the reinsurance side about articulating our value.

The reality is, is there a direct linear correlation between rates going up and our revenue going up?

No, there isn't because there are fully transparent arrangements in place that we've put into place with a number of clients and continue to put in place with a number of clients.

But, do I see huge downward pressure from that?

No.

Is there an element of having an upside on our brokerage revenues?

Yes, there is.

But, what we have to be good at is articulating our value also during a hard market.

So, what we're going to do is have the element of increase in many of our fee arrangements, even in the hard market because one, they'd like some of those arrangements to be at around rating environment, anyway.

And secondly, we do articulate that in this sort of marketplace, our value is greater than it is in a more easy market.

So yes, there is an element of truth in that, but it's nothing new.

With regard to your question about fees versus commissions, I gather that question had to do with Willis' ratio of commissions versus fees.

We're still at the 70/30 mark.

About-- it's about 60 to 70% now of our business is commissions and about 30% or so is on a fee basis.

And it's been pretty constant.

It's been a little bit more fees over the last several years as we've grown our large account business, but it's still predominately commissions.

Okay.

And would you sense that if the rates continue to harden in the primary side, would you expect that to change at all in 2006?

No.

No.

Okay, great.

Thank you.

Our next question comes from Jon Balkind of Fox-Pitt Kelton.

Good morning, everyone.

Just two quick questions.

One, just to follow up on the reinsurance-- could you talk about your split from a business standpoint between property and casualty?

And then second, Joe, I guess this is for you.

In terms of the new hires over the last 12 to 18 months, when you look at your pipeline going into the 1/1 renewals, what's your sense of the hit rate, either on broker record or potential RFPs versus the books that you knew that you had a shot at when you hired these people?

Okay.

Grahame, you want to answer the first question?

You're a star today, Grahame.

Yeah, somebody else's turn.

But-- no.

In terms of the property casualty split, I mean, our business is-- we've got a high degree of specialty content on both sides of the Atlantic.

And then the remainder of that is property and casualty.

The split between that is very complicated to give a straight answer to that because it's very different in different parts of the world.

What I would say is that obviously from the point of view of impact at the moment, where we're seeing direct impact is on our property business and our property cat business.

Do we see an impact on the casualty side?

Yes.

I think that ultimately we do see a small impact because as people start to allocate their capital, if they're getting big spikes in other areas, there's a high likelihood that that will have some effect on the casualty market.

But, to get a straight property casualty is very, very difficulty.

Jon, as it relates to the-- I guess you're asking me with all the recruits, what do we think of our ability to be able to take advantage of those recruits as it relates to our 1/1 renewals and our hit rate and RFPs and all that stuff.

There's no way in the world I could give you a statistic as it relates to that.

I can tell you that so far, the recruits that we have brought over have met our expectations.

As I said, half of the growth that you've seen has come from those recruits.

So, as a result of that, I've got to believe that our ability to bring those accounts over is very good.

And we're excited about the opportunities that exist for us next year.

As I look at the RFPs that we've been engaged with, the success rate in those RFPs remain very good.

So, I don't see any reason why that ought to change, Jon.

Great.

And then, one quick follow up.

In terms of the 1/1 renewals given the dislocation in the market, are you noticing any change in customer behavior in terms of their willingness to put their business out for RFP?

No.

I think it's been pretty consistent over the last six months.

I think that there was a-- at the beginning of the year, as you know, there was a surge because of the incidences of the day, because of the fear that surrounded our business.

And there was a big surge, I think, in the first three or four months of the year.

That subsided, but in subsiding, still a high level as it related to the year before.

And I think that's been fairly consistent, Jon.

Great.

Thanks, guys.

Our next question comes from Terry Sho of JP Morgan.

Yeah.

Hi, Joe.

I'd like to ask some numbers questions.

I'm a little surprised, not quite so much on third quarter margins, but the fourth quarter.

If you talk about-- I think, Joe, you made a comment during the intro that the-- I think you said something to the effect that your margin excluding the loss of commissions would have been still 23%, something like that.

I had-- or 22.5% versus 24, a number that you cited.

I'm having a hard time reconciling everything because the drop off in margins was very large.

It was over 800 basis points.

And you said that part of it was loss commissions and part of it was due to new hires.

As far as the new hires, do we assume that this is just an elevated salary base or are there certain one-time payments?

And it seems like when you used to say that new hires are not dilutive for the first year, it seems like it's quite dilutive for the first year or am I reading this wrong?

And why is the fourth quarter margin going to be also pretty bad?

In fact, I'm just looking at the forecast that I have.

Over an 800 basis point drop off.

With that quarter being historically a higher quarter because last year or '04 was already down substantially from '03 because of the beginning of the loss contingent commission.

So, a bunch of these margin numbers issues, if you can help me on that.

Okay.

I'll let Tom answer the questions and then I'll follow up.

Thanks, Terry.

Yeah, there are a number of costs and you can see there are some upfront costs related to our new hires.

And there are also the extra payments for the retention of the existing people we have that you recognize in the competitive world we live in.

So yes, you will see further margin compression in the fourth quarter.

Are those kind of ongoing costs or should we look forward into '06 that this is a transition year?

The drop off in margins and the reduction in earnings space seems very large.

Is this the new base from which we start because earlier, Joe, I think you talk about strict clean margins of 25 or something like that, mid 20's?

And each point costs quite a bit in terms of earnings.

So, is it dilutive?

I mean, the question is straight.

Is the new hires dilutive, but we should get paid back in future years?

There's no question that we're very pleased with the way our new hires have performed in the round.

To the extent there's any dilution adding them all together, it's going to be pretty modest this year, but we will be paid back handsomely, we feel, going forward.

Also, Terry, remember in the fourth quarter, you've got 4 or 5% of contingents that are baked into the number that we didn't have versus last year.

Right.

And if I can understand better on sort of the whole contingent translated into higher commissions over time, that we won't see that as a separate category any more.

Right.

But, in terms of recouping that.

Marsh (ph) talked about the new, I think they don't want to call it rate card any more, but potential for revenue addition by being compensated for services performed, etc.

And you talked about it, as well.

Maybe go through that one more time.

Is there an outlook for meaningful recruitment as we look out?

So, what should we think about in terms of improvement in margins because we've come a long, long way down?

I mean, what are the prospects to go back towards that in the "new world?"

All right, let me take your first question, which had to do with what are our various opportunities as it relates to rate.

We don't use rate cards here.

We don't do that.

We have, as I have suggested, sort of negotiated our wage structure with our carriers and we have, in the world of transparency, explained to our clients what it is we do for what we charge.

And I think that's come along quite well over the course of the last year.

And so, from a rate point of view, I’m very encouraged from having gone through the last 10 or 11 months of having that discussion.

As we look next year, I think we're in pretty good shape.

I can't give you a number, Terry, but in pretty good shape.

On the one hand, I'm very encouraged by the way our people, our client advocates have handled themselves over the last year.

We expected more fees in the London market for the services that we provide.

But, I think all in all, that's sort of come out very, very nicely and we're comfortable about that, so much so that the next time you hear us talk, we're not going to be talking about these things as much because there's no frame of reference.

As it relates to margin, what I tried to do was to explain that with the world changing, we could have been sitting here like a lot of people we heard with flat revenue growth or less than flat revenue growth and maybe the margins would have been a little bit better.

What we chose to do is to grow our revenue through aggressive expansion of our sales force for a couple of reasons.

Number one, we had the opportunity to hire very good people.

We took advantage of it.

And secondly, when you look at the ability for us to make acquisitions in a world where people take contingents and we don't, it's tough to make those acquisitions.

And so, as a result, we've decided to continue to invest in good people.

That is going to have the effect of reducing margins, maybe more than some people would have liked.

But, I feel very good, as we have calls next year and the year after that, that that's going to manifest itself in continued expansion in our revenue and working our way back from a margin point of view.

I think it's terrific.

My point of view is is that if you look at the way the world used to be around 29 and 30%, certainly it's nice to be up there and that's what the world gave us before it changed.

But, when you feel that-- when you look at the way the world is today and we started it around the 22 level with a lot of good people and a great culture going forward, I've got to like that.

So, we made the decision to sacrifice a little bit of margin short-term for long-term growth in those margins.

But done without contingents, I think it's a better business.

I think it's a fuller business and one that relies less upon the props of a contingent and more about real growth and value that you provide, which is a much sounder company over time.

And I think you've got to kind of re-base yourself that that'll take the surge going forward and that's what we've done.

I understand all of that.

I'm just questioning the, kind of the margin level because one thing is to give up a little bit of margins, but the earnings base has been reset down quite a chunk and just wanted-- because you had in the past given general commentary about the salary to revenue ratio and it's come up a long way, like 800 basis points or so from where it had been two years ago, let's say a year and a half-- before all this happened.

And is that the new, kind of the new world, the new target?

Or is there an opportunity to recoup the margins in a meaningful way?

That's what I mean.

I mean, we've-- it has not been such a large chunk.

I think you've got to look at this year, Terry, as a very unusual year.

I mean, it's been a perfect storm.

And there is everything that could possibly happen in an industry has happened.

I think when you look at everything is said and done, I think the 22% range at the end of this year is a pretty good place to start from.

And it's not as if we haven't talked about this.

I tried to give everybody a heads up on what we were doing, look at the various 10Q, look at the various comments that we made and it's pretty consistent with what we thought we were going to do and what was going to happen.

And we really feel pretty good about that.

I said at the conclusion of my comments that I thought, as we go into next year, that you're going to see expansion in those margins.

I can't tell you what they'll be.

I'm not going to make any predictions as to what they'll be.

But, you can be rest assured that we're going to spend less than we make.

And if we do that, our margins are going to start to wind themselves back up again.

So, you have no particular target of salary to revenue in mind?

I don't simply because I don't know what the world will be offering us.

If we still have the opportunity to be able to recruit good people, we're going to take advantage of that.

And if I tell you a number and then I say to our people all over the world, don’t hire that good person because I made this prediction and then it doesn’t-- it's not in the best interest of the company, I don't think I should do that.

I can tell you, though, that we expect the margins to expand next year.

How much of this year would you say is more of a kind of one-time bonus payment nature or retention award or can that be quantified?

I can't quantify it, but I've got to hope this year is a one-time event as it relates to the whole year.

I don't mean one-time event.

I mean more of a kind of extraordinary payment for your people that will not be there any more, kind of one-time bonuses.

I can't tell you that that won't happen again, but I will tell you that there's an expectation that the world becomes a little bit more normal next year.

But, I can't make any predictions or guarantees that those things won't happen.

But, in order for us to expand our margins, which is our goal next year, I would hope and it is our aim and goal that we get more normal.

Okay.

Then-- sorry, one last one, just on capital management and share repurchase, your cash position, your ability to continue to, even after finishing the current authorization, to be able to deploy excess cash to buy back stock.

Tom, if you can comment on that.

Yeah, yeah.

We've still got cash in hand.

I believe it's over $1 million as of the quarter-end.

The business is extremely cash generative, as you know.

And the absence of acquisition opportunities at reasonable prices, we will continue to pursue the program.

And you wouldn’t give a rough estimate of how much you think you generate in terms of cash flow per year?

The earnings pretty much turns into cash, Terry, if you look--.

--Right, right, right.

And so, it's whatever the earnings forecast and you really don't have great need to kind of reinvest because it's a people business other than opportunity to make acquisitions.

Exactly.

And this year, of course, we did suffer the one-time regulation change in the UK.

All right.

Thank you.

Our next question comes from Dan Johnson of Citadel.

Thank you.

Real quick, the-- can you give us an update on the London market revenue situation, where you are in trying to move from collecting from markets to collecting from clients please?

Richard, do you want to-- I made some comment about that, but do you want to follow up, please?

Sure.

I think we made reference earlier on to the brokerage and fee growth and we clearly think the brokerage and fee growth is a more sustainable form of income than market derived income.

We've sought to bring all of our brokerage levels up to a consistent level and I think we've been reasonably successful in that sense as the year has progressed.

So, we've adopted a very simple approach that is understood by the broker, by the clients, by the markets and by our own people to increase and make consistent brokerage levels.

And obviously, that's subject to normal disclosure requirements in terms of our transparency protocols.

And obviously, that doesn’t apply to the fee business.

But, that's what we've been trying to do and that's what we've continued to do throughout the year.

And where are you with that disclosure protocol?

Do all your clients now understand the revenue arrangement?

We've introduced the disclosure protocols from the 15th of January 2005 and that's been rolled out all around the world in respect to all of our insurance clients.

And clearly, we've-- where we're on a fee basis by definition, they know what we're earning and when we're on a brokerage or commission basis, we're disclosing that and have been all year.

Great.

And then, quick numbers question.

Stewart Smith was out of the quarter as of when?

As of the end of the first quarter, Dan.

Okay, end of the first.

We're already seeing approximately-- is it roughly 20 million a quarter they were running?

Yeah, something like that and $25 million in the fourth quarter of last year that would spell those numbers out in the release.

Got it.

And finally, legal spend-- what would you say '05 sort of above normal legal compliance on things that you would not consider to re-incur in '06?

Well, the-- I was proved wrong this year when I thought that the legal expenses last year were at an all time high.

And so, you'll forgive me if I don't try and predict the future on that one.

Fair enough.

Thank you.

Yeah.

I might mention that-- we talked-- Richard appropriately and accurately said that we've been transparent since January 15.

That's a big deal because as you go into next year with all the things that are going on, the fact that our people have been trained universally around the world, we are fully transparent.

So, when you get to a year of that and then you get to a year where we've already went a cycle, that's encouraging.

That makes us feel very comfortable.

Our next question comes from Charlie Gates of Credit Suisse First Boston.

Good morning.

In your introductory remarks, at least twice, you made the comment that you shouldn’t project forward I believe the 2% organic growth in the first quarter or the 4 in the second and the 6% in the third.

Were you trying to tell us something or could you elaborate on that?

No, I was-- when I reread my notes, Charlie, I noticed the progression.

And when we were all in school, we were asked progression questions.

I just wanted to make sure that if I didn't say anything, somebody out there would say, well, 2, 4, 6 and then it must be 8.

I don’t know.

But, I just wanted to make reference to the fact that it's not that easy.

I wasn't trying to tell you anything other than to suggest that the world is not that neat.

Okay.

I guess the only other question I have at this time is, also in your introductory remarks, you made reference, I believe, to this new software system or system that you were putting into place in the United States.

Were you trying to telegraph some negative impact on margins as a result of that?

No.

As a matter of fact, I was trying to telegraph what was an example of what we think we need to do to enhance efficiencies.

I've been asked lots of questions about how you're going to enhance your margins or how you're going to continue to do a good job at your discretionary cost and spending.

And I think that what we've seen in our future is a combination of being able to deliver value through better processes and better technology, which gives our people more time to be able to talk with clients and grow our revenue base, etc.

It was not about necessarily telling you that we're going to spend more money or it's negative.

It was about making the right investments so that we're able to glean this efficiency.

Terry said, what do we look like in the future and how big can we grow these margins again?

That's all part of getting to a higher level after we're regrouping.

And I think one of the ways we're going to contribute to margin expansion is better processes, better efficiency in operations and in IT.

And we're all over that.

Richard's looking at our processes in London and around the world.

Janette Scampus (ph), who runs our operations in IT-- we're looking at greater efficiency in Mumbai and all our operating centers around the world and investing in policy management systems, all the kinds of thing that represent the next phase in the growth of Willis, which will get us to eventually higher margins in the future.

When that will take place, I don’t know.

And what the level will be, I don't know.

But, we're on it.

And that's what I meant, Charlie.

Thank you.

Our next question comes from Ron Frank of Citigroup.

Good morning, everyone.

Two things, both of which I guess are follow ups at this point on things that have been asked.

Joe, I'm trying to put together a picture here of the hiring.

Early in the year, your largest competitor was pretty much turned upside down and that obviously created, among other things, a huge hiring opportunity for you in the environment.

Later in the year, you observed an increase in competition for new people.

And since the turmoil event of the competitors doesn't repeat itself, at least not-- wouldn't assume it would and we've seen this elevated level of competition for people, it seems like it stands to reason that that pace of activity and recruiting would slow down some next year and that, if I'm right about that and as you harvest on the existing people, that would be part of the margin improvement you could look forward to.

Is that an unrealistic way of looking at things?

It is not unrealistic.

Okay.

And second, I wanted to follow up on a comment Richard Bucknall made.

Richard, you indicated that you're seeing the migration of income from market base to commission base, but that it's mitigated somewhat by transparency.

And I was, just wanted to zero in on that piece and figure out what you meant by that.

Well simply that, as I said earlier, we've been transparent around the globe.

And clearly, when we explain to our clients what we're earning, that does from time to time get challenged.

So, there will inevitably be some moderation.

So, just sort of a knowledge is power thing on the other side of the negotiating table?

Well, I think, as Joe has indicated, we're going through a whole new process.

I mean, we're sort of changing the ways of the last 100 years in many respects in 12 short months.

And this is a process we haven't gone through before.

It's a process that our clients haven't gone through before.

But-- so, this is the first time in a number of cases that we've actually explained what we're doing and I think we're getting increasingly better at that and also explaining what we're earning and going through that whole process.

Okay.

Thank you.

Is there other questions?

We'll stay as long as you want us to.

Our next question comes from Jay Cohen of Merrill Lynch.

Three questions, but they're pretty quick.

The first is, maybe just to get at what Terry was trying to ask.

The extra expenses for employee retention, are these one-time bonuses?

Are you basically entering into contracts where you inflate these expenses for a number of years?

No, they're certainly not multiyear, Jay.

But, I think it would be wrong to categorize the general level of expenses as one-time.

That's what we were trying to say.

Okay.

Secondly, in your specialty business, can you give us some sense of how business the energy business is?

Clearly, that's where price increases will be fairly dramatic.

The energy business is a fairly big business, but I think it could be bigger, much bigger.

We have a very good business in London and Houston and Calgary, which are the three hubs of energy, as you know, Jay.

But, it's not as big as I'd like it to be and we'll certainly take advantage of whatever affords us because of energy and the fashion of energy given the events that have taken place.

But, that is definitely one of the areas that we want to grow over the course of the next year or so.

No numbers on that, though?

No, I don't want to give you any numbers because we don't-- we allocate these numbers all over the world based upon various offices.

But, it's a business that I can tell you, it's in excess of 50 million.

Great.

Last question.

Tom, any guess in the tax rate for next year?

No.

I think that we've been bringing it down modestly, as you know, year-on-year with some success.

But, looking forward, I would imagine that trend might continue.

I think 32% is a pretty good rate and if we can keep that up, it would be nice.

Of course, with the new laws coming out, we certainly could expect to see more volatility quarter-to-quarter unless the exposure draft gets changed.

Great.

Thanks for the answers.

Our next question comes from Nick Pirsos of Sandler O'Neill.

Good morning.

I have a couple of questions surround production levels.

If I can just confirm where we stand at the nine month mark.

I think we're at about 2,500 at year-end.

Well, the levels that we are at, we're growing at about where we always grew, which was about the 5% level.

That really hasn't changed.

What has changed is is that the level of the type of people that we're hiring and the performance managing out of people is what gives us the ability to keep that level of growth at about 5%.

And if I could just put a final point on it.

I think, Joe, you said in your opening comments that, I think, of the year-to-date organic growth, I think you said over half was attributable to kind of new hirees.

Just trying to get a better sense for what over meant.

It was half.

I said half.

It was half.

Okay, great.

I said it was half organic and half recruits.

Okay, great.

Thank you.

Our next question comes from Brian Meredith, Banc of America Securities.

Good morning, Joe.

Two quick questions here for you.

First one-- I've heard in the marketplace and I'm hoping one of you can confirm this or is it high-stakes if it doesn't work is that the major losses we've had from the hurricanes tends to help retentions because customers tend not to move when they're adjusting a big claim.

They tend to stay with their incumbent broker.

Is that true?

I think generally speaking, that's probably accurate.

When you're in the middle of a lot of turmoil and a lot of looking for claims and looking for settlements and all that stuff, that generally speaking is probably a true statement.

Okay, thanks.

And then, the second question--.

--Matthew Roswell, Legg Mason, you may ask your question.

Go ahead.

I'm sorry.

You had another question, Brian.

They cut you off.

Sorry.

Go ahead.

Hi, Brian.

Matt Roswell.

Two hopefully very quick questions.

Joe, in the opening remarks, you talked about how you were getting some higher fees in commissions and it was mitigating some of the rates of clients in the quarters.

Were you speaking of London or North America and whether that was more kind of just general soft market conditions tend to raise or you were able to recoup some of the loss contingents, if it was North America?

And then for Tom, just on the share count going forward, is this a pretty good level to use as a base?

I would say, to answer your first question, it was across the board, all over.

I can't point to any place that was more better than other places.

I just think it-- I was making reference to all over, Matt.

And do you think it's what generally happens in a soft market or recouping of kind of contingent payments or you just can't tell?

No, I can't tell.

But, I would tell you that we made a concerted effort.

I think in soft markets, commissions tend to rise anyway.

But, I think we made a concerned effort to look at what we charged and look to see if the value that we were given was appropriate to the charges that we were asking for.

And, I just-- we made a concerted effort.

I think we talked about that sort of in the first half of the year.

And we thought as we were going through the transparency phase, we would kind of look at all of that together.

And I think we did a very good job with that.

So, that was an across the board experience.

Okay.

And then, on the share count?

Yeah, Matt, as you can probably tell, we've been buying stock pretty steadily the last two quarters and the periods we're allowed to get in the market.

And so, the average diluted share count for the quarter of 163 million was the average, of course.

And therefore, you'd expect the number in the fourth quarter to be below that.

And where did we end the quarter?

At around 162 or so?

I think it was around 161.

161, that low.

Okay.

Thank you very much.

Ian Gutterman (ph) from Adage Capital, you may ask your question.

Hi, Joe.

Two questions.

First, on organic growth-- as we look into next year, if I just do some quick numbers, if you did 7% new business this quarter and hopefully, it stays there if not gets a little better, and you don't have a drag for contingents next year really and pricing obviously is going the right way, can I take from that that you would be disappointed if you can't do a double-digit organic next year?

You cannot simply because I don't want to make that statement.

But, I will tell you that, who knows what's going to happen?

I've learned that the world can change pretty quickly.

But, if you have a scenario where rates are drifting upwards, we don't have the-- so there's no headwind in that regard.

The manifestation of a lot of the recruits in the organic sales culture continue to do what they're doing, if we don't have the drag of people worrying about transparency-- I say worry because it's the first time they've gone through that and we don't have to worry about that and the enormous time that people were out because of training that we conducted, why?

You put all of those things together, we're very hopeful and excited.

Great.

Second question-- I could try the margin question one more way.

If I look back in the past for contingents, you're at, call it a 29.

And if we have a four point impact from contingents, that would say 25.

Is that a reasonable way to think of it?

I'm not saying for next year.

Maybe it's the year after that or the year after that.

But, once these new hires are-- because obviously, the new hires are not producing a mid-20's level right now, but at some point they will be producing at your company average.

When they are, is that 25ish range the right way to think about steady state once we get there?

Yeah, you're right, Ian.

There is 2% or so compression in the margin from the additional hires.

I guess what I'm trying to understand is when you say that 2%, is that just increased expense from the new hires or is that just because they're not producing yet and once they're producing, that 2% goes away?

It's simply because if you add enough to the-- if you add roughly equal revenues and expenses and sufficient size, it squeezes the margin.

Right.

I mean, is there any way-- I don't know if maybe you can prepare it for next quarter-- but some sort of sense of what the margins are on sort of the business produced by and the expenses of the new hires verse the old hires, if you will.

It's almost like an organic margin.

In due course, these people will contribute higher because you get a certain fixed cost base.

But, they differ at different rates and typical is in the third year before they're enhancing your margins.

Okay.

So, three years.

Okay.

And just as far as understanding from a-- obviously, the GAAP financials are different when you're doing organic hiring versus an acquisition.

But obviously, you can make an acquisition either way.

But from an economic perspective, can you give us a sense of how much more attractive it is to be hiring organic verse having to pay-- to do M&A as far as-- again, if we're looking at earnings down the road, not so much the short-term?

Yeah.

I think if you look at the experience of a transaction of an acquisition over the last four or five years, you're looking at a multiple of revenue probably in the 1.7 to two times and I've heard some more outlandish than two times of deals that were made.

If you look at a producer in our business that, just to say, I'll round it off, that there's $1 million of production, you're paying much, much less than that.

Let's say, for example purposes, all in with everything being said, let's say 50% of that.

So, you're talking about the difference of, in that particular case of $1.5 million of an acquisition versus a recruit.

The difference is is one goes through the income statement and the other one is accrued and accounted for over time.

But, the attractiveness as it relates to the deal and what you do is much better to recruit.

And that's why-- that, plus the fact that it's tough to do it when everybody is not in the same boat as we are.

That is to say, they don't pay contingents.

They still take them.

That's why I think we're doing the right thing.

No, I totally agree.

It's just, I think that that gets missed sometimes just because one hits the income statement and one doesn't hit as quickly, so it's a timing issue.

Yeah.

That's why I mentioned it earlier and I’m glad you mentioned it again.

If we had a news conference and said, we just bought XYZ and we paid 1.6 or 1.7 revenue or two times, whatever it was, that would be-- yeah, that's pretty reasonable and all that stuff, depending upon the multiple of EBITDA.

And then, we'll see what happens over time.

And it's just absorbed into the regular accrual accounting and everything and terrific.

This way, it shows up much, much more.

But, I have to tell you that you get less operating impact, you get less chemical problems, you're recruiting people that you would like-- that want to be in our program, that want to be a part of our culture.

When you make acquisitions, that's necessarily not the case.

You don't have the same operational and technical issues that you do when you make acquisitions.

And there's a lot of people out there that would love to be at Willis and we're going to find those people.

And we think this is the right way to go.

So, at the end of the day, we think in building this recruiting culture, not anybody that wants to join us, but people who really want to become part of the sales culture and become part of what this place is all about, I think is much better for us over time.

And that's what we're going to do and concentrate on.

So, you're always going to have this so-called drag from the recruiting expenditure that you may not have had in the past.

But, that does not suggest that we can't do that without expanding our margins, which we fully intend to do.

Thanks so much, Joe.

Our next question comes from Nevia Park (ph) of Beckham Value Advisors.

Hi, good morning.

Joe, I think you guys have been doing a great job on the hiring front and it's very heartening to see that the new hires according to you are contributing to the organic growth.

What we are trying to understand-- I'm sure somebody else has asked this question, also-- is what is the net earnings power of this company two years out?

What's the-- how much-- what margin can we expect the company to operate on a sustainable basis going forward?

I-- boy, that's the $64,000 question.

I guess my first answer-- and I don't mean to be smug-- is that I guess, I don't know and if I knew it, I'm not sure I'd want to share it.

But, you have to know, and all kidding aside, that this place is intent and it's always been intent on growing our earnings and growing our margins.

What I tried to explain is that this is a different year.

It's an unusual year.

And that we were dealt a set of cards and instead of saying, we're going to stay with the pat hand that we used to have all the time and just do the same things we did before and to exercise the same model we did before, is we said to ourselves, these are a different set of cards, now what do we do?

And I think we've done pretty well with them.

And now that we've got these cards, I think what you'll find is a return over the next couple of years to the growth of the earnings and the growth of the margins.

I can't tell you what that will be, but we're going to continue on that path while continuing to do the things that we have done.

But, sufficed to say that we're very excited over the next couple of years.

In this new set of cards, if you look at what the real lifelike growth is in the underlying operating income of the company, then if you remove the contingents and you look at the nine month performance of 2004 and you compare it to the nine month performance of 2005, what does that look like?

I haven't done those exact sums, but I would imagine it's not a million miles different from 2004 to 2005.

Okay.

So, if you-- backing off of the numbers that you have provided on the press release and if you assume that 50% of the cost of the increase in salaries is coming from new hires, you actually come up to approximately a 25% operating margin number, which is much higher than last year.

So, is that basically saying that the new hires are contributing at a much higher rate than what your existing sales force is doing?

No, no, they're definitely not.

It's too early, as I said.

It takes you into the third year before they start in general contributing at a higher rate.

So that the new hires in 2005 certainly will be costing us something on the bottom line and will be costing us a bit more in terms of margin.

The new hires from 2004 and the main will be contributing to the bottom line, but not yet contributing to margin expansion.

So, what's the new contribution-- oh, sorry.

What's the top line contribution for the nine months from the new hires because said half of the-- it's 3% for the three month period.

No.

As Joe said, about half for the whole nine month period.

Okay, okay.

And what's the sustainable earnings power of these new producers similar to what your organic sales force is like?

Is it similar?

Well, yeah-- in fact, probably higher when it's settled down because it'll be similar and if you just looked at the production and team intent and expert and talent that we've added, when you add that to the fixed cost that we've already got, then ultimately, they will enhance the margins.

Okay, great.

Thank you.

Brian, I got word-- Brian Meredith.

I'm sorry that you got cut off.

But, I think your second question was you wanted to know with the competition out there, if we're losing producers that we don't want to lose.

Yeah, we've lost a couple that we don't want to lose.

I think I made reference on the last call with the new competitors and the old competitors, it's gotten quite lively and very competitive.

One of the reasons that we talk about retention and the cost of retention is because of all that.

So, the answer is definitely yes.

I hope that-- and a lot of it has to do with increasing the amounts that are paid and all those things that I made reference to on the last call.

But, if you question is have we lost people we don't want to lose, yeah, sure.

And we're sorry we lost them.

But, but that trend is out there and that's the reason we've put the number in for retention as we have, Brian.

Our next question comes from Steve Fran (ph), Trust Company of the West (ph).

Thank you.

I was wondering in very rough terms relative to revenues if you could split out either in the quarter of for the nine months what property cat, marine, reinsurance and energy were proportionally?

We don't disclose it, that information out other than to say that our property business versus our casualty business is about half, generally speaking.

In some cases, our casualty is a little bit more than half and in other places of the world-- but it runs on a half and half basis.

And with respect to those lines, is the fee to commission split in line with the corporate average?

Well, the corporate average, as I said before, is said to be 30, generally speaking.

And that runs pretty consistent, a little bit less or a little bit more, but nothing dramatic on a Bell Curve basis.

Thank you.

Our next question comes from Sacky Cook (ph) of Manipsha Capital (ph).

Hi, good morning.

A couple questions.

Number one is, I know that you had mentioned in your comments about the organic growth rate for global and international.

I wasn't sure which one that there was-- that that organic growth rate was getting the benefit of converting some of the previous kind of London market service agreements into commissions and fees.

And I was hoping you could maybe disclose either dollar amounts or what percent of the organic fee was coming from that conversion?

And then, I've got another question.

No, we don't disclose that.

Richard made those comments and I think pretty accurately.

But, we don't break down what those dollar amounts are.

So, was it--I mean, but that docket was pretty significant number last year.

So, I'm just wondering, is it 50% or 20% because I guess my point is, is once that conversion is over, then the organic growth rate will drop down to whatever the real organic growth rate is and not a conversion of a revenue line that was disclosed as something different previously.

The fact is, it's very difficult to tell.

You have a market dynamic happening where your overall basis of compensation is changing and therefore, you actually could not trace dollar-for-dollar what all of the things that are happening there.

As Richard said, we've established a very good base.

Our clients know to the dollar what we earn from providing valuable services to them.

And therefore, we think we can justify what we've got and we can justify more going forward.

But, in terms of trying to get to the bottom of every single movement, it's quite difficult.

And that's why we've split it out in the way we can, so you can try and assess it yourselves.

Okay, great.

That's great.

Now, the second question was just-- and I appreciate all your comments about the new world and I think you've done a pretty good job of communicating that.

But, one of my things that I see as far as the new world from listening to your conference calls as well as to other people's conference call is actually that the compensation situation could be different in the new world.

And so, I guess my question is, it looks like the commissions as a percent of revenues if you go back a couple years ago was in the low 50's.

Obviously, we're at-- looks like we're at 59% at the nine month mark.

And I understand that there's potentially some one-offs this year.

But, in listening to all the conference calls, it looks to me that maybe we should expect that the commission as a percent of revenue in the new world where you have to retain your good people and you sound like you still want to be a hone for recruiting, maybe we should be thinking that at calm as a percent of revenue of 56% is reasonable for the new world.

Does that-- does my thinking sound reasonable?

Well, it sounds reasonable with the following qualifications.

First of all, that percentage is without the contingents.

And so, appropriately, the percentage of the compensation is going to be higher because the contingents are gone.

Secondly, there is an inordinate amount of recruiting done at higher levels, which are more costly.

So, that's going to drive it up.

And the retention level-- somebody asked me earlier whether that was just something that we're going to do all the time.

I don't know any of those things.

But, if the question is are the levels going to be a little bit higher than they used to be, which is 50%, ongoing, because comparisons won't be without the contingent issue in there, then if we continue to recruit, yeah.

By definition, the number will be higher.

But, I can't tell you what that number will be.

Again, I'm going to reiterate and please forgive me, but if you can't acquire companies that have contingents, then that arrow has been taken out of the quiver and I've got to use the other arrow, which is to recruit.

But, I think if we do that well, in a lot of ways, we're better off because we don’t have the attendant issue that come with it.

So, yeah.

By definition, you could probably see that be higher for those reasons.

No, I agree.

I'm just saying, I think sometimes, people listen to these calls and the new world is only a revenue line thing.

And I listen to this call and other calls and think maybe the expense line, there's a new world there.

Well, I've tried very hard-- we all have-- to really explain what we're trying to do here.

And you can see by the revenue growth that it appears-- I'm knocking a little bit on wood because these things are not always scientifically come out the way you want to-- but, it seems that we're doing the right things and we're trying to build for the future.

And I'm just not fixated on the margin thing, especially-- that's why I said, in the first five years we grew our margins, we got rid of a lot of our debt and that was with the cards and that's what we did.

And the cards got different.

And I tried to explain copiously what we're trying to do here.

And I really believe that when you get through a year like this and you get-- and the contingents are gone-- in our case it was $160 million-- and you still do all of this stuff and you've got a 22% margin, I think that's a good business.

And I'm not going to do something crazy that doesn't grow it or hurt it over time because that's pretty good.

Anybody would love to be in that position.

And that's what you hear the excitement in our voice about.

These are decisions being made to spend money purposely, not without regard to margin, but with regard to building a good base so that that margin grows for the future.

And thank you for the comment.

Great.

Thanks very much.

Our next question comes from Burt Spence (ph) of Oak Valley Capital.

Hi.

Two questions.

One, if you can just-- most of this call has been focused on the margin issue, for good reason.

I was really curious if you can just comment broadly, just briefly about what you're seeing in terms of the rates. [Inaudible] that you're seeing any typically with regard to the property side.

And then, my second question was how do you view the down-tips in terms of new hiring levels versus-- or new hiring levels versus '05?

I mean, should we be expecting to see continued acceleration in that category or is it going to be the same or lower?

I'm just trying to develop a better sense of where we're heading from here.

Burt, you're coming-- we're catching every third word, but let me see if I understand your first question.

It had to do with rates and what we thought rates would be going into next year, I think.

And then the second one had to with hiring levels, I think.

Right.

Is this better?

Can you hear me better?

I'm sorry?

Can you hear me better now?

I'm sorry.

No, it's still every third word.

But, generally speaking, did I get the question right?

Yes.

I was curious about that property rates, specifically, but just rates in general going forward.

And then--.

--Well, as you heard my colleague say, it's too early to tell.

Richard went into that.

It's too early to tell.

But, it looks like you're going to get reinsurance rates obviously be higher.

That's a significant part of our business.

As Grahame said, it's better than 20% of our business and we do a great job with that.

It's too early to tell, but it appears property, cat, energy, those lines appear to be higher.

But, we don't know and I don't know at what rate.

It's just too early to tell.

And therefore, we don't know what the effect of the casualty rates will be, whether they'll stabilize or whatever the case may be.

And we're not cuffing it.

We simply don't know.

And I think everybody-- anybody that tells you they know, run for cover.

As it relates to the recruiting, as I said earlier to an earlier question, the landscape will certainly change over the next year differently than it was last year because issues change and the environment changes.

But, I will tell you generally, we've gotten really good at this recruiting thing.

I mean, we were very copious in the past, but I think we made an overall effort, especially in North America, to recruit for the reasons I mentioned.

So, going into next year, whatever the environment is, I feel very good about our ability to continue to do that because we've gotten really good at it.

We've kind of brought in new people, new faces.

Mario mentioned new people that run our regions out there that are fresh and aggressive and hit the ground running and are ready to go.

So, I feel very good about that.

Thank you.

Any other questions?

Yes.

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

Joe, my question was asked and answered.

Our next question comes from Ron Frank of Citigroup.

Yes.

Joe, just a follow up maybe for you, I guess, or maybe for Tom on the excess cash issue.

One way to use that is share repurchases and you certainly have been aggressive there.

But, another is dividends.

With the last dividend increase coming up on its anniversary date, I was wondering if you can give us a feel for how you look at that?

Do you have any target in mind in terms of payout ratio?

Is there room for that to move up without previewing what the board might or might not do?

I think that's-- I'll answer that question.

I think that's too early to tell.

But, if you look at the last couple of years, Ron, and what our philosophy has been, which is the use of cash, excess cash for share purchase and for increasing our dividend, I don't see any reason why that trend shouldn't continue.

But, in terms of giving you percentages or targets or what that may or may not be, it's too early.

Fair enough.

Thanks.

We have time for one more question.

Jim Edelman of Highland Capital, you may ask your question.

Good morning.

Could you just tell me, just to get my arms around this cash flow issue of acquisitions versus recruiting, year-to-date what you've spent on acquisitions compared to the prior year and not netting out the Stewart Smith proceeds?

You'll get the cash in the Q. We'll file it in the next day or so.

So, I just have to wait until then?

Yeah.

Okay.

Any other questions?

Okay.

Thank you very much.

Have a good day, everybody.