Willis Towers Watson PLC (WTW) 2005 Q4 法說會逐字稿

Welcome and thank you for standing by.

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

During the question and answer session, please press star one on your touch-tone phone.

Today's conference is being recorded.

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Now I will turn the meeting over to Ms. Kerry Calaiaro, Investor Relations Director.

Good morning, it's Kerry Calaiaro, and thank you and welcome to our earnings conference call and webcast at willis.com for the fourth 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 February 23rd by calling 888-568-0121, or 1-203-369-3458 outside the U.S. with no pass code or by accessing the Web site.

If you have any questions after the call, you can reach me at 212-837-0880.

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

Thank you, Kerry.

Hi, everybody.

Welcome to our call.

I've got some friends with me today.

As usual, Tom Colraine and Richard Bucknall, our co-COOs, Pat Regan you've never heard from before and will a lot of in our future, our new CFO, Mario Vitale, the CEO of North America.

Grahame Millwater, the Chairman and CEO of Willis Re, and Sarah Turvill, who is the CEO of Willis International.

Obviously, 2005 was a year like no other.

That's probably an understatement.

Murphy had a great year in 2005.

Anything that could go wrong did go wrong, but it was a great year of transition for Willis.

The conditions that we faced, which included a soft market, intense regulatory scrutiny, uncertainty, the initiation of transparency, unprecedented catastrophes, and I can go on and on, were all part of the landscape of 2005.

But adversity, we believe, gave us many opportunities, and each one of these opportunities gave us the challenge of making choices, choices about not only 2005, but what our business would look like in 2006 and beyond.

The decisions that we made last year will reap great rewards, we believe, for the years ahead.

We seized many opportunities and we made what we believe were very smart investments for Willis in the future.

We invested a great deal in people because we had the opportunity to be able to invest in those people because they wanted to join us.

We invested in practices that are already strengthening our businesses, as we speak today, and these people included not only producers, because we talk about producers all the time, but we talk about executives that reinforce our place throughout the world, many regional partners in parts of the world such as Canada and Mexico and Asia, to reinforce our leadership in those parts of the world, many new CEOs or managing partners of offices in Dallas and San Diego and Cincinnati and Los Angeles and San Francisco, and I can go on and on, practice leaders all over the world.

We've hired leaders to enhance our practices in energy, employee benefits, professional indemnity, the things that we think we can do better, 2005 was a year of seizing initiatives, seizing opportunities so that we could position by virtue of the opportunities that existed in 2005 that will bear great fruit for this Company in the future.

In 2005, we also made investments that included processes in technology.

The way we look at the business is very simple, and it would be helpful for you to know the way we view this and what our vision is.

There are three ways that you could basically grow a business organically, which is keep what you got, get more from what you got, and get new ones, not only clients that refers to, but it's people.

And if you do it in that order and you set your whole business up to provide value for your clients, they're going to see that discernible value and organically you're going to be able to grow.

No one in this business has ever been able to sustain organic growth over a long period of time because of a value proposition that they're able to deliver through people and through processes and technology that give you the ability to be able to offer one flowing motivated operation that has discernible value that's delivered through these systems.

Those are the things that we began to create in 2005 because we had the opportunity to do it.

We also saw in 2005 the glaring possibility that we may not be able to make acquisitions of any significant nature, especially in the United States, because of contingents.

So we created a vision that basically said organic growth through great value delivered through client advocates, who of our global resources around the world, which is what we were going to do to sustain ourselves over time.

That is less a transformational strategy than it is an incremental strategy, but with a great deal of delivery over time that's sustainable and very, very exciting to our organization.

We also, with respect to our investments, I might also add, in ourselves, and the importance of shareholder return, were proud to say that since the inception of our dividends in 2003, between share buyback and payment of our dividends, we returned over $1 billion to our shareholders.

As we look at the future, we don't expect many of the marketplace issues that we saw last year to repeat themselves in 2006.

However, you don't know.

The world has changed forever for us and we're starting 2006 from a new place and we'll certainly act accordingly.

But given the strategy that I just mentioned, we'll continue to retain our best people.

We'll continue to recruit top talent because that's what we have the opportunity to do, to be able to grow our business, continued investment technology in processes, and we'll continue to make the right investments in our Company, all for the future success of Willis.

I think these strategic decisions continue to invest in our business, keeping and attract best people in ourselves for sustainable, moderate growth, is the platform that we're going to deliver on and we're going to maintain very focused throughout the world.

As far as 2005 growth in Willis Group is concerned, we were very proud of our organic growth in commissions and fees of 8%, which means that that philosophy and the way we're going about our business, we believe is working. 9% of that was net new business and 1% was a negative impact from declining rates, other market factors, as we continue to see the rate impact moderate, you're going to hear a little bit about that in a second.

It's the best organic growth, I might add, that we have had since the first quarter of 2004.

However, I know I said this in our last call.

I'll say it again, that seemingly, there's an emerging trend here, and it has to do with the progression. 2% in the first quarter of growth, 4% in the second quarter of growth, 6% in the third quarter, now 8%.

I cannot promise that that progression will continue.

We'll try, but I can't promise that that will continue.

The drivers of the revenue growth was strong net new business and higher client retention levels, which goes back to what we focus on a lot; keep what you got and get more from what you got and get new ones.

That is part of our mantra.

That's what we do, and we expect that revenue to grow because of it and you sprinkle that with new recruits.

What comes out the other end is very, very good revenue growth.

Now, I'd like to share some of the highlights with you of different parts of the world.

North America, organic revenue growth in commissions and fees was 6% from net new business and increased client retention in the fourth quarter and 5% for the full year.

In fact, we've seen higher client retentions in all of our businesses around the world.

You're going to hear me talk a lot about that.

Most businesses concentrate on new business.

We concentrate a lot on keeping what we have.

The cost of acquisition is less of the ability for our clients to be loyal over a period of time, is something that we spend a lot of time on and we're going to continue to do that as we grow this sustainable business model over time.

In North America, we're also growing our revenue base from a diverse group of industries and product groups.

We've made investments in developing a formal financial institutions practice over the last couple of years, which has seen wonderful growth.

We've done the same in employee benefits, construction, environmental, health care, each one of those practices grew double digits.

We're very proud of it, but there's still a lot of market share to go and that's all part of this plan in terms of this sustainable model that we're going to grow inwardly by making acquisitions and everybody being focused on that vision and what that vision's about.

Our global businesses, I'm very proud of as well.

The organic growth in brokerage and fees and net new business and some continued migration of London market derived income through brokerage was 9% in the fourth quarter and 5% for the full year.

U.K. and Ireland retail, as well as all areas of global markets and global specialties performed well in the quarter.

U.K. and the Ireland retail, I might tell you, is an area where we did make a lot of acquisitions.

As you know, the Coyle Hamilton acquisition in Ireland that made us the largest in Ireland.

We made a series of acquisitions in England to reinforce our position there.

All of that, we think, will manifest itself in the years to come and we're very, very excited about that, but despite that, we still-- despite consolidation and all of the issues that come when you buy companies in the first year, we still were able to grow our business and blend it very, very well with our other specialty businesses in London, our more seasoned businesses.

Financial and executive risks had a great year in London.

Aerospace and niche had great years.

Aerospace is a great example of how you can focus on your business by looking at other products and other ways to do business in the absence of contingents, or what we call market-derived income, in London and they performed outstandingly.

Everybody in London in our global businesses performed outstandingly.

The marketplace remains competitive both in fees and premiums.

Rates are generally soft, other than energy risks in the Gulf of Mexico and cat and property exposed areas, where there's poor loss records.

But we'll talk about that in a second.

In international, another area of great pride for us, not only did we grow our business 9% in the quarter, 5% for the year, but there was growth across the board.

Our strength lies today in our international operation.

It's very sound, South Africa, Latin America, Europe, we made several acquisitions, Sweden, Peru, Brazil.

And as you know, one of the things that we're very proud of, not only with the new head of Asia for us that we hired last year, but we had 19 branches in China.

We are the largest broker in China, still a fledgling business, but in great position.

We have 51% ownership of insurance broker, Pudong insurance brokers in China, the only one with a majority interest in a Chinese broker, and we're ready to go.

We've done some great things internationally to position ourselves that make us exciting, again, for the future of this company, and are very, very proud of everybody's efforts across the board.

Grahame Millwater, who's the Chairman and CEO of Willis Re, is certainly in a great position to give you his observations about the reinsurance markets, and obviously, those observations usually carry forward into the direct market.

So I'm going ask Grahame to talk a little bit about what's going on in reinsurance.

Grahame?

Thank you, Joe.

While we at Willis Re [inaudible] much quoted as describing the first agenda [inaudible] as a tailored to markets and that's at the beginning of February, nothing has changed to alter that view.

In U.S. property cat, retro, marine and energy markets, we saw scarcity capacity, considerable turmoil, and subsequently significant price increases in those loss affected areas.

And we were seeing price rises in the area of 30 to 100%.

[Inaudible] we were seeing significant price increases, but we saw significant changes in the actual program structures themselves.

However, areas outside of these directly affected areas can be best described as stable, not as hard.

For instance, international property, global casualty, other specialty lines such as engineering and aerospace, where we saw price increases of to flat to 5% in perhaps in some cat exposed areas where we saw losses such as central European flood we may have seen up to 20%, but certainly it was stable, not hard.

I suppose the key question on everybody's mind at this stage is how this market is going to develop as we move through the year.

Obviously we're coming up to first of April renewals, then we got significant U.S. renewals in first of June, first of July.

There are several factors suggesting that we may see tightening of the market over this time.

I suppose two particularly pertinent issues are how the rating agencies are looking at the insurance companies and also how the cat levels are being revised to take into account assumptions that perhaps weren't there when we saw the Katrina-Wilma-Rita losses.

Those cat levels are not just going to be revised just for the U.S. alone, I think we'll see revisions across the world.

Now, these two inter-relate because if you're underwriting a portfolio of risk and your cat model is telling you that portfolio actually is up to 30 to 50% more exposed than you think when these models are recalibrated, that obviously has a significant impact.

Also the rating agents are coming and saying, well actually, the assumptions about these exposures were wrong, so we're going to build in a greater assumption of risk and that will load up again on top of those cat model revisions.

Those could be the two driving factors as we go through the year of how certainly cat exposures around the world are treated.

We're also, I think, going to see a revisions of underwriting policy as we enter the year, particularly pertinent will be how Munich Re and Swiss Re adapt their approaches to the international book of business and that is an unknown at this stage.

And the other factor is that as we come out of first of January in certain areas, we obviously saw renewals at the first of January going a long way to the aggregates, peak aggregates of certain insurance companies.

This is particularly relevant in areas such as marine, where there was very little retro cover available.

So therefore the reinsurers are saying, well actually, as we come out of first of January, because we didn't have retro cover in place, we've already filled quite a significant amount of our exposures.

And therefore as we go through the year, we may see that having a significant impact in how much more marine reinsurance business they can actually underwrite.

There's undoubtedly, as probably a factor of the rating agencies and the cat models again, there's a need and a requirement for reinsurance at a higher level, but of course because it is more expensive, people are saying how can we actually look at afford that greater reinsurance buying.

And the knock-on effect of that is in many cases people are also increasing their retentions at the lower tent to enable them to afford the purchase at the higher end.

So these are several factors that are suggesting there may well be tightening in the market in the reinsurance markets.

However, there are also dynamics going the other way.

There is a real desire, I think, to keep market share in certain areas outside those directly impacted by the losses because the combined ratios on the reinsurance side have actually been quite healthy and that is obviously a major driver of why we're not seeing much movement in the international book of business.

We are also seeing direct pricing.

There's never been a greater disconnect between direct pricing and reinsurance pricing and even if reinsurance pricing is moving up, what you're seeing is the direct pricing staying static and therefore making insurance companies very reluctant to actually pay more for their reinsurance.

So that's a real pressure not to pay more in reinsurance prices or if the reinsurance prices are moving up, again, an increase in retentions, reducing volumes into that reinsurance market.

And finally, we're obviously great publicity about the new capital entering the market.

That's taken many forms.

We've got the start-ups, we've got the [inaudible] deals, we've got replenishments of capital and, again, as we move through the year it will be interesting to see the dynamics of those factors pressing for hardening against that capital, looking to write business and also equally important looking to underwrite a diversified portfolio of business, which again, may put a damper on some of the international business around the world.

Back to you, Joe.

Thanks, Grahame.

Now Tom Colraine will review our financial results.

Tom?

Thank you, Joe.

For the fourth quarter of 2005 net income was $60 million, or $0.38 per diluted share compared to $108 million, or $0.65 per share for the same period in 2004.

Adjusted net income per share was $0.38 for the fourth quarter compared to $0.62 for the same period a year ago, primarily the change due to loss contingents and higher compensation costs.

For the year, the net income was $300 million, or $1.83 per diluted share compared to $427 million, or $2.54 per share for the same period in 2004.

Adjusted net income per share was $2 through the 12 months compared to $2.55 for the same period a year ago.

On revenue for the fourth quarter, total reported revenues of $562 million.

Foreign currency translation decreased reported revenues by 3% and net disposals, notably Stewart Smith at the end of the first quarter of this year, reduced reported revenues by 3%.

For the year total reported revenues were about level at $2.3 billion.

Foreign currency translation had no impact on reported revenues and net acquisitions added 1%.

On operating expenses, total G&A expenses through the 12 months were $1.8 billion, up 12% on a reported basis and 9% on an underlying basis adjusting for foreign exchange and net acquisitions.

Salaries and benefits excluding the first quarter severance charges through the 12 months were $1.3 billion, or 58.6% of revenues consistent with what I said on the third quarter call where we mentioned that salaries and benefits would be higher than the 57.5% reported for the nine months 2005.

About 3% of the increase in the compensation ratio through the 12 months was due to lower contingent commissions and the rest was due to higher total compensation costs.

As we expect the full year 2006 salaries and benefits expense ratio to be similar to the full year 2005 salaries and benefits expense ratio, we anticipate quarterly accruals in 2006 to be more even throughout the year than they were in 2005.

Other operating expenses for the year were $405 million compared to 391 million for the same period last year, or 17.9% of revenue in 2005.

Excluding the first quarter 2005 non-recurring charges for clearance divisions and legal matters, the other operating expense ratio for the year was 16.6%, down from 17.2% in 2004.

Naturally, we continue to maintain a watchful eye on these and every one of our expenses.

Looking at the operating margin, we have a detailed table in the release that sets out our view of adjusted operating income and margin for the quarter and the full year.

I'll just review the operating margins here.

The reported and adjusted operating margin was 19% in the quarter, down from the adjusted operating margin of 28% a year ago, or 9 points of a difference.

5 points of the decline was from lost contingents.

The bulk of the remainder was from truing up incentive compensation in the quarter.

For the year, the adjusted operating margin was 22.5%, down from 28.8% a year ago.

About 4 points of the margin compression through the 12 months came from loss contingent commissions.

The remainder came from higher compensation costs, the effect of foreign currency translation and Stewart Smith, which was sold in April 2005.

Our margin compression was the result of our decisions regarding increased salaries and benefits, and we continue to have good control of our spending on salary and benefits and other discretionary and non-discretionary costs.

As we have said before, we do anticipate modest margin expansion in 2006.

Turning to some other matters, on tax, excluding the effect on tax of amortization of intangibles, disposals of operations and performance-based stock options, the underlying rate in 2005 was 31.5% compared to underlying of 33% in 2004.

The impact of the lower tax rate contributed $0.04 to earnings in the year and $0.02 in the quarter.

Foreign exchange movements reduced reported earnings per share by $0.05 in the quarter compared to last year and have reduced earnings by $0.06 for the year.

The guidance we gave in the third quarter was about $0.04, but in the fourth quarter, we saw the dollar further strengthen which increased the foreign currency impact.

On capitalization and liquidity, we remained active in our buyback again during the fourth quarter repurchasing another 1.5 million shares for $54 million.

Through 2005 as a whole, we repurchased 10.3 million shares for $360 million under the existing $500 million buyback authorization, leaving a remaining $140 million under this authorization.

We also used $33 million cash for dividends and $12 million for acquisitions during the quarter ended December 31, 2005.

At the year end, there was approximately $130 million, $193 million, my apologies, of cash and cash equivalents including $94 million of immediately available cash.

I'll now turn the call back to Joe.

Thanks, Tom.

I want to conclude by telling you how excited we are about the fact that we really came out of 2005 in great shape.

It's what shapes our future.

We had 22.5% margin after all the contingents being taken away, transparency being introduced, soft markets, and everything that can possibly happen, as I said, and we have a 22.5% margin.

We think that that's a good starting point to grow our business for the future, and when you have a good starting point like that, you don't want to do anything unnecessary to screw that up.

That's why when you hear us talking about revenues, retention, recruiting, the three R's so to speak, we do that because the revenue piece is a suggestion that we need to grow our business organically.

We need to grow through sales.

We need to be able to offer value that's unprecedented in this business that nobody's ever seen before so people are compelled to do business with Willis.

The old ways of growing businesses, which is through acquisition, you go back in history of this business, everybody grew through acquisition.

There was very little concentration on organic growth, very little concentration on providing value and growing businesses and retaining clients and all the kinds of things you're supposed to do classically.

We've always tried to do that over the course of the last five years, we've simply heightened that.

So when we talk about revenue and recruiting and retention, these are the levers and these are the tools that we're going use as we go forward.

We have great culture in place.

It takes a long time to build a culture.

You hear us talking about one flag and on calls like this sometimes it's a little bit marketing-ese, if you will, but having a one flag culture where people are working together around the world is a big deal because if you're a global company, clients should expect that you're going to get the best of Willis and the best of Willis resources delivered all over the world through a client advocate or somebody that represents your best needs.

Again, this call is usually about numbers, but I have to tell you that's a big deal because nobody's been able to pull that off and that gives you the ability to grow organically over time on a sustained basis and build a great company.

We talked about Glocal.

We talk about all of those things.

This culture is very well established and very much in place.

The things that have to be done now are the delivery of processes, the ability to be able to grow our people, to make sure that our people are here so that they can participate and contribute in what this future is all about, and obviously recruit good talent, which is what we did last year, who want to be a part of this.

Because those are the levers that we can use to do that and the delivery mechanism against doing that is efficient technology and processes so that the efficiencies of the future come through that and not the normal ways that we have done it in the past.

Our controllable expenses have always been great.

We talk about our salary and benefits being higher.

We talk very little about the fact that our controllable expenses are flat to down.

We're very good at that.

We've done a very good job at that, but there's no place to go there other than to seriously maintain that, which we will, but this is not a company that can use that as a tool to express itself and to grow its margin.

The way we're going to do it is to get efficiencies and use that efficiency as leverage to grow our top line and our margins will grow.

We're very excited about what our cause is.

Our cause is basically to build something nobody else has been able to do over time in a sustainable great manner and that's what we're going to do here.

Everybody's very passionate about it and very excited about accomplishing that goal, not only this year, but for the future.

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

[OPERATOR INSTRUCTIONS] Our first question comes from Dan Johnson of Citadel investment Group.

You may ask your question.

Hi, Dan.

Great.

Thanks and good morning.

Joe, can you talk a little bit about the organic growth expansion in the global business?

I think it was mid single digits last quarter, came up to about 9.

Can you put a little color around that and any way to quantify how much of that is contingent fees that have come back through just a more standard commission rate?

It was 9%.

It was 5% for the year, which is what I said, Dan.

One of the things, then I'll let Richard Bucknall, who is here with me who is responsible for those businesses, that we are very proud of, is that market-derived income had always been a very big source of income or revenue for that part of the world.

And what we were very excited about is we were able to grow organically by simply offering more products.

I gave you the example of aerospace, and simply working more together with the rest of the world, which is very, very exciting.

We put our global markets operations in international and North America respectively, which will give us a greater ability to be able to leverage those operations in London, but I'll let Richard give you the color.

Richard?

Sure.

I think there were a number of dynamics involved.

Most of the growth in the global businesses in the fourth quarter came from our global specialty and global markets businesses.

I think the dynamics included some nice new business wins, improved retention.

There were some timing issues, and there was, as we've mentioned on previous calls, continued migration of the market derived income to brokerage and fees, but rates was not a big factor.

We didn't see any real uptick in the rates apart from very restricted areas.

There might have been a slight lessening of the reduction of rates, but rates was not a big factor.

It was the combination of the other three or four factors that I've articulated.

Okay, Dan?

Great.

Thank you very much.

Thank you.

Our next question comes from Charlie Gates of Credit Suisse.

You may ask your question.

Thank you.

Hi, Charlie.

The organization of your call, better than it's been in the past.

Nice going.

Thanks, Charlie.

Here's the question.

I believe in your prepared remarks you made reference to, to quote you, sustainable moderate growth.

To what extent can operating earnings of the Company grow at a good rate without margin improvement?

Well, I usually don't separate the two when I talk about margin improvement and sustainable earnings growth.

The reason I say sustainable earnings growth and moderation is because if you look at the capabilities that we have here, and that's why I tried to put a framework around it, if you look at the levers of revenue, recruitment and acquisitions, those are the three ways you usually grow in this business.

The last lever of acquisitions is not something that we're going to count on, certainly in the United States for all the obvious reasons, although they're affordable to us in the rest of the world.

But they're not big transitional, transformational types of things.

So merely what I was trying to say is that you make steady investments, you make those investments over time, both in people, technology, processes, businesses.

One of the nice things about our business, Charlie, is that even with a 22.5% margin, which is certainly not what it used to be, but against the backdrop of where others are and against the backdrop of what we've been through, we think that's pretty good business and you don't want to do anything to recover all that we lost in one fail swoop.

That's why we keep saying sustainable and moderate income.

It'd be silly to try to get that all back at once.

We also believe that we have a lot of leverage in businesses that we could do much better in.

We think we could do much better in energy.

Our employee benefits platform is very good platform.

It grows very well, but we think we could be an international, global powerhouse in employee benefits.

And that's something that doesn't require contingents, it doesn't require all the kinds of things that were done in the past.

You got to make investments to do that.

So when we talk about investments, we're talking about an investment phase, which includes seeding at the same time that we harvest.

So when you're seeding and harvesting at the same time, you're not going have explosive margin growth, but you're going to have sustainable moderate growth over time, until you get to a point where you turn around and you got a really, you know, great business.

Look at China.

We made great investments in China.

China's not going to come about and result in great earnings contribution in 2006 or probably not 2007, but one day it's going to be outstanding, or look back and say that was a great investment.

You guys did a great job.

So that's what I mean by sustainable and moderate.

Organic growth may be better depending upon market conditions and depending upon how much wind is at our back.

We seem to do very well, as you can see, in soft markets.

I think we could do very, very well in hard markets.

That remains to be seen and who knows, moderate might turn into be something a little bit better than that.

But that's the reason we couch, you know, our opinions about the future like that, Charlie.

My one follow-up question.

With the very strong growth, organic growth in the fourth quarter, can you opine as to what the sources of that growth were?

That is, from a generality standpoint, could you say to what extent that was, from say, other leading companies?

That's what I'm trying to go.

You say from what, Charlie?

You had 8% organic growth in the fourth quarter.

That's awesome.

Could you opine or could someone opine as to where that growth came from?

Yes, it came across the board.

I think it was a combination of the people that we have at Willis across the world.

I can't tell you how well, I can't think as we're talking of anyplace in the world that didn't contribute and contribute well.

There was no big black hole anyplace.

Secondly, the people that were here, therefore, did very well in contributing.

That's the keeping what you got part.

I think that the recruits that we made, especially late in 2004 and early in 2005, made a great contribution to this Company.

We told you we didn't know when they would begin to be productive but that turned out to be, you know, very, very good, and I think a combination of those two, together with a sales culture that I've always told you is well in place, because people are accountable here and we all do business and we all get into the sales process, I would say that those were the three reasons.

And I would also say that of some of the businesses that were heavily reliant, and Richard touched upon this but I'd like to emphasize it, heavily reliant on market-derived income, instead of saying, gee, you know, that's too bad that this happened to us and spending all year sort of feeling sorry for ourselves, basically said how are we going to make this up and how are we going to look at the world a little bit differently, that happened in aerospace, it happened in construction, it happened in our niche businesses.

I just think they did an outstanding job.

It shows you how nimble this company is.

It's big, but it's nimble and has the ability to be able to adapt to what the world gives it and that's exciting.

Thank you.

Our next question comes from Ron Frank of Citigroup.

You may ask your question.

Thanks, good morning, Joe.

Hi, Ron.

How are you doing?

Good, thanks, and you?

Good.

A couple of things if I could.

First, Joe, I want to make sure I'm understanding, but there's a, sort of a tone regarding the cost of people.

In the fourth quarter, as I understand it, there was some more accrual for comp because of the issue of maintaining comp at a certain level competitively.

Your release made some cautionary comments about the market for people as it were and that seemed to feed into, you know, keeping margin guidance restrained for next year, and at the same time, you said that the hiring outlook, it seemed, was about the same, and I was wondering if you could just bring that together a little bit?

I would have thought if costs of people were rising a bit, that the hiring outlook would probably ebb a little.

I just want to make sure I understand the ins and outs there.

First of all, I think that that line makes up a couple of ingredients, Ron, as you know.

One is the incentives that you pay your own people and of course the cost of hiring.

Those are the two ingredients.

Mm-hmm.

As it relates to the incentive piece for our own people, we basically made the decision that our people went through a great deal last year.

They went through a whole year of transparency which was difficult.

I mean something that nobody's ever done before is have conversations with clients about how much we make and going through the discussion of how much value we provide while we do that.

That's time consuming.

Going through all of the procedures that we have to go through to comply with the AOD, not only in the United States, but all over the world, is time consuming.

While doing all of that, expected to grow the revenue, which we did handsomely and better than everybody else in a soft environment, going through engagement guides and having our people do almost everything that we've asked them to do and do very well, we thought that we ought to reward them for that, even though the performance may not have been in sync with that which our formula said one would be paid, we thought it was a good idea to reward them for keeping us in the game and doing the kinds of things that represent the good nature, the passion our people have.

So that's the reason, you know, you see the incentive line on that side being a little bit higher.

The underline is the recruiting line and as long as we have opportunities, which we think we still have, you know, we're going to continue to do that.

So we'll see how 2006 goes, but we think those opportunities will still exist and we wanted to sound a cautionary note that if those opportunities exist for us, the opportunity to invest in businesses and products and things of that nature and people, that will allow for sustainable growth over time.

We're going to do it, and that is the reason why we gave you that assumption, that the world from that point of view would be the same in 2006.

So it sounds like it's less an issue that you anticipate the costs per person when you recruit to go up as much as it is just that you expect to continue recruiting.

Is that a fair assessment?

Yes, we expect to continue recruiting.

What the price of recruiting will be, I'll let you know when we get to that point, but there is a lot of recruits that we intend to continue.

Again, remember the three-legged stool, Ron.

Yes.

You grow organically, you recruit and you can acquire.

The acquisition root's been taken away from us, at least big companies that can take contingent, such as the fact.

Right.

So therefore, one of the things we have to be, two things we got to be real good at, growing our business, keeping our clients, being very good at the value proposition and recruiting.

Okay.

Last question.

I want to make sure I understood what Richard said in response to Dan Johnson's question.

Richard, you said that the growth in the quarter was new business wins and some migration to straight commission from what were contingents.

And were there other items as well?

I said there was also some timing issues.

Okay.

And I sought to emphasize that we were not helped at all by rates.

Rates will continue to be soft in most areas.

Okay.

Thanks very much.

Okay, Ron.

Thank you.

Our next question comes from Sackett Cook of Menemsha.

You may ask your question.

Good morning.

Got a couple of questions.

Thank you.

On this, I don't know if you're going to disclose this, but the salary and benefit increase in '05, which is over '04 it looks like 170 million, how much of that would you say is the new hires?

We're not going to break that down.

We don't usually do that, but the two components was what I just said, was the incentives and the salary and the new hires.

I mean those were the components.

You really don't know, which is why we said modest and moderate and used all those words, because we don't know if 2006 will be like.

We had lots of opportunities to recruit people in 2005.

We expect the same.

So, you know, that's why we said the salaries benefit line might stay up there because it's what's afforded to us and we don't know.

The incentive line, keeping our people, is very, very important.

We'll see how this year goes, but we're certainly not going to be bashful about doing everything we can to do that.

I mean when you look at the revenue growth, which we think is very good, it could always be better, and we're going to strive to make it better.

It seems that the approach that we are taking as it relates to that is working very well.

We're going to continue to do that.

So I'm not going to break that out.

Let me ask you, I mean I think you're-- I like your integrity as far as talking about how kind of acquisitions has been closed off to you.

I guess my question is, is people who look at acquisitions in this space tell us that, you know, you pay, you get-- you pay two times the revenue.

And I'm just trying to understand in your model where you're not doing acquisitions, but you're acquiring individual people.

Is there any revenue to kind of salary or what it costs to you bring these guys on the books?

I'm just trying to compare like how your kind of external expansion looks compared, you know, in the mass looks compared to somebody who is going down the acquisition route.

So a multiple of revenue is-- what's the way you think about that?

Well, you hit it right on the head.

I mean you make acquisitions.

The good news is, is that there's a big flourish.

There's a lot of music that goes around with it.

There's a lot of excitement about the total number regarding the size of the acquisition, and the accounting for it really doesn't manifest itself until later.

You know, the accretion or the dilution, whatever the case may be, you see it later and you really can't see it clearly.

But you clearly pay much more than one time revenue, sometimes you pay one and a half sometimes you pay two, depending upon what it is.

I don't like to pay two, but that's the way it goes and you're paying a multiple of EBITDA as well.

What do you make for acquiring producers?

What is a rough multiple when you go down that route instead?

You're paying half or less than half of one time of revenue, but it goes through the income statement and you see it in salary and benefits.

That's the difference.

Right.

And you don't see the revenue for a while.

When you acquire a company, you not only account for it differently, but you see the revenue more quickly when you're buying a whole company based upon the renewal sequence and all of that stuff.

But when you're recruiting a person, you're paying much less.

It's much more accretive if you do it correctly over time.

You don't have cultural issues.

You don't have operational issues.

It makes a lot of sense to do that, but you got to be patient, which is what we are.

Right.

And then my last question, and I think someone tried to ask this earlier, I think the organic growth rate for the year of 5% looks really good.

I guess my question is, you know, let's assume nothing happens with rates and let's assume next year, because you're going to continue to hire people that you're going to get some organic growth from them.

I guess the one pocket that you haven't talked about is it could be in this year 2005 your organic growth was great because there were a couple of your large competitors who were winded.

I guess my question is, what happens if they are not so winded next year, do you continue to think that you can take business from the other big brokers if they're kind of, if their restructuring is over and they're back to full strength?

I'm just trying to understand how important, you know, that aspect of things was for what we saw this year and what you think about that for next year.

I think that it would be wrong to assess our ability to grow our business because of the status of our competitors.

I think that you should assess our ability to grow the business based upon our ability as a company to grow the business.

You never look at the competition.

If the competition is bad or has a problem, it doesn't make you good.

What makes you good is being good and focusing on your business.

If you look back, well before our competitors were so-called winded, and everything was fine, we outpaced all of our competitors in organic growth quite handsomely, as I remember, without these issues being considered.

So, you know, obviously if we have opportunities, clients want to give us opportunities, we're up to it.

But you never win or lose a battle based upon how good or bad your competitor is, you win or lose a battle based upon how good you are and that's the way we run our business.

Okay, fair enough.

Thank you.

You're welcome.

The next question comes from Jay Gelb of Lehman Brothers.

You may ask your question.

Thanks, and good morning.

Hi, how are you doing?

Great, thanks.

Joe, could you talk about the dynamics in the marketplace as of 1-1 in terms of whether Willis is taking share from major competitors?

Yes, you know, we obviously, I said before that one of the great growth levers that we have is that we have a global business that's quite good that we're going to enhance, as I said earlier, but our market share is not, you know, what I think it can be.

You've heard me say that every share point that we gain is about $220 million of revenue in that range, and we're going to continue to do that.

And I think it's grown.

It's very difficult to calculate that statistically.

I can only tell you that when I look at our RFPs, I look at our retention level, and I look at the amount of wins that we have around the world, it appears that we're doing very, very nicely, but very, very nicely is not good enough.

We're going to grow.

We're going to grow exponentially.

We're going grow aggressively, but it does appear that we're picking up some market share, but I'm not going to give you statistics because I'm really not sure what they are.

But I think the share is getting better.

Okay, great.

And then separately on the comp and benefits ratio, how much is that driven by your outlook for, I guess kind of static revenue growth as opposed to growth in the dollars of compensation?

It really, it grows through an assumption that our revenue growth is going to be okay.

It's going to be reasonable, and we make the assumptions that we're going to do the hiring and the kinds of things we've been talking about all morning.

It doesn't suggest unreasonable revenue growth, if that's your question, nor does it suggest flat revenue growth.

It basically says the market's going to be like it was last year.

We don't assume hardening.

We don't know, as you heard Grahame say, he gave you both sides of the story.

It's just a reasonable year in Willis-speak, a reasonable year.

You can judge what that means.

And again, the same assumptions as it relates to salary and benefit costs.

Okay.

And then final question.

I believe in the prepared text you mentioned about the comp and benefits ratio being more stable over the year and less lumpy, because it ranges anywhere from the mid-50s to the mid-60s in the interim quarters.

So will that change the seasonality of the earnings on a quarterly basis?

Yes, Jay, it, it could because there's no doubt, it's pretty obvious we did see it at end of the third quarter that there would be higher, significantly higher incentive comp in the fourth quarter of 2005.

All other things being equal, we would anticipate that that was a more evenly spread through 2006, as I said, all other things being equal.

Okay.

So when you say more evenly spread, you're not saying level over the course of the year, you're just saying less of a spike that we saw in the fourth quarter?

Correct.

Okay.

Thank you very much.

Thank you.

The next question comes from Adam Klauber of Cochrain, Caronia.

You may ask your question.

Hi, Adam.

Good morning, thank you.

Over the last couple of years, the reinsurance segment has grown very well.

Is that continuing in the last couple quarters and also is growth in that segment helped by reinstatement premiums?

I'll let Grahame Millwater answer that question, Adam.

Grahame?

Yes, I mean I think it's growth for all [inaudible] moderated last year, mainly because of, you know, we started the year with a softening of the reinsurance market.

Obviously that all outed in the latter part of the year, but certainly a combination of rates and also increased retentions around the world moderated all insurance broker growth really in the past two years.

I think we performed very well last year in comparison to our major competitors.

I think going forward, frankly, it's very volatile.

I mean you heard me talk about all the dynamics in the market, and a lot of it's very client-specific.

It depends on what your client in particular, I mean, you know, we give of [clients] best advice and sometimes that involves buying less reinsurance.

Sometimes it involves buying more reinsurance and of course increasingly, it's not just a linear relationship between pricing and what we earn as more fee structures come into the reinsurance brokering market.

So it's a very volatile picture at the moment.

What I would say is these are times when times are difficult, there's a lot of restructuring of programs, there's a lot of challenges for our clients.

These are times when really, really good reinsurance brokering comes to the floor and I think if you look at our positioning and our competence, I think we see just oodles of opportunity over the next couple of years in this environment.

Thank you.

And one follow-up.

Joe, you had mentioned that you are seeing some higher, I believe, more commission revenue or more, yes, higher commission revenue, as there's some rotation to some contingent to other type of arrangement.

Will that accelerate in 2006?

No, I have no idea.

What we try to do is to make sure we charge the fairest price for the services that we provide and we're always looking to make sure that our pricing, our fees, our commissions, are what they should be, responsibly.

So that's why we talk about value so much, Adam, because in a world of transparency, people got to know what we charge and they got to know that there's value for what we charge.

So that's an ongoing process and it has nothing to do with contingents and we continue to do that all the time.

Great.

Thank you very much.

Our next question comes from Meyer Shields of Stifel Nicolaus.

Good morning.

Good morning.

If I can play off of that real quick, in 2005, your salary and benefits ratio was higher than in '04, in part because of the loss of market-derived income.

If you've had some success throughout the year in replacing that in core commissions or fees or whatever, shouldn't that point to a lower salary and benefits ratio in '06 compared to '05?

I'll take that one, Meyer.

You know, there's obviously a very limited amount of market-derived income in the 2005 numbers, so that's yet to go away, which we would anticipate in 2006.

On the other hand, there will continue to be higher pension costs, which obviously feeds into the salary and benefit lines, that cost is probably about 1% of margin in 2005 and total costs of another 1% in 2006.

So there's definitely [inaudible] in the other direction.

Okay.

Second question, I think for Richard.

I think you emphasized that rates did not have much of an impact in organic growth in the fourth quarter.

Should we infer from that, that since there are some lines that are seeing significant rate increases, that there might be a better rate picture in the first quarter of '06 compared to 4Q '05?

I think the insurance sector is similar to the reinsurance sector that it is in very specific lines that we're seeing rate increases, which we've touched on.

The property risk, with the catastrophe exposures, specific energy risks and clients that have had some big losses.

Across the piece, we're still seeing rate reductions.

Okay.

Let me ask that differently because I'm not sure I've got it yet.

Will-- for the lines of business that are actually hard, will there be more of a rate impact in the first quarter of 2006 than there was in the fourth quarter of 2005?

I don't think I can really answer that.

Don't know.

Okay.

And one last question, if I can.

If you find out, let us know.

Well, I'm trying to, but so far no one's telling me.

Just looking for, what's the tax rate we should assume for '06?

I think the 31.5% is a good starting point.

It is difficult to predict, you know, with the impact on new accounting standard and FAS 123R.

Okay.

Thanks so much.

Thank you.

Our next question comes from Al Copersino of Columbia Management.

You may ask your question.

Hi, Joe.

How are you?

Hi, El, how are you?

Doing just fine.

Thank you.

Good.

Following up a little bit on Sackett's question, obviously, I can understand why you don't want to disclose the portion of salary and benefits that comes from new hires.

I can see that for a lot of reasons.

Is there any way that you can give us some other information though to give us a sense for the timing of when these vintages of new hires begin to become accretive to margin?

Is there any information you can give us such as the margin that generated by the '04 hires, for instance, the margin that the '05 hires have created?

I assume the margin from the '05 hires is pretty close to zero, I would think.

Is there anything you can give us on that front, or is that also something you'd rather not--

The problem is not because we're not trying to be cooperative.

The problem is that when you peel the onion one layer, it's almost impossible not to be tempted to continue to peel it, and it gets very cumbersome.

I can only tell you, and you don't know, by the way, when these things are going to be accretive, because-- and I appreciate there's always a disconnect between, Joe, here's the expense, when are you going to get the revenue and as a result, when are you going manifest that in margin and earnings?

I really appreciate your question, and I'm not-- none of us are trying to, you know, obstruct the process that you go through.

Basically speaking, though, I think that in the first year, you're lucky if you get a breakeven.

In the second year, there's a little bit of accretion.

And the third year, you really manifest itself.

So if you want to get a general answer from me, that generally is what you should look for.

So anything that we got in 2004, you're probably looking at 2005, generally speaking, as being hopefully neutral in terms of accretion.

Dilution, those people in 2006 should be slightly accretive and, again, that depends upon the line of business.

It depends upon the rates.

It depends upon what time of the year in 2004 they came, and then next year, they should be highly accretive.

And so on and so forth.

But to get into that game and trying to be helpful, Al, you usually are not because you're leading people in a direction in a very subjective format and that's why I'm reluctant to do that.

It's certainly not because I'm not sanguine to your problem.

No, I appreciate that, Joe, and thanks very much for the detail.

Okay.

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

You may ask your question.

Good morning.

I have two questions.

Hi, how are you doing, Nick?

Good.

Thank you.

Have I two questions.

The first may be a little tricky because presumably the data is still evolving, but just trying to get a better sense for production variance between, and these are kind of my terms, historical Willis producers and maybe some of the more recent hires.

And what I'm really just trying to get a focus is, are newer producers focusing on any different asset classes, i.e. more value proposition accounts and as a result, their potential for margin is presumably higher than kind of the core base, or are they effectively no difference between the two?

I would say generally speaking, no difference between the two.

There are lines that we have been concentrating on.

I mentioned earlier that has done quite well.

In the United States, employee benefits grew at significant double digits, which we're very proud of.

We have a great product line in employee benefits.

Our executive financial risks grew quite nicely.

Our construction, one of the mainstay businesses that we have grew very, very nicely, health care.

So I can't say that anything kind of stood out or that there's any kind of differences as it relates to any of those things.

Okay.

And you heard Richard talk about the global businesses.

So, no, I'd say it was across the board.

Great.

And my second question is last year on the heels of all the kind of industry turmoil, there seemed to be some movement in the marketplace among large risk account managers to, you know, get higher RFPs amongst them to diversify their broker distribution base.

Are we seeing still that type of phenomena this year or have things kind of settled down from that standpoint?

I think that there was a big spike in the first half of last year.

In the second half of the year, I'm being very subjective, you know, there's, you know, no numbers to back this up, but in the second half of the year, Nick, you still saw greater RFP activity than you did the year before, but not as much in the first part of the year.

And then, and I think now it's a moderate, sustainable RFP, sort of a climate which we're participating in and I think doing very, very well.

But it's not the theater that existed in the first half of last year.

Great.

Thank you.

We have time for one more question.

One moment, please.

Mr. Steven Labbe of Langen McAlenney, you may ask your question.

Hi, good morning.

Hi, Steven.

How are you doing?

I'm well, thank you.

Good.

I am curious as to what the option expense is included within your outlook for salaries and benefits?

And the [inaudible] salary and benefits that we gave is on a comparable basis for 2005, so it does not take into account any new charge of FAS 123R, Nick.

What I can tell you is that in 2005, the pro forma charge for options would have been $0.08 a share and the charge we anticipate for 2006 under FAS 123R will be under that level or maybe a little bit higher.

Okay.

Is that going to be reported separately or will that just be within the salaries and benefits line come first quarter?

I think we'll certainly report it separately so that you've got a fair basis for comparison.

Okay, great.

Thanks a lot.

Thank you very much, everybody.

Have a great day.

We appreciate your participation.

Bye-bye.