Willis Towers Watson PLC (WTW) 2006 Q1 法說會逐字稿

Welcome and thank you all for standing by.

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

The call is being recorded.

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

I would now like to turn the call over to Kerry Calaiaro.

Ma'am, you may begin.

Good morning and thank you.

Welcome to our earnings conference call and webcast at willis.com for the first quarter of 2006.

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

A replay of the call will be available through May 18, 2006 by calling 866-442-1775 or 1-203-369-1075 outside the US with no passcode or by accessing the website.

If you have any questions, you can certainly call me directly 212-837-0880.

As we begin our call, let me remind you that we may make certain statements relating to future results, which are forward-looking statements as that term 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 such a difference can be found in the company's documents filed with the Securities and Exchange Commission from time-to-time.

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

Thank you, Kerry and happy birthday to you and to all of the world.

Welcome and thank you everybody for joining us today.

Joining me as usual are Tom Colraine and Richard Bucknall, our Co-COOs and for his maiden presentation Pat Regan, our new CFO;

Mario Vitale, who is the CEO of North America;

Grahame Millwater, the CEO of Willis Reinsurance, and Sarah Turvill, the CEO of International.

First, I will give you an inner view, an overview and then Pat will go through some of the numbers and then we will talk more broadly about the company.

Overall, we are very pleased with the quarter.

I think we made a very good start for 2006.

We started to see I think more importantly some traction with regard to a lot of the investments we made in 2005.

Even though there continued to be no hardening in the markets, still soft, but good revenue traction, across the board especially in North America where, as you know, we made most of the investments last year.

Our revenues grew 11% and it was really important to us that there will be a positive reflection for the decisions that we made last year and we're very pleased about that.

Our organic growth in our global businesses, which includes reinsurance as most of you know was 3% even though reinsurance did not have the usual first quarter that it does.

As you know, in reinsurance there were retention issues, there were rate issues, there were capacity issues, which we think during the course of the year as it unfolds those issues will go away and that business will begin to manifest itself as we think it should.

So, when you include, what happened in global which affects our numbers as relate to reinsurance, we are very pleased with what went on.

In International, our organic growth in brokerage and fees was 7% in the first quarter despite a negative impact from the rate environment.

And we also saw margin expansion in the first quarter and -- obviously, it increased our earnings per share.

So, the first quarter after coming out of what we call a transition year in 2005, we were pretty happy, not ecstatic yet, but pretty happy.

I think ecstasy will start to come as the year unfolds and the investments we made unfold even more, as a lot of the initiatives which I talk about later continue to unfold, that happiness will turn into greater happiness, but we are really pleased with the way the first quarter came out, coming along the year where a lot things went along on.

I also want to, before Pat goes into the financial results in detail, I want to mention a couple more important things.

We saw improvement in our salary and benefit ratio, partly because Stewart Smith was not in the first quarter results.

The S&B was also helped this quarter by timing of our incentive compensation.

Pat is going to review this with you, but I had mentioned to you last year, on the last call that we were going to see more normalcy in our performance-based compensation schedules, which we were off of last year because I mentioned that we were -- we made conscious decisions as it related to retention.

So you also saw us return to our formula driven performance-based compensation.

And although [inaudible] we remain highly competitive, I think our results reflect more selective approach towards recruiting opportunities.

So, all of those things were sort of different than last year, and as a result, you saw normal Willis S&B lines start to look like what you're used to and I think that's important to note.

However, expenses were higher in the first quarter of 2006 compared to last year because we do a couple of things differently here, but again conscious decisions that we made that were very conscious.

For example, we had a Sales Conference, which was a global sales convention that took place in Orlando in the first quarter.

Those things were expansive, we had 1,000 people come from all over the world, but that's what we do here.

We kick -- we usually do these things every early year, but those are decisions that we make on a year-to-year basis, but those were expenses we knew we were doing it, but that's part of the sales culture we put in place, part of what makes our company different.

And then the other thing that you saw in that number again conscious is some consulting fees directly related to processes that we are fixing especially in what we call shaping out our feature initiatives and wondering where we are taking all the paper and all the processes in one in all the continents that's been there for years is going to be, relatively speaking, over the next couple of years, paper-free totally automated, all the value a client sees up front, we're very excited about that, but those are the things are costly when you get into them, in the beginning, but those again were conscious decisions that we made.

Now to talk a little back, North America, which we are really very pleased about; 11% revenue growth in an environment that was flat relatively from a rate point of view was really terrific, I want to congratulate all of people in North America for a wonderful job.

There is nothing much I can point out, almost everyone of our regions had strong first quarter performance, our executive risk area, our large accounts area, employee benefits area, just right across the board, very strong practices and very strong regions.

Obviously, the region hires played a large part in that, I think our existing work force, our client retention was very, very stable.

Even though RFP activity slowed, you know, in the quarter, we saw -- we still saw a good growth, which meant that we were doing more business with clients we already had, our retention rates were not so -- we are holding on the clients we had and our new business was very good.

So, I couldn't say, many more good things about North America.

And a lot of you last year had actually the question, when you are going to see results of what we went on in the North America and all the, the money spent and right off the bat you are seeing it, and we are very pleased about that.

I am also pleased about our global businesses.

As I said before, the number's only 3%, but reinsurance is in there and if reinsurance has had the number that it usually has; that number would have been much higher, 6% would have been much higher.

But I think you are going to see that as the years go, go on, just to remind you global is comprised of reinsurance, our global specialist, which are marine, aerospace, construction, energy and niche and our UK and retail businesses.

In our construction and niche businesses and the global specialties performed extremely well.

I want to, make mentioned them as well.

Reinsurance, I'm not going to tell you anything that you usually don't know at this stage, US property, CAT, retro, marine, and energy, there is lot of scarcity in capacity and subsequent price increases and clients reviewing purchasing in these areas and restructuring programs accordingly.

And as a result of that, significantly increase self-insurance or retention to co-insurance as is called.

The capacity shortage in these areas appears to be getting worse as available reinsurance capacity reduced due to rating agencies, new models, lack of retro, heating up with each risk written.

Clients are trying to get into markets, early to meet their US renewals to avail themselves of what capacity is there and areas outside these classes best described as state [inaudible] so that whole, market in general hasn't clarified itself that if you -- where no order is available, you want to get into that in detail, we will be very, very happy to do that.

International, again another area I am proud of, I'd day [inaudible] all the company.

I am just proud of our people, they work hard, they are focused, there is a plan, there is a vision, there is a mission, international is certainly no exception to that.

We were up 7% in first quarter despite the fact that there is a little bit of negativity in rates, sort of more wind on our face in the international, but there is good growth, Latin America is terrific, next come Venezuela, performed very well.

Asia, Singapore, China, we are very proud of what is going on in China and our presence in China.

In Europe especially Spain and Italy did very, very well.

And we completed a couple small acquisitions there.

So, things going very, very well.

I think it crossed the board from a revenue point of view.

I am going to turn it over to Pat Regan now.

This is going to be his first performance in taking over this slot from Tom Colraine, but Tom Colraine is sitting from my left.

He is ready to answer any questions that you have.

Just to remind you that Pat is the new Chief Financial Officer who, so there is continuity in our whole financial function but the team is here and Pat congratulations and here you are on.

Thanks Joe.

For the fiscal 2006, net income was $140 million, or $0.88 per diluted share compared to $67 million or $0.41 per share the same period in 2005, due mainly to accounting changes for stock options and pensions, which I will discuss in a moment.

Adjusted income per share was $0.88 for Q1 2006 compared to $0.82 for the same period year ago.

Foreign currency translation reduced earnings per share by approximately $0.03 in the first quarter.

However the dollar has weakened since the end of the first quarter and if it remains approximately at its current level, we would expect the loss to almost completely unwind.

Before I review the remainder of the numbers, I want to briefly discuss the accounting changes in the quarter.

The details are in the supplemental financial information in the release.

So I will just summarize the changes and the financial impact.

Firstly FAS 123R, the new accounting standard for stock options.

For ease of comparison, we have retrospectively adopted this standard for our 2005 results.

The impact was that salaries and benefits increased by $4 million pre-tax in the first quarter 2005, and increased by $18 million pre-tax for the full year 2005.

The FAS 123R stock option expense was $3 million pre-tax in the first quarter of 2006 and we estimated that it will be approximately $25 million pre-tax for the full year 2006.

Secondly we made two changes to the UK pension plans.

Firstly, we have changed the method of calculating the value of plan assets used to determine the P&L charge to a fair value basis.

While FAS 87 allows two methods, the FASB's preferred method is the fair value basis.

Additionally, it is now allowing the accounting for our US and UK pension plans.

Secondly, after reviewing the long-term rate of return on our UK pension scheme assets, we've increased the expected return from 7.25% to 7.75%.

Based on these two changes, we would expect the group pension total expense to be approximately $42 million pre-tax for the full year 2006, compared with $62 million pre-tax for 2005 as adjusted.

Following these accounting changes for stock options and pensions, the 2005 salary and benefits revenue percentage increased from the previously reported 58.6%, to a retrospectively adjusted 59.8%.

However, because the change in pension accounting will reduced the pension charge in 2006, the net impact of these accounting changes in 2006 is not excepted to be significant.

Turning to our revenue performance, for the first quarter, total reported revenues were $671 million relatively unchanged from a year ago, with a 6% organic revenue growth.

Foreign currency translation decreased reported revenues by 5% and net disposals which was primarily Stewart Smith reduced reported revenues by 1%.

On operating expenses, total G&A expenses through the 3 months were $453 million ,down 13% on a reported basis.

Excluding the effect of foreign exchange, non-operating items in Q1 '05 and disposals underlying expenses grew by 5%.Foreign currency translation decreased reported G&A by 5% and net disposals reduced them by 1%.

Salary and benefits through the three months were $348 million or 52% of revenues compared to $365 million or 55% a year ago, again excluding non-operating items in Q1 '05.

This improved ratio was helped by traction from our hiring strategy, a return to a strict formula basis for incentive compensation, and a more even quarterly accrual for incentive compensation in 2006 compared to 2005.

Specifically, the S&Bs revenue ratio have a 2% benefit from incentive compensation in Q1 '06 as compared to Q1 '05, but will be negatively impacted by approximately 3% in Q2 '06.

Other operating expenses for the quarter were $105 million or 15.6% of revenues compared to $96 million or 14.3% a year ago, again excluding first quarter 2005 non-operating items.

As Joe has mentioned, the increase of these expenses reflects our continued investment in key strategic initiatives.

For the full year 2005 excluding non-operating items, other expenses were 16.6% of revenues.

Turning to operating margin, the reported and adjusted operating margin of 30.4% for the quarter was up from an adjusted operating margin of 29.1% a year ago.

The reason for the margin movement again include increased productivity from our hires, the timing of the quarterly incentive compensation, partly offset by the investment in our strategic initiatives.

Wrapping all that together means that the company expects to generate modest margin expansion in 2006.

Turning to some other matters, firstly tax, Excluding the effect of taxation of amortization of intangibles, disposals of operations and share-based compensation, the underlying tax rate in the first quarter of 2006 was 31.5%, consistent with the full year rate for 2005.

On liquidity, there was approximately $158 million of cash and cash equivalents including $53 million of immediately available cash on March 31, 2006.

During the quarter, we used $34 million of cash for dividends and $22 million for acquisitions.

With the US regulations in place, the first quarter is now seasonally light cash generation quarter for us.

And therefore, there were no shares repurchased under the existing buyback authorization.

With that, I will now turn the call back to Joe.

Let me just conclude this by giving you a couple of thoughts.

We thought the first quarter was nice, but we think that our aspirations are much higher than that, and I think it's nice because, we returned to our formulas, we are back to our performance based wealth creation type of compensation, revenues grew very nicely despite hardening of the market, and despite reinsurance and so we had a nice quarter.

But really when you look at the world, if you look at Chapter 1 as we will call it, which would be the[ LVO KKR] piece, there are things that we did and we built the sales culture, we grew market share, we instilled expense discipline, we adopted a performance-based compensation, we strengthened our balance sheet, established a pretty good track record of performance with underlying objective to build a great company for the long-term.

And then to 2005, I will call that, just for the purposes of illustration Chapter 2.

And this Chapter 2 is transitional year, we did a little -- we did some things that kind of took us out of our gain simply because the opportunity existed and the world was a little bit crazy, there were declining rates, elimination of contingent commissions for some brokers, intense regulatory scrutiny, transparency, what we see is the opportunity and made some very, very smart investments and all of those things happens in 2005 and I am going to call that Chapter 2.

Well, what I think we are in right now and what has done internally we are in Chapter 3.

The first quarter were significant because it mark the beginning of Chapter 3, and we are going to call chapter 3, the transformation again of Wills.

And Chapter 3 is all about building a stronger platform and delivering differentiated client value.

We are going to deliver value that is much different than everybody else delivers.

We are going to drive that revenue, increase the value and therefore we think our revenue will be driven even further as we initiate or begin while the initiatives that we are putting in place.

And we are going to do that profitably by building platforms or rebuilding platforms that make us more efficient.

I think the example that I gave you of the shaping our future product in London is a great example.

Everybody knows that the London businesses have always been very paper driven, not a lot of process or technology based the way we do business, lot of paper being shuffled whether it's slips, cover notes, whatever the case maybe, lot of hand-offs of paper.

We are changing all of that, so that we will be completely over the next couple of years, completely what I have made is, as I said before, a lot of value upfront with the things that matter to our clients like claims and policy issuance and contract certainty and a lot of great things that we are doing and we are building that platform out the same way in North America.

So, that all of our offices are essentially on the same platform building out that so that people can spend more time delivering value to our clients and leaving the administration into other areas so that we can do this thing even more correctly then we did it in Chapters one and two.

And by doing so, we want to become the employer of choice.

So, the 2006 first quarter marked the beginning of Chapter 3, as we have dubbed it internally and we really are excited about that.

We think we have done pretty good job in first couple of chapters, but we are going bring it up a notch and, we are going to see the manifestations of that as we go on.

And continued to make deliberate good investments in key initiatives to make all that happen.

And we should expect to see the real significant benefits from this particular strategy manifest itself in 2007, but as the year goes on, we will obviously give you some insight as to how that's happening.

The first thing we want to do is to host an Investor Day, a first ever since I have been here on June 8, by invitation and webcast, we are going to discuss this vision, we are going to clarify all the initiatives that I just spoke about.

We believe that we will mark a significant characteristic if you will, in all of these initiatives and everything we are doing in the next chapter of this great company.

And I think, we think all my colleagues think we are in a very, very sailing time.

I will be very, very glad to wish my colleagues to answer any questions that you have.

[OPERATOR INSTRUCTIONS]

[Sam Johnson] you may ask your question.

Please state your company name.

Good morning.

AIG Global Investment Group.

Hi Sam, how are you doing?

I am doing well, thank you.

Two questions please.

Can we talk a little bit about the London market fee environment, I don't know if I actually saw a number on there and can you maybe just update us on that?

As well as talking a little bit about the actual implication of the change that you used or the actual change as a result of the 0.5 pension increase on the assumed assets for this year's earnings?

Thanks.

Okay.

Richard Bucknall, who is in London, I will ask him to answer the first question with regard to London fees and if anything has changed there.

Richard?

Thank you Joe.

I don't think there has been any change since our last call, at Willis we are focused very much on both transparency and ensuring that where we are on the commission that we have consistent basis for our brokerage and fees.

I guess on -- in the fee environment whether there is some very high profile accounts maybe subject to competition.

There has been element of extreme competition on the fee elements, but that is in respect to the relatively small number of accounts.

I think that answers your question.

Thanks Richard.

Let's try to answer the second part of your question there.

Sam, I think you want just know what the financial impact of the change was?

Yes, please.

Okay.

The, I mean, in totally, as I mentioned during the call, the total pension expense for 2006 will be - we expect to be $42 million compared to the adjusted number of 62 million for 2005.

The change from 7.25 to 7.75 as it has a relatively small impact....

Yes, it's in the $5 million.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Charles Gates.

Please state your company name.

Hi, Credit Suisse.

Good morning.

Hi Charles.

How are you doing?

Good thank you.

My first question.

I know, you bought a lot of stock in 2005, but as far as given the effect on your stock in early '06, you would buy more?

Well, we have lot of things that possibly, might be going on.

We always look to see where our cash position is, which we think is pretty good.

And we've always been a buyer of our stock, we have capability, as you know, through our confirmation that we have to take it up to 500 million by '04, and that's always a possibility.

But we look at our financial capabilities and the thing that we can do throughout the year and I think we will take advantage of that as things go on Charles.

My follow-up question.

On the Marsh conference call yesterday, the fellow who runs Marsh the broker made the comment, and I am reading from as transferred, "we are actually seeing some pricing improvement in our business in the last several months.

We've seen of about 150% improvement in our overall placing ability."

Would you comment on that, and how you assess that in the current environment?

Well, I don't know what that means, I did not listen to the call.

So, I am not going to presume what that means, if he is making reference to the fact that they were able to increase commissions, I can't comment on that.

I am not going to comment on another company's commission structure.

If the historic audit fee, I just can't comment on that.

I do know that there has been a lot of pressure if you will in terms of the way companies charge to repaying clients.

And I think a lot of it has been silly and is not really economic.

So, I can just tell you from our perspective, and I look at and we look at what we charge our clients so that we make a fair return on the value that we provide as that our pricing has been, economically feasible.

But I will tell you, I have seen prices out there that are where we take this which goes from the ridiculous which is charging nothing to retain clients to supply, which is to charge less than one should to be and to live on the clients.

So, I think that we've seen a lot of that, but I can tell you there might be from time-to-time some place out there where we have done something correspond to '05 because these pressures, both we maintained our pricing capacity, our capability I think are going pretty well.

So, I can't speak for anybody else but I can speak for myself, I think pretty thrilled Charlie.

Thank you sir.

Our next question comes from Ron Frank with Citigroup Investment Research.

Please ask your question.

Thank you.

Good morning.

How do you doing?

All right.

How are you Joe?

Excellent.

Happy birthday Kerry.

Thanks Frank.

I would like to direct a question to Graham if I could and explore the situation in the reinsurance market a little more.

It sounds from the color like reinsurance revenues were actually down in the quarter.

And you know, the message seems to be that despite what might have happened to pricing in the cat and property exposed areas of the market that you were hit basically with the combination of less or reduced volume - deliberately reduce volume by insurance which makes sense, but also a capacity reduction.

So, my question is, to what extent is this sort of a permanent loss for the year and to what extent is this just a change in seasonality i.e., as pent-up demand get satisfied outside of first quarter do you see some of it come back?

Okay.

Let me start up by saying, I am glad that we didn't go backwards from the point of view of revenue.

We just used to going forward a quite lot, we didn't go as much forward as we used to in this quarter.

It is, frankly, a very, very complicated and variable is on market out there.

I mean we've got, yes, significant rate increases in certain lines we got future capacity shortages in certain lines.

Net earnings, client by client you cannot necessarily generalize about this, but it is having an significant effects on the structure, the program structure.

And in these cases we always continue to give best advice to clients and in many cases in this sort of markets sometimes means co-insurance rather than actually trying to find capacity at any price.

And also that means increased retentions, you have got obviously alternative structures there is a lot of talk about other capital coming into the marketplace that helps investors in all ways, at this point I think that's early days and then the only days for that.

So, and on the other side you have got a very, very stable reinsurance market that we are seeing no necessary increase in place of any, of any severity.

At the same time, you have still got dynamics going on about retention and everything else.

You actually have to look at it almost account by account in terms of, because of the five of the accounts that we handle.

And I mean, it matters that itself, for instance, one large clients what's the risk in itself.

But we've been -- there is normal purchases of energy cover, there is a lot of people saying that we need to touch energy cover, sensible price and we need to dramatically reduce our energy lighting.

You have got issues on the retro, and a very little retro capacity to the extent of something that, basically we said we would have a re-fi retro.

And you have got cost putting out of classes because of seeing what we just don't see a reliable cost for us to participate it.

But at the other side you have got people looking at new program structures as being appointed upon on real problem areas that we come out of part one.

But, I mean the general situation is answering your question is, is it a specific issue for the long term, no I don't think it is at all, I don't think our division has ever been busy here frankly.

People are flying all around the world working on opportunities left by the center.

So from the point of view is that good, yes, it is great.

Do we see potential for real revenue increases later in the year, yes.

Can I actually pin point those in this volatile market?

Absolutely not.

What I do know, is we are very good at what we do.

We are getting opportunities left, right and center.

So, I mean that's a long way of saying, no I don't think it is a long-term issue, in fact I am very, very encouraged about long term.

But just, exactly how that's going to manifest itself in this very volatile market is just very difficult to say.

Okay.

Thank you.

Okay.

Thank you.

Jay Gelb of Lehman Brothers, you may ask your question.

Thanks and good morning.

Good morning.

I had a question about your comment on request for proposal activity and how that's slowing.

Can you give us a little bit more color on that and then also talk about to what extent the trend of client is in multiple brokers is still intact?

Yes, the RFP, I think has a great deal to do with the activity.

Last year that took place with regard to, I think clients that were simply looking, for other brokers and looking for alternatives.

You know, I think that was very rampant in last year because of the theater that surrounded the business last year.

I am not going to get into gory details and talk about companies, but obviously there are a lot of theater that went on.

And there were people that were simply looking for alternatives.

You don't see as much as that because the theater is less, but that does not mean that there is not a lot of RFP activity and that we are not engaged in a lot of that activity, it's simply less than it was a year ago, it's not the theater that existed then.

As it relates to client looking for multiple brokers, I think that continues -- we continue to see that.

We continue to see clients more than ever before frankly that are diversifying their broker relationships, which is good for us.

You know our market share is growing but it's nowhere near our other two large competitors and as result as there is diversification and as there are alternatives that are being liked by clients around the world.

We are getting I think our fair share of that diversification and those alternative decisions and as a result our business is growing because that's a good thing for us versus maybe some others..

Okay.

And then separate issue on the salary and benefit if I understand it correctly there was two point benefit in the first quarter from the change in bonus accruals three point drag in the second quarter how will that play out in the third and fourth quarters?

You are actually correct on the impact on the first and second quarter, over the full year we pretty much expected to even itself out.

Okay and then can you also comment Joe on the pace of hiring activity it looks like your slowing that, that outlook somewhat?

I am sorry, on the what?

On the hiring activity, being robust?

Yes, we in the last call we told you we made some assumptions that the world was going to continue to be frenetic offer the same opportunities that we, we had last year.

So we told you that we expected the same thing since that call you know the world is less frenetic and like you know we have become very, very selective in our recruiting efforts almost going back to the way we were before 2005.

I don't, I kept you know saying everybody that you have great going by and instead of watching it go buy we decided to participate in it and as you can see in North America that participation is planned out.

We are also a little bit different now, there is a little bit more selectivity in what we are looking at.

So I think from that perspective you are looking at you know more and more normal set of circumstances although I will be quick to say we are looking at thankfully, a lot of opportunities there are still opportunities that are coming all the way.

But I think it is the best way to describe it is a return to a more and normal trend in our recurring profits although we are still in the recruiting business.

It -- we have not been a major acquirer recruiting is very important as part of what we do.

But again the world has changed a little bit different look, differently than it was last year.

But the opportunities are still there but I think the way I can explain it the most or best is that we are being very selective.

Great thanks for the answers Joe.

Thank you.

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

Hi good morning Joe.

Hi Brian, how are you doing?

Good, two question to you, first back on the other operating expenses I understand you had, I mean, of your unusual items but a couple of items in the first quarter that touched the pop up.

We expected to moderate here when we go to the rest of the year?

Well let Pat answer it and then I will give you my color.

Yes the as we talked about we have investing in a couple our, in the first quarter we will continue to invest in our key initiatives as we go through 2006.

But not withstanding that I would expect the operating expense to revenue percent to be grow in December 2005.

I would tell you know that Sales convention is obviously non recurring, the consulting fees you know will be there it is the first we saw them but again we are revamping our entire platform through out the world, we think that at the end of the day not only will we provide more value and we will go through this in very good detail on our investor day.

But it is very important to -- to note that these expenses again as I said or when I talked about last year are once that are decisive, things that we are making decisions on that I think over time will make the place more efficient and will lower even more than we have in the past our cost base, so whole idea of business is to deliver more value which creates more revenue and do at less cost which is what I think will mark, and I think we did that very well in the first couple of chapters.

I think chapter 3 we are going to do it, but in a different way and I think efficiency through technology, the rearranging of our administrative processes to make it easier for our people to be more concentrated and focused on doubling our revenue base even better than we have dome it in the past.

So my enthusiasm which as you know goes unbridled but comes through the next phase being gee, revenue build up and growth in the past without having done these things I think in the next couple of years you're going to see the manifestations of all of that.

But it's a you know it's a process but we began prices I think actually in the first quarter.

Okay and as a follow up to that Joe, 11% organic growth in the North American operations.

How much of that growth would you say was attributable to RFPs that you won called the second, third and fourth quarter last year, so there is a lag effect in should we expect that organic revenue growth start moderating going forward here is should RFP activity slow down modestly?

Brian, we are not going to project going forward what the organic growth is going to be, what I can tell you is that after 3 years we've been building in the North America businesses is a sustainable organic growth organization.

One that's based on sales and service culture.

You heard Joe say before everything is clicking right now, the recent hires are performing well the existing work force is doing an absolutely terrific job, new clients as well as retaining our existing clients all that client retention efforts are paying off terrifically and while our fee activity has somewhat slowed our new business is up its up at high levels because they are doing things right.

And because a lot of business it is not going out for RFP activity also, it is just going out and we are bidding on and winning it and so a lot of that is clicking we are excited about going forward but we are not going to project what that's going to lead to.

Now usually Brain I know that in some other places it is still up, you had run through percentages of RFPs to the one RFPs they did win and all these kinds of statistics all I know is, is that this revenue growth speaks for itself and it tells you that we are holding on to clients I think at a very good rate I think we can do better job we can always do a you better job, until you're100%, we can always do a better job I think we are doing more business with clients that we already have and obviously we are opening accounts at a pretty good sclip o I usually don't get into we had 7,000 opportunities and we won 6,000 and all that repaying the numbers speak for themselves that some thing must be working more.

Right thank you?

Thank you.

Any other questions.

Our next question comes from Meyer Shields with Stifel Nicolaus, sir your line is open.

Good morning.

Good morning all.

You put out a press release a few weeks ago announcing the appointment of Paul Gibbs as the head of the western region.

Yes.

I am inferring that your replacement would have been a very high profile recruit from Marsh.

I don't want to get into the specifics of individual people, but can you tell us what we should understand from that in terms of how you are managing productivity of the recruits from last year?

Yes, you are making reference to our Orlean Corsetti who was our first major hire from Marsh and I think basically after a year or so, she decided she wanted to pursue other interest, I don't say that cause it sounds like a PR comment but that's what she wanted to do.

And I think as times play out here every time you recruit a lot of people as we did last year you will find that I would say the majority of the people that we recruited as is manifested by the results did very, very well.

In Orlean's case she simply decided that she wanted to do something else that was as simple as that.

I am very and we wish her well, I might add.

I am absolutely enthused about Paul Gibbs who ran Southern California piece all of our western region in replacing her as a more than able replacement, I am ecstatic spent some time with Paul yesterday, here in New York when we went through our performance reviews, he is excited, the people on the West Coast are excited and I think he will do a great job.

Okay, thanks.

Also in terms of the reconfiguration of the segment can you get us a little more color in terms of what businesses are actually moved around from global elssewhere?

I don't understand your question.

Say that again please?

I am sorry, the press release sort of explains the names of the segments that moved from global to North America and global to international in fact a better understand of what those companies have actually represent?

Okay, in the global when I say global markets, what I am doing is I am making reference to the businesses that or requisitely called our wonder businesses which are reinsurance, all of our specialisms, our niche businesses in London and it also includes the UK and Ire;amd, Republic of Ireland business that's what to we referred to as our global businesses.

International is all of our branches outside of the global businesses and North America.

And North America is Canada and the United States.

Okay so, specifically what was it, what message it says to relocate the revenues?

You mean sort of the global market in North America and International.

Yes.

What we basically did was is we thought that it was better to align on marketing effort closer to the business, than it was to have separate enterprises that was risk associated with the business.

So, if you had distribution very, very close to the placement capability such as, so, is then having global markets, as some of it than the International working with International and some of it in North America working with International, we thought it would be better to make them part and parcel of those operations, so, that they could be very close and work very closely together.

The whole point of being a global company is to, is not to have geographic locations around the world.

The point of thing of global air price is to make sure that our clients are best served and we have the ability to place business where it should be placed in their best interest.

In the absence of that being global doesn't really matter if you don't use it and having the ability to be able to serve these clients on a global basis is very important as well.

And if you don't do that, gain global joint focus simply means you've got a lot of offices all over the world [inaudible].

So, this was another attempt made and that people worked more closely together, I think it's worked so well.

Okay, great.

Thank you so much.

You are welcome.

Our next question comes from Adam Klauber.

Please state your company name sir.

Good morning.

Cochran and Caronia.

Hi Adam, how are you doing?

Can you give us an idea once you got into some of these larger accounts over the last year, what type of opportunities are opening up to you, in other words, few of you maybe want some small program, are you getting chance to look at some of the larger program?

Yes, if your question is that we are seeing access to the larger parts in these accounts, yes, it's absolutely yes.

Again, as the matter of philosophy, I don't get into all of those statistics because I don't - I again think I need to do that, but if you are trying to go through the writing of mains, the very large accounts that you are very familiar with.

You would be impressed with that list and you would be impressed with the victories and you will be impressed with the fact that there is something odd one of their plans on a contrary.

We are looking at very significant opportunities to be able to partner with a lot of these companies and so, yes, if the first part of your question is we are getting pieces of it that's turning in some more, the answer is absolutely yes, and what cases, we are getting very good opportunities at larger pieces of the business right from the get go and I am very pleased, as a result, I would like to win them all, that's our nature here, we are very competitive.

In fact, I had to be pleased with the percentages that we are getting Adam.

Thank you.

Follow up question.

I think you mentioned that the rates aren't going to be impacting your organic growth, are you seeing more pressure on rates as the year continues and if that's having an impact on your growth?

No, I don't think that the - we try to build the business here as we will rate some of the fact what we do, I mean is that's what's happening here, I mean we just sit around and wait for rates to go one way or the other, I think we did quite well last year with rates directly in our face.

We grew 2, 4, 6 and 8%, progressively last year with rate dead in our face, I would say the rates in the first quarter were more like neutral, if you will, they certainly weren't on our back and I think we did very, very well.

We'll have to see what happens during the rest of the year on a rate basis, but we don't make the budgets or projections internally based rate one way or the other, we're geared to opening a lot of accounts, we're geared to hold on to the accounts that we have, that's the way it the place runs.

When, you've got a large majority of the market share still available to you, it should not matter what those rates do, but that's the way things have broken out.

Okay.

And just one more, as far as acquisitions the whole sector saw a slowdown in acquisition activity in 2005 compared to 2003 and 2004.

Have you seen any change as far as acquisition opportunities being out there or is it still slow environment that we saw in 2003, 2004?

I think, first of all, our model is not an acquiring model.

Our model is an organic growth model, get the plumbing right, grow the topline, create real sales and do it as efficiently as possible, which I said earlier, I think we are going to do even better than the past, which is you are going to find over the time the margins expand and we are very excited about that.

So, our model is we do this ourselves, that doesn't mean to say we haven't made acquisitions throughout the world that have been small in nature, the biggest one we made has been, Coyle Hamilton in Ireland, which we are very proud of.

But generally speaking they have been smaller acquisitions and that's philosophically what we are going to continue to do.

That doesn't mean to say that we are not interested in availability throughout the world that we are not going to take a look, but this place is great to grow internally, we are now in acquisitions and to build the real culture in our company.

As it relates to what I have seen, I don't know, the activity has been modest throughout the world.

There is a lot of companies that rely upon, growth from an acquisition point of view and I think there is always going to be very, very active, but yes, it has been modest, because trying to - should be trying to figure out, how they are going, of course the way the world is, I am very proud of the way, we are coping with everything.

But I can only speak to Willis that we are a company that looks inward and it builds our company philosophically from a revenue and in efficiency point of view, in a value point of view is the way we are growing to grow this company.

If something comes along that make some sense to us, we are certainly not going to turn ourselves, turn our heads the other way and say we don't do that.

But the place has geared to I think into nice level in chapter 3 and that's we are going to do.

Thank you very much.

Thank you.

Our next question comes from Jay Cohen with Merrill Lynch.

Your line is open sir.

Thank you.

Good morning everyone.

Hi Jay, how are doing.

I am well, thank you.

Just - most of my questions are answered.

I guess you have been leaving with transparency now for bit of time, and I am wondering if you can evaluate what that has meant for your expenses, presumably there is some added expense related to transparency and I am wondering if you can kind of look back and see what that might be?

It's very difficult Jay to distinguish what pieces of our expense basis in relation to transparency.

But our training expense I think is gone up, because of transparency that is related to legal expenses there have been attendant to that more than normal.

And you look at legal expenses, I think that is - those expenses are ridiculous, those things more than doubled, since or before all of the issues occurred in 2005.

I think it takes more time and energy in our branches throughout the world to be transparent, to comply with the AOD.

A lot of printing takes place our printing costs have gone through the roof, -- I have never seen print costs costs high since my days when I was at responsible at Shearson and Smith Barney, I mean, printing is unbelievable.

Now, we have to send out to clients consents and the printing is mad.

I mean it's Piccadilly Circus everyday with the printing.

So, yes, there is a lot of attending costs that hopefully will moderate overtime, but even though our costs are, generally speaking, in pretty good shape than I think we do a good job at watching them, they can only moderate over time.

I mean, again, last year was a very unusual year, but those are things off the top of my head.

I would tell you Jay that, actually the most prominent from a cost point.

That's helpful, thanks and Kerry, happy third year.

She loved when you said that Jay.

Anybody else?

Steven Labbe, you may ask your question.

Please state your company name.

Langen McAlenney.

Actually all my questions have been answered.

Thank you.

Thank you.

Have a nice day.

You too.

Anybody else?

Our next comes from [Robert Bittner].

You may ask your question.

Hi, it's Bob Bittner with [Elm Ridge].

Again, just to be clear, the pension had a $5 million positive impact in the quarter, I didn't get the incentive comp benefit in the quarter?

The incentive comp benefit in the quarter was a 2% benefit to margin.

2% benefit to margin.

Thank you very much.

Any other questions?

[Leon Gittelman], you may ask your question.

Please state your company name.

Adage Capital.

Hi Joe.

Hi.

How are you doing?

Good.

I just had a few numbers questions.

Can you talk about the change in segments within global businesses that have taken out of global, how -- what was the organic growth for last year in global, it look like with the current definition of the segment?

I am not going to answer that question.

We don't break it out as you know.

Well, you do.

In the past you have given us what the global -- where the segment growth was, right?

Well, we have given you the global business, the international business and the North America business, but we haven't broken down in segment.

When I am saying, I am saying the global business that you changed, what's in the global business, right, what businesses are included in there, I think...

What's the change -- the global market and we distinguish the global markets, global market is just to be all in our global businesses and we broke global market into global market just in America which is now part of North America and we update global more international and that part is international.

And if your question is that by that breakup, did that significantly alter the outcome of those areas.

Okay, that was my question.

Okay, the second one is, can taxes petrify the accruals for the compensation, you said a 2% impact in the quarter, 3% next quarter.

Is that in the growth rate of, expenses year-over-year, or we are talking about that as percentage of revenue?

The answer is essentially to revenues.

In absolute terms on margin for the quarter, it was 2% impact on margin for the quarter as a percentage of revenue in Q1 and then negative impact of 3% is essentially the revenue in Q2.

Okay, thanks a lot.

That's what I want to make sure.

And then just lastly, the FX, can you sort of reverse engineer what the margins in the quarter would have been and the FX was constant, I mean I know it was $0.03, but I don't know what that means to margin?

The - yes, you had the way the numbers worked, and I have a bigger impacts on the EPS and it is on the absolute level of demand and could you get it was both revenues and expenses, you just got lower amount of them, so the margin impact is actually going to be small.

Okay great.

Thank you so much.

Thanks.

Jay Cohen with Merrill Lynch.

You may ask your question.

Hello.

Mr Cohen, your line is open for your question.

I am sorry about that, I had been on mute.

Thanks for taking the call.

I have a couple of questions.

I just want a little clarification on the discussion of the change in first and second quarter margin due to accruals.

You keep on using the word margin, I just want to clarify are we talking about the operating margin, discussing the two points and three point swing or we are talking about is different line item?

We are talking about the operating margin.

Great, thank you that was my first question.

My second question is what was the dollar amount actually on the expenses that the effects impacted?

On the effects impacts, let me come back to again to a dollar amount, to say it was 5% impact on expenses.

So...

You say 5%.

5%, correct, yes.

Okay.

That will suffice.

I appreciate your help, thank you very much.

Thank you.

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