Willis Towers Watson PLC (WTW) 2006 Q2 法說會逐字稿

Good morning, afternoon or evening.

Thank you for joining us today.

At this time you are on a listen only until the question-and-answer session of our conference call.

This call will be recorded.

I'd like to turn the call over to Miss Kerry Calaiaro, you may begin ma'am.

Good morning and thank you.

Welcome to our earnings call and webcast at willis.com for the second 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 August 17, 2006 by calling 866-445-8187 or 1-203-369-1139 international, with no pass codes, or by accessing the website.

If you have any questions after the call, my direct line is 212-837-0880 and you can also speak with [Abby Goldstein] at 212-837-0847.

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.

Hi everybody, this is the first call that we've ever had from London and so I'm going to tell you that all of our management group is here in London, in person, so anybody you want to talk to, have at it.

The only people that are not here is Mario Vitale who's in New York, along with Jeanette Scampas who runs our IT and Global Operations Division.

I'm going to give you a few comments like I usually do and then I'm going to turn it over to Pat Regan, our Chief Financial Officer.

I'll talk broadly about our company and our outlook.

Obviously we're very happy with today's announcement and we're very, very happy about the quarter because it starts the first half off on the right foot.

It also reinforces what we have been saying all along that this year will mark the year that we begin to go back to our ways of growing our margins and growing our earnings and doing all the things that we were used to doing after our distractions, if you will, from a year ago.

And doing the kinds of things that we thought were the right things for this company.

So we're really extremely pleased about that and we're especially pleased that, as we said at the Investor Day, this was the beginning of Chapter 3.

And if you remember, Chapter 1 was the first -- was the year 2000 through 2005, year 2005 where all the things that went on and all the things that we thought that we had to do with regard to hiring and making the kinds of decisions and the kinds of investments that were really important to our future.

And now Chapter 3, as was announced and discussed in June at our Investor Day we laid out our game plan for profitable growth which we called Shaping the Future which talked about driving revenue growth, which talked about defining core segments and how we're going to deliver value to our clients.

Creating the most appropriate fee and commission structure, enhancing our sales process and fully implementing we think the best client advocacy program, the only client advocacy program in the business.

Then we talked about optimizing our platform, which was enhancing our service model processes, technology and focusing on the right locations for administering our business and investing all of the things that we had to do, both time, energy and money, to be able to deliver that value and then efficiently and profitability bring that value to the bottom line.

We talked about becoming employer of choice, creating a clear path for development of our people and getting them excited about their own future and reward and recognition for teamwork.

The results that you have seen today is a direct result of Willis being a team sport and everybody working together and creating a culture which I believe, and I know I'm prejudice, is second to none in this business.

And then obtaining financial goals through controlling our expenses by re-looking at a lot of the things that we do on a day-to-day basis.

Focusing on client profitability and enhancing our capital structure.

It all has to do with investing in training, it has to do with investing and looking at real estate and looking at all the kinds of things that now will quantumly take us to the next level.

What's interesting about what I just said is that we're really confident these initiatives will make a significant impact on our company by expanding our revenues, operating margins and profitability.

But nothing, I think, that you have seen as the results in this quarter have really manifested themselves yet in any of these initiatives.

So that's all to come.

Everything that we've done has simply come from the culture that we have been building over the years, which I think is a strong accountability sales culture and always watching our expenses and just watching our business and running our business diligently on a day-to-day basis.

So all of the things that we talked about on Investor Day I don't think you've yet seen the results yet.

This quarter I think marks another step in the right direction.

Our organic growth of 10% we think was outstanding.

We're really proud of our people and are proud of the way this business is operated and how hard they've worked.

That by the way follows 6% in the first quarter and 4% a year ago, so it was quite a leap over where we were then.

We saw really strong contributions in all parts of our business, which just really makes it I think outstanding.

North America was 8%, which following the 11% first quarter and a 6% quarter a year ago, which is terrific growth and I think a manifestation of a lot of the hires.

When you asked me back then when are all these people going to show how well they did, well they're doing it.

This is the answer to that question.

Global businesses were up 13%, which included a double-digit organic growth in Reinsurance, which we're really proud of, which follows 3% in the first quarter and 4% a year ago.

So again, tremendous growth year-over-year.

And our International operation was 6%, which follows a 7% first quarter and 3% a year ago, which again is outstanding.

We also talked about the fact that we were going to emphasize or highly focus our Employee Benefit business and our Energy business.

These are the areas that we said we were going to focus on.

We are investing heavily in these two areas and they had particularly strong results for the quarter, and we don't think all of our investment has yet manifested themselves either in that regard.

And so we've seen a lot of traction from our hiring strategy, which I know cost us some money, especially in the S&B line which people weren't used to, but it was a strategy that we made consciously.

And that was over an 18-month period and I think you can see the results of that.

And I'm really proud of the expansion of our underlying margins, which was 200 basis points, and profitability.

I think they're direct results of solid growth and contributions from every area of our business.

And obviously we're very pleased at the $0.45 in the quarter, which is well above what the Street estimate was.

We also launched our Quality Index, Willis Quality Index, which we're really proud of.

That's an index which will measure carriers and the service they give, their ability to pay claims, their willingness to pay claims, getting policies out on time, all the things that our clients care about was launched, if you will, in terms of us announcing it but will not be in full glory until probably the end of the year.

But we're really happy about contributing to our clients' ability to feel confident about how their placement takes place and where we place the business forward.

We also said that we were going to embark upon an M&A strategy that was going to acquire companies around the world of the 5,10 million variety that had to do with buying companies in geographic areas where we wanted to expand against a backdrop of brokers who specialized in businesses and industries that we wanted to expand.

And we made that very, very clear and we said we wanted to acquire 50 to $100 million of revenues of companies a year in that regard.

And I want you to note to that end we're very, very pleased that [Roje Shangarden] who was at Marsh for 25 years in lots of different capacities I think as Corporate Treasurer and had a lot to do with finance and ran M&A for a long time there will be joining us on Monday.

And so we're really pleased about that.

I'm talking faster than I usually do because there's so much to say and we're so excited about what's going on here, but that's a great thing.

Obviously the capital management portion of our announcement has really been terrific.

The Board basically said, after I went through with them what the various opportunities and alternatives are in the business and ways to invest money, money that I thought the best thing to do was to invest in ourselves and so the Board approved the new $1 billion stock buy-back plan.

Obviously this authorization replaces the one that we previously announced, which was 500 million buy-back plan and its remaining 140 million authorization.

We feel so comfortable with our future that we're really excited about that.

While I'm on the subject of capital management, I know that lingering in the back of peoples' minds is what happened a few weeks back with regard to our pooling of our debt offering.

Simply put, we told you then that had nothing to do with the financial condition of the company and, as you can see, it does not have anything to do with the financial condition of the company.

At the rating agencies at the time we talked to them, told them why we had pooled it and they were quite comfortable.

As you can see our rating hasn't changed either.

Basically what happened was is that there were some alternatives that coincidentally came up just at the time that we placed that offering.

And we thought that the prudent thing to do was to take a look at those alternatives and, while we were doing so, prudently just pool the bond offering.

We knew it's an unusual thing to do, we knew it was something that would make people nervous, but in the end we thought it was the right thing to do, which gave us time to look at the opportunities that were shown to us.

And so that's what we did.

It was nothing more than that, it was nothing less than that, that's exactly what happened.

And I'm sure you can appreciate that's all I can say about that matter, but I knew that that was something that was on your mind, but that's what happened.

So that has come and gone, we've now got the billion dollar buy-back that we're going to embark upon and we go from there.

Let me break down now for you some of the parts of our business.

The organic growth in commissions and fees was 10% for the quarter, 9% net new business and 1% impact from rates and other factors.

But pricing value [thrust] significantly and as we like to call it, just talking about the tale of two markets here and that continues.

Outside of wind storm, natural catastrophe exposures, especially but not limited to North America, rates continue to soften in all sectors, especially Aerospace and especially in our International area.

That's why I'm so proud of the work and the growth that we've had in International.

In areas with exposure to wind storm and catastrophe such as windstorm, flood and earthquakes, there are significant rate increases and shortage of capacity.

That's why there's a tale of two markets.

The positive impact from rates and other markets factors of 1% basically reflects declining rates more than offset by other market factors including higher insured values and changes in limits or exposures.

And so we're very pleased with our results throughout the company and now I'd like to share some of the highlights of the business units.

In North America our organic revenue growth in commissions and fees was 8%, which was outstanding.

Good traction across-the-board.

New York, the Southeast, the Midwest, our practices in executive risk and employee benefits and our net new business growth was double-digit in many of the areas within North America.

Good people continue to join and grow and be part of our culture.

And as I've already said, a lot of the hires which mainly came from North America over the last year or so have just done splendidly.

So we couldn't be more pleased.

On our Global businesses, the organic growth in brokerage and fees was 13% in the second quarter, just outstanding.

And Global Specialties, our FINEX, Energy, Aerospace and construction units performed very well in the quarter.

Reinsurance grew double-digit as I said before, even with capacity and retention issues, and good growth in North America, especially in the Southeast Property Renewals.

Willis U.K. and Ireland contributed to overall growth, especially in Corporate Risk Solutions, large and middle market accounts.

And as I mentioned, our Global Employee Benefits practice is performing extremely well under the leadership of Greg Arms, Rick Elliott and [Allen Becay].

We're recruiting steadily for this growth area that we said we were going to concentrate on a great deal and we recently added a Multinational Capabilities Team.

Our Global Energy Practice under Phil Ellis is doing very well, and now we're starting to see great opportunities as we leverage our presence in London, New York, Houston and Calgary.

And then finally in International where organic growth in fees was 6% in almost every area that International was in, which is every place outside the U.S. and the U.K., I think is a significant soft market.

So that's why we're really pleased about that 6%.

We continue to see good growth in Latin America, Scandinavia, Asia, just an all around great job.

Now let me turn this over to Pat Regan, our CFO, who is going to review the financial results with you.

Pat?

Thank you Joe and good morning everyone.

For the second quarter total reported revenues were $593 million, up from $549 million a year ago, representing an 8% reported revenue growth.

Foreign Country Translation decreased reported revenues by 1% and net acquisitions increased reported revenues by 1%.

As Joe mentioned earlier, organic growth was 10% for the quarter.

Turning to the operating margin, firstly, as I previously laid out at our Investor Day, the reduction of market remuneration in the second quarter 2006 and the change in the quarterly phasing of incentive compensation reduced the second quarter operating margin over 4 percentage points versus the operating margin for Q2 2005.

The reported operating margin of 20.1% in the quarter actually represents an improvement in the underlying margin of over 2 percentage points.

This underlying margin improvement was positively impacted by increased net new business, accretion from our recent hires and lower pension costs.

Imminently total G&A expenses through the three months were $459 million, up 11% on a reported basis.

However, excluding effects of acquisitions and disposals and this change in the quarterly phasing of incentive compensation underlying the expenses grew by 6%.

Foreign Country Translation had no net impact on reported G&A and net acquisitions increased them by 1%.

Salary and benefits through the three months was $351 million or 59.2% of revenues compared with $316 million or 57.6% a year ago.

Again, allowing for the combined impact of the reduction of market remuneration and the changing in phasing of incentive compensation, the underlying salary and benefit to revenue ratio in the second quarter improved by over 2 percentage points as compared to Q2 2005.

Another way to view the trends in productivity is to look at our revenues per FTE.

Net headcount at 30 June, 2006 was approximately 13,000, up 1% from year-end as we continue our selective approach to hiring.

This translates to revenue per FTE of approximately $179,000 through the 12 months to June 2006 compared to $174,000 for the year through December 2005.

Productivity increase of approximately 3%.

Other operating expenses for the quarter were $108 million or 18.2% of revenues compared to $98 million or 17.9% a year ago.

These expenses continue to reflect our investments in key strategic initiatives.

In summary, despite the reduction in market remuneration and the change in quarterly phasing of incentive compensation, net income was $72 million or $0.45 per diluted share in the second quarter 2006, unchanged from the $0.45 per share adjusted net income for the second quarter 2005.

Foreign Country Translation had an insignificant impact on earnings per share in the second quarter.

For the half-year the reduction in market remuneration and the change in quarterly phasing incentive compensation reduced the operating margin by over 1 percentage point versus the operating margin for the first half of 2005.

The reported operating margin was 25.6% for the first half 2006 and grew by approximately 1 percentage point on an underlying basis.

The underlying salary and benefit to revenue ratio improved by approximately 2 percentage points to about 55% for the first half of 2006.

Turning to some other matters, firstly tax, excluding the effect of taxation of amortization of intangibles and share-based compensation, the underlying tax rate through the six months ended 30 June 2006 was 31.5%, consistent with the full year underlying rate for 2005.

On cash and liquidity there was approximately $210 million of cash and cash equivalents, including $104 million of immediately available cash at June 30, 2006.

During the quarter we used $37 million of cash for dividends and 9 million for acquisitions.

As Joe discussed earlier, our Board of Directors has increased our share buy-back authorization to $1 billion.

This replaces our existing buy-back authorization.

We're currently reviewing the construction, timing and funding of this buy-back program.

There were no shares purchased under the existing buy-back authorization during the quarter.

Finally, as we discussed at Investor Day, we expect to incur some one-time expenses in the third quarter of this year related to our strategic initiatives.

These will include items such as the rationalization of our real estate portfolio all across Willis, data center consolidation and other technology efficiencies, optimization of the use of our facility in India, the cost of specialists' help in areas such as our London market review and our efficiency review across International, and other such items, all which will deliver significant efficiencies for us going forward.

We also expect to close on the sale of Ten Trinity Square, our current London headquarters, in the third quarter, recognizing a substantial gain.

The company remains on schedule to move into our new London headquarters in early 2008.

With that I'd like to now turn back the call to Joe.

Thanks, Pat.

So for the full year for 2006 after that great start, we continue to think that we can grow organic commissions and fees, just like we said we thought we could, our salary and benefit expense as a percentage of total revenues to be less than 59%.

And we still expect modest operating margin expansion in 2006 compared to last year.

So all of the things that we told you that we thought would happen are happening and we continue to believe that they will sustain themselves over the course of the year.

I also want to remind everybody, as we said at Investor Day, that we expect to deliver breakout financial performance in the next five years.

We specifically say breakout financial performance because that's what we're going to do, that's what the investments that we're talking about in all of our initiatives and shaping the [fewers] future is meant to do is to deliver breakout financial performance.

Specifically, just to remind everybody, by 2010 our financial targets, our salary and benefits expense as a percentage of total revenues to be below 54%, adjusted operating margin of 28% or better and industry leading organic revenue growth, which is something that we take great pride in.

We take great pride in the fact that we all sell here, that we're all in a selling mode, that this is a sales culture and we're very proud of all the initiatives in shaping the future because it distinctly, by initiative, leads toward our ability to be able to tell you what we think the future will bode.

And it we think it will bode very, very well.

We appreciate your listening and will be very happy to take any questions that you have now.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Charles Gates.

Please state your company.

Credit Suisse.

Good morning.

Operator, we're having some difficulties --.

Can you hear me better now?

Can you hear me?

Yes we can.

Could you please check it.

Oh hello, Charlie.

Hello, good morning.

Hey congratulations on a great quarter, sir.

Thanks, Charlie, appreciate it.

Hey I have two questions.

My first question, back in June I believe you opined that you thought that price competition in the insurance brokerage industry was, to use your word, and I'm going to just pronounce it maniacal?

Why do you have to write down everything I say, Charlie?

I apologize.

That's all right.

I said maniacal, yes.

Okay.

Could you comment on that?

Could you update your assessment with regard to --?

Yes I think in the large account sector that there's price wars going down that I think are maniacal, I think it's still taking place.

I think that as we look at various opportunities and I am told what people are charging to be able to win business, I think that profitability is hurt a great deal when that happens and people are not pricing at the value they're supposed to be giving.

And I still, if your question is is that still going on, the answer is yes.

How would you define large accounts?

Oh geez.

I would say that accounts that probably would give you in excess of $250,000 of commissions or fees.

My second question, my last question, sir.

You announced this enormous share repurchase program.

Over what period of time do you think that might be accomplished?

You know we really haven't defined that yet, Charlie.

I think you can figure a reasonable period of time, that's a lot of money, but it's something that we're going to announce when we're going to begin or when we're going to be -- we're going to end.

But what is exciting about it is that we're going to do it and that our Board feels excited about our future, as do we, and we've basically made the decision that the best place to invest our money is here.

Congratulations on a great quarter.

Thank you very much.

Thank you, sir.

Our next one is coming from Keith Walsh.

Please state your company, sir.

Hello, it's Keith at Citigroup, great quarter, Joe.

Hello Keith, how are you doing?

Good.

Good, thanks.

A couple questions, first if you could talk maybe just some commentary around the London market, how that's progressing?

And then secondly, at your Investor Day you had a really helpful analysis of your accounts by profitability, I just want to know how that's progressing across the rest of the organization and some timing as to when you'll be done with that?

Thanks.

Richard, do you want to talk about the London market?

I think --.

We're in London so we can talk about the London market.

My sense is that the market in London is much the same as before in certain -- Joe's already referred to it that for the catastrophe exposures as we've seen worldwide, there are enormous increase in rates in reductions and limits.

But in all other sectors we've seen rate reductions as we are around the world.

In terms of the issues of processes and systems, I don't think there's a market related issue, but just to remind you that we are committed to shaping our future work and we are committed to streamlining and improving our processes and systems and replacing systems that are sometimes several decades old.

And so we are certainly looking to improve our own efficiency.

Thanks, Richard.

The second part of your question had to do with profitability.

As you know, one of our initiatives that we announced during our Investor Day is to take a look at our client profitability and that's well under way.

And none of that, by the way, I think is manifested again as I said in the second quarter.

Pat Regan's in charge of that and I'll let Pat talk about that.

Thanks, Joe.

Yes, Keith we're continuing to progress with that.

We've got a phased approach across our businesses and we've got that started in certain areas of our business.

And that work's progressing well in terms of truly understanding the analysis and having some of those initial conversations.

In terms of completing that work, I think as we talked about in June it will take some time to fully roll that right across all of our businesses across the globe.

So that's not something we'll complete in 2006 and it certainly will extend into 2007.

I mean from that analysis it seems like you were showing in that one segment like half of your accounts losing money or a drain on profitability.

What we showed on the day, Keith, was an illustrative example and it wasn't even for one kind of business unit or anything, it was purely illustrative for one individual portfolio.

So I wouldn't extrapolate that across all of Willis and certainly the actual kind of shape of that graph will vary significantly business unit by business unit.

What we were intending to show was that, by doing this analysis and by understanding this kind of thing better, there are significant opportunities for the way we do business.

Thank you very much.

Thank you, sir.

Our next one is coming from Jay Gelb.

Please state your company, sir.

Lehman Brothers, good morning, Joe, how are you?

Hey Jay, how are you doing?

Great, thank you.

Joe, I was hoping you could talk about the sustainability of the 10% organic growth in the second quarter in terms of clearly the strength is coming from Global and I'm not sure how much you expect of that going forward to come from North America?

Well I think the sustainability is best defined by our track record over the last five years.

I can't remember a quarter when, in our peer group or the public brokers for that matter, when our organic growth hasn't been the best on a quarter-by-quarter basis.

I don't say that arrogantly, I say it more proudly.

And the best way to answer your question, this is not a 10% growth that doesn't fit with the trends of the past.

We concentrate a great deal here on sales.

As I said before, there's a sales culture here, we all sell.

We all get engaged in selling, I sell, everybody sells.

That's what we do here.

Client advocacy, the client advocacy model one-flag approach, which is everybody helping each other to do the best possible job for the client, our global approach, which is global resources delivered locally.

Those things, Jay, have been in this culture for several years now, this is nothing new.

And so what you're seeing is the constant and continuing maturation all of that.

So the sustainability of that I think is defined by the fact that that continues, the organic growth continues to I think lead the way and we're proud of that.

We're always looking to see how everybody else is doing because we're a competitive place, that's our scorecard.

We look at our retention levels a great deal, we look at our growth in new accounts, we look how the -- what we do, we announce every day on Good Morning Willis what our wins were.

And so there's a real live culture here, it's just not one of those blips where you have a quarter and it happens to be good.

I mean this is something we work at all the time, our training sessions, what we do with our calling programs, our global pipelines and the review of those pipelines, which are reviewed by me and all the management sitting around the table, is reviewed all the time.

So the sustainability has to do with a, this is not unusual and b, we're just hitting our stride.

Again, I don't say that arrogantly but it's something that we pride ourselves on here and it's something that everybody's expected to do.

Okay thank you for that.

And then secondly on the guidance, given the strong performance in the second quarter and what seems to be a positive outlook going forward, why didn't you raise the guidance for this year?

Well I didn't have guidance for number 1, I don't think I had guidance.

I mean the outlook in terms of organic growth, margin expansion --?

Well I didn't consider that guidance.

Guidance to me is you know what our revenue growth is going to be and what our earnings are going to be.

I basically said that we were going to modestly improve our margins, I said that we would be 59% or under it in our S&B and I continue to say that.

The reason you're not getting any more than that from me is a, I'm not a guidance business but I try to be helpful to you all, and secondly these are erratic markets.

As you heard everybody say, and I said it's a tale of two markets, in some places it's very, strong.

In most of the places this is a soft market.

And I'd have to be crazy in a soft market.

We don't even know what's going to happen with hurricanes yet, good, bad or indifferent from the pricing perspective.

So when you're in those kinds of environments and you really don't know what's going to come next, I've got to be silly and I'd be misleading to tell you what I thought was going to go on.

But I will tell you, whatever occurs, we're going to adjust and we're going to do the best we possibly can to continue to grow this business.

And hopefully what you're seeing is the beginning, as I said earlier in my conversation, of going back to what you always expected from Willis, without the interruption of 2005, and steady growing our margins, steadily growing our earnings per share and I feel confident in that.

But other than that, I'm not going to give you any more guidance because I just don't want to do that.

Understood.

Thanks very much.

Thank you.

Thank you, Jay.

Thank you, sir.

Our next one is coming from Mark [Surpin].

Please state your company, sir.

Hey it's Morgan Stanley, good morning.

Hi Mark, how are you doing?

I'm pretty good.

Pretty good.

During your Investor Day you guys talked about some reinsurance revenues that were pushed off into the second quarter.

I was hoping maybe if Pat could quantify what the revenue impact was on that business and give us a sense for when that business would be expected to recur in 2007?

I'll let Grahame Millwater, who is our Chairman of Reinsurance, kind of give you a broad overview and then Pat can add in his 2 cents or 6 cents or whatever he wants to add.

Yes I think what we talked about at the Investor Day was the fact that there was high volatility in the purchasing in the first quarter.

And we didn't know necessarily whether some of that purchasing would take place during the year because of the degree of restructuring as opposed to specific movement of business into the second quarter.

Frankly I'd love more than anybody to say that the reinsurance world is more predictable, consistent, but my comments of the past quarters continue.

It's very, very volatile, there's not only major restructuring going on, but there's also account specific restructuring going on.

Joe's tale of two markets is nowhere more pertinent than actually in the reinsurance world.

One of the things about the second quarter is we do have much of our U.S. property book focused in that quarter, so that's benefited to an extent.

But again I come back to the point, even in the U.S., it is very account specific and we continue to give the best advice to our clients, which is where we feel they should purchase more, we advise them that way, when we feel they're better retaining or we advise them that way.

So each quarter continues to be very unpredictable.

Certainly to an extent there was an expectation that some of the purchasing that was not done at the first of January, particularly in areas like Marine and Energy, may follow through during the year.

We're not seeing that to any great extent to be frank.

So to some extent the decisions that were made earlier in the year have pretty much stayed as they were earlier in the year.

But it is extremely volatile and unpredictable.

All right, I don't think I have anything to add to that.

Okay.

Okay so you wouldn't say that any deals you would normally book in the first quarter fell into the second quarter?

No.

I was talking specifically about purchasing the decisions that have not been made that may come later in the year, not about parts of that portfolio specifically moving.

Okay?

Yes.

Thank you.

Thank you.

Thank you, sir.

Our next one is coming from Adam Klauber.

Please state your company, sir.

Cochran Caronia Waller, thank you.

Good morning, Adam.

Good morning, Joe.

You mentioned that the new producers are coming on line and starting to contribute.

Could you give us maybe any more definition or color of how significant a factor that was in organic growth picking up, number 1?

And number 2 maybe if you can give us sort of the slope of the curve as far as where are these new producers on their ability to bring in revenue?

Or where do they start peaking out?

I mean is it still another 6 months, 9 months, 12 months until they really hit peak run rate?

I'm not going to give you a specific answer, but I'll give you a directional answer.

This organic growth is coming from all over the place.

I'm not going to tell you that you know half of it's coming from hires over the last year or year and a half, although I would say that the impact has been significant, but by no means is this occurring because of the producers.

I would tell you it's across-the-board.

Our retention levels are trending higher over the last six months than they did a year ago.

Our new business, as you saw, was at the 9% -- you know in the 9% range.

Certainly we did more recruiting in North America over the last year or so than we did elsewhere, but in International where our recruits were more steady and less robust in terms of a spike than North America, you can see that that's doing quite well.

U.K. and Ireland we were very pleased about and that's really come from a lot of grinding it out, a lot of phone work and a lot of calling on the new program that they have going on.

We have that going on all over the world.

And then you look at the practices that I pointed out to you that were coming along, so I would say that it was across-the-board but no real element one way or the other.

As it relates to the second part of your question and recruits specifically, I would say they're doing exactly what we thought they would do.

We told you that in the first year these things tend to be neutral on the accretion point of view, a little bit accretive in the second year and then in the third year the margins are more than decent.

And so we haven't gotten to the more than decent part yet, but we're starting to see some very good results as it relates to their ability to generate revenue.

So all positive.

Okay.

Thank you very much, Joe.

Thank you.

Thank you, sir.

Our next one is coming from Ann Maysek.

Please state your company.

Deutsche Bank Securities, good morning.

Good morning.

Can you give us some idea of, as of you're thinking about the share repurchases, what other financial metrics beyond the stock price the company is thinking about?

In other words, what kind of leverage targets might you have as you think about share repurchases, number 1?

And then number 2, can you shed any light on the debt deal cancellation that was done a month or so ago?

I'm just trying to put that in context for fixed income investors.

No as I said earlier in my comments, maybe you didn't hear it, that we pulled the bond deal simply because some other alternatives coincidentally came up just about the same time and we wanted to review them.

And we did not think that we should be reviewing alternatives and doing a bond deal at the same time so we did the prudent thing and we pulled it.

Nothing much more I can say about that, that's it, it's over and now you should just focus on the billion dollar share repurchase and I'll let Pat answer that part of your question.

And I won't give specific targets for debt to capital or anything, obviously as we think through the various criteria, we obviously bear in mind the interest coverage, debt to EBITDA ratios as well as debt to capital as part of our overall configurations, along with impacts on earnings per share etcetera.

Okay.

As we talked about earlier, we're thinking through the timing and the funding program and what that might look like.

Okay.

And my apologies on missing your commentary, I joined late.

Sorry about that, Joe.

Okay no problem.

We answer all questions.

I appreciate that.

Even twice.

Sometimes I need to hear it twice.

That's okay, me too.

Maybe sometimes I need to say it twice.

All right, thank you.

Thanks a lot, have a nice day.

All right, thanks.

Thank you.

Our next one is coming from Jon Balkind.

Please state your company.

Fox-Pitt, good morning everybody.

Hello Jon, how are you doing?

I'm doing all right, Joe.

A couple of quick questions, one, and I may have missed this as well, did you guys happen to quantify the costs in Q3 in the building sale gain?

And then two, the London and Continental European market seems to be in a state of flux, I think I heard JLT sort of talk about aggressive pricing, which we've been hearing for several quarters.

And then conversely you seem to have another large competitor that's losing share, at least on the Continent.

Can you talk a little bit about the two dynamics and how it's impacting your business?

Yes Jon, I'll take the first one.

We didn't quantify either the building gain or the size of the one-time expenses, we're finalizing that as we speak.

What I did say is that we expect a substantial gain on the sale of our building in the third quarter.

Great.

And then on the --.

Jon, the second part of your question, does it have to do with what I was talking about earlier about aggressive pricing?

No.

It just simply has to do with sort of the competitive landscape for business, not from a pricing standpoint, just how business is shifting.

I don't really care about the pricing dynamics, we can all speculate on that, but just how the competitive landscape is shifting, who's gaining net units of share versus the rate competition you're seeing.

Or the rate aspect of the market.

Well we can't speak for our competitors, but I can tell you from our point of view I think we're picking up share nicely.

That's something that we spend a lot of time talking about as you know but I don't want to get into where it's coming from and talking about our competitors.

But I can tell you from our point of view we're very pleased with our market share pickup, John.

I just don't want to get into where that's coming from.

Okay and can you give any color geographically on the continent in terms of where it's coming from?

I can tell you, as I said earlier, and I know this sounds like a cuff but I'm looking and thinking about lines of business where it's coming from and looking at across the board.

We're doing really well internationally.

You can't grow revenue internationally 6%, John, when you're looking at headwinds and rates in almost every country where we defined internationally.

So I'm really pleased.

I mean you've got headwinds there that are in the 2%, 3% range and so I'm really proud of Sarah Turvill and all of our people internationally.

In North America I'm looking at what we're doing there.

I think what I'm most proud of is our ability to be selective about the accounts we're going after and the way we're pricing the accounts.

And I know everybody says that they price accordingly and appropriately but I really mean it.

We have really, I think, good metrics in place to examine how we price.

And I think that helps a lot along with the accounts that we win.

As I said in the UK and retail and in our specialisms a lot of headwind in aerospace, for example -- lots of headwind in aerospace.

To me those rates as soft as they've been in a long time.

And we're winning a lot of new business.

And that business is coming not only from airlines but it's coming in general aviation business.

It's coming in product areas as well.

Our niche businesses are doing really well.

I mean it's just across the board.

I'm not cuffing you.

I can go on and on about every specific.

I'm really proud about Reinsurance.

As you know we don't disclose specifically but I did say double-digits but it was -- let's put it this way it was strong in the double-digit range.

And I'm proud of these people.

I mean they do a great job.

And we're picking up share.

Great thanks, Joe.

Thank you our next one is coming from Meyer Shields.

Please state your company.

Thanks, Stifel Nicolaus.

Good morning all.

Hi how are you doing?

I'm good, how are you?

Good thank you.

Are you still comfortable with the 50 million to 100 million in acquired revenues for 2006?

I am comfortable with 50 million to 100 million in 2006, yes.

Okay, good.

With regard to --.

[You count what] we've already done.

I'm sorry.

[You count what] we've already done.

I have 13 million year-to-date is that right?

Yes.

Okay switching gears you talked earlier about being the employer of choice and how morale is improving.

And I was wondering if you could I guess fill us in a little bit in terms of what metrics to look at and how that's tracking over the past couple of years?

It's tough to look at that metrics because the only metrics we use is our internal surveys which by the way we have one going on now.

We appreciate the fact and I'll tell you what that whole employer choice is about.

We really appreciate the fact that because we're so disciplined about what we do and we say that proudly, again not arrogantly, but proudly that our people work very hard.

And we appreciate that more than I can say.

There's a lot of accountability that goes on here, and with accountability comes hard work and all the things that go along with that, and we're trying to create an atmosphere that rewards that accountability and rewards that discipline.

And that's what that employer of choice is all about.

You know we have a client bill of rights.

We're in the process of developing an associate bill of rights.

We call our employee associates here.

We're looking at various and different ways of recognition.

But all of that at the end has to do with the way we service our clients because the three things that are most important to our clients is client advocacy, the ability to be able to advise our clients to make them feel that we know as much about the business as they do.

Getting their claims paid and issuing their policies and just the general servicing of business.

And that's hard and all about what we're doing is about looking at our businesses from a small account point of view and how we service that and how we've the ability to be efficient and profitable as it relates to that so our people have time freed up to be able to do the kinds of things that are fulfilling to them.

But by being fulfilling to them obviously do the best job for our clients.

That's why we talked about in our Investor Day being able to open locations and service centers so that we could administer the business that is not of value in the front, so our people in the front end of our branches can be able to take care of client needs for the things that are important, and the things that are not important to them but are important to the administrative process we do elsewhere.

That's all part of value.

It's part of efficiency and its part of being the employer of choice because it allows our people to do their job and service their clients.

And that's why we're looking at all of this and shaping our future is all about that.

So there isn't one initiative that is an outlier.

They're all part of the same process and that's all being developed and rolled out as we speak.

And you haven't seen even the manifestations of that yet.

So we believe all that is exciting and really will sustain and propel us for the future.

Okay that's very helpful and if I can throw in one more question, can you describe -- I'm thinking particularly the North American large account marketplace now, the overall mobility in terms of partial accounts splitting off where they used have one broker and now they have multiple?

Mario are you there?

Yes sure I'm happy to respond.

Mario Vitale who is the Head of North America.

Good morning everyone.

We're still seeing the same trends we reported on the last couple of quarters in the North American large account area.

There's still a great deal of activity.

In fact RFP activity has been picking up.

We're still seeing clients making a lot of difficult choices.

We're still seeing a lot of movement.

We are very happy with the share of that business that we're winning both on an RFP and a non-RFP basis and to add to your specific question we're still seeing a lot of the -- the trend continuing.

A lot of large account clients splitting their brokerage amount several different brokers and we see a lot of upside for us with that continuing.

Okay that's very helpful, thank you.

Thank you our next question is coming from Jon Hatcher.

Please state your company, sir?

Delaware Investments, good morning all.

Good morning Jon, how are you doing?

Very well, I appreciate it if you could elaborate more, in thinking about the timing and potential financing of your share buyback how important to your business or, as well as how committed are you to maintaining investment grade ratings for your senior debt?

Thank you.

Jon I think, as we said earlier, we're still finalizing kind of thinking through the timing and the funding options for the buyback program over time.

I think I probably won’t go into a lot more specifics now.

Obviously one of the criteria we'll think through in thinking about that is our credit ratios and our credit rating.

Can you speak to the importance of those ratings?

As you say I'm not going to get into a lot more specifics on that now.

Obviously it's important to us to maintain a solid credit rating but I won't get into any more specifics on that now.

Jon obviously our credit rating is something that's important to us and it's not something that we take lightly.

So as we consider funding mechanisms that will be obviously one of the prominent things that we consider.

All right so it could be in the form of something subordinate or a hybrid structure or something like that?

We don't know that's why we're being vague and we appreciate the fact that we're being vague.

But we haven't concluded yet what the funding mechanism is going to be.

But to your question and/or point ratings are very important and that's one of the considerations.

Okay?

All right, fair enough.

Thank you.

Sure.

Thank you, Jon.

Thank you, sir. [OPERATOR INSTRUCTIONS].

Any other questions?

Not at this time, sir.

Okay thank you very much everybody.

Have a great day.

Bye bye.