Willis Towers Watson PLC (WTW) 2006 Q4 法說會逐字稿

Welcome and thank you all for holding.

All lines have been placed on a listen-only mode until the question and answer portion of today's conference. [OPERATOR INSTRUCTIONS] This conference is being recorded.

If you do have any objections, please disconnect at this time.

And now I'd like to introduce Ms. Kerry Calaiaro.

Ma'am, you may begin.

Thank you and good morning and welcome to our earnings conference call and webcast at willis.com for the fourth 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 February 22nd, 2007, by calling 800-224-1285 or 1-402-220-3691 outside the U.S. with no pass code or by accessing the website.

Certainly if you have any questions after the call, my number is 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 Private Securities Litigation Reform Act of 1995.

Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated.

Additional information concerning risk factors that could cause such a difference can be found in the company's documents filed with the SEC from time to time.

I'll now turn the call over to Joe.

Welcome everybody and thank you for joining us today for our fourth quarter earnings call.

Joining me today are Grahame Millwater, the Chief Operating Officer of our company and Pat Regan, the Chief Financial Officer.

At the beginning of last year, we introduced our Shaping the Future initiatives which is the next chapter of our company.

And we laid out while discussing with you what the next chapter would be about, the expectations that we had for 2006.

We're proud to tell you today that we did everything we said we were going to do and we said we would have growth in organic revenue and we did.

We said we would have modest margin expansion and we did.

And a decrease in salary and benefits ratio and we did.

We generated these strong results throughout 2006 and what I would call and I think anyone would call soft market environment.

And by the way, we expect that to continue through 2007.

The execution of this Shaping the Future strategy is something that's very, very important to us.

The strategy is great.

We've laid it out.

Grahame Millwater, in a little while, will talk more about that strategy but we think it's all about execution.

And that execution is showing a great deal of momentum even though we're into the second year of that strategy and that execution.

So it's very, very early in the game.

The fourth quarter as well as the full year we think is a manifestation of that execution.

And as a continued vote of confidence in ourselves, we bought back $211 million of stock in 2006, leaving us with $789 million of the stock remaining in our $1 billion buyback authorization.

During 2006, S&P upgraded our credit rating and Fitch improved their outlook.

We're very, very proud of both of those results.

The financial highlights, earnings per share was $0.55 in the fourth quarter and for the year were $2.25, an increase of 18% a year over year compared with $1.90 last year.

Again, we're very pleased with that because it means a couple of things.

It means we're executing our strategy and it's coming off of the transition year of 2005 when the contingents left and we had to regroup and reorganize our business and figure out what our future's about.

So all that made us very, very proud that we're back on track again.

Our organic growth in commissions and fees which we think we really work hard at was again very good, 7% growth in the fourth quarter, 8% for the full year compared to 5% last year, with each business unit, North America, Global and our International units contributing to our success.

Adjusted operating margin was 23.5% for the fourth quarter, up from 17.6% last year, representing an underlying increase of almost 300 basis points.

As you know, we've looked at the increase in our margins very, very closely because they represent the health of our company and the growth of our company.

Adjusted operating margin was 22.7% for the full year, up from 21.2%, representing an underlying improvement of almost 200 basis points.

Underlying improvement in the ratio of salaries and benefits to revenues of almost 200 basis points for the quarter to 58.3% down from 63.3%.

Very important to us as well because in 2005 we did a lot of hiring.

Our S&B line obviously went higher.

We did that on a very selected basis but we also knew that we had to hire people.

We took advantage of the people that were available to us.

They were outstanding.

And so what you're seeing now is not only the revenue participation from those people but the washing through of the cost of those people at the same time, which is helping us expand our margins.

And it's doing exactly what it's supposed to do.

The underlying improvement of almost 250 basis points to 57.7% for the full year is down from 59.8%.

Again something that we worked toward.

It's something that was a goal of ours.

Let me talk a little bit about the businesses.

By the way, Grahame will get into-- or Pat will get into some more of the context of the underlying nature of those margins.

I want to talk about the businesses a little bit.

Our results around the world were strong, in large part because of the significant year-over-year improvement in organic growth in commissions and fees in our operating businesses in North America, Global and International.

In North America, organic growth in commissions and fees was 4% for the quarter but more importantly 7% for the full year compared to 5% last year.

Regionally we did very well in the Southeast, the Northeast and Central.

In our practices, very good performance in employee benefits and Willis Risk Solutions, both of which are very much a part of our Shaping the Future initiatives.

Employee benefits and growing that business is very prominent in one of the practices we want to grow.

And Willis Risk Solutions dealing with large accounts in our Global 550, which we call it, also had very good years.

Those things we're going to concentrate on very, very much in the next three or four years.

The past recruiting efforts are paying off in North America.

Seeing good benefits and good hires.

I will also add that our new management team headed by Don Bailey I think is doing a terrific job in looking at a lot of the things that we have to do in 2007 to move the ball.

And he's got a great team behind him.

And we're very pleased at what's going on in North America.

In our Global businesses, organic growth in commissions and fees was 9% in the fourth quarter, 8% for the full year 2006 compared to 5% last year.

Our Global Specialties, particularly strength in aerospace, energy, construction, and fin ex was very, very strong.

This is an area, again, that we're very proud of.

I want to keep saying all the areas we're very proud of, but we are.

Because this is a team sport.

Everybody's operating in unison with each other.

But this is a great example of when I talk about 2006 kind of coming out of the transition year of 2005 which made us adjust to a new environment without contingents.

A lot of our businesses in London had to change the way they conducted their business, had to look at their business differently.

And our people rose to the occasion I think magnificently.

Aerospace is a great example I think of an area that is doing particularly well for us, post impact of contingent commissions.

We restructured, changed, adjusted what was necessary in order to grow a business where contingents disappeared completely.

In addition, aerospace has been a pilot for executing several strategies as part of Shaping Our Future including client profitability.

So we're already seeing positive benefits from this execution and we're very proud of aerospace's performance.

Great example of how the world changes, what do you do?

You look back and say, let's see what the world is now and do something about it or continue to be disappointed that the world isn't what you were used to.

Great example.

I'm very proud of all of our people all over the world.

Aerospace is a great example.

Reinsurance was another area where we had good growth last year despite an environment that everybody would suggest was extremely volatile and volatile probably is a good word.

David Margrett succeeds Richard Bucknall.

We're very-- we want Rich-- wish Richard Bucknall very well.

He's a person that made a great contribution over the last 20 years to this company and we're very appreciative of what he's done.

David Margrett, who's been with us a couple of years, maybe even more, it sounds like-- seems like yesterday David, fills in and replaces Richard.

And we do think we'll do a terrific job in overseeing all those global businesses and what's going on in London.

In International, our organic growth in commissions and fees was 9% as well.

Outstanding in the soft market that we had, 8% for the full year compared to 4% the year before.

The strong performance was particularly noteworthy because most of the markets were even softer in some countries last year than they were generally speaking.

Like Australia is extremely soft and other parts of the world like that.

We continued to see good growth and again in employee benefits, which we think represents a great deal of impact in our future.

Emerging markets, like China, Russia, Brazil, Latin America, we had powerhouse markets in Spain and Italy.

Great businesses there.

We're really proud of our colleagues all around the world.

Effective January 1st, 2007, we merged the UK retail operation with International, not necessarily just for synergy, which we will get, but we have now two outstanding retail organizations, one in North America and one in International.

Both talk to each other, both feed off each other.

And UK is led by Allen Gribben.

Sarah Turvill was responsible for International.

They now merge.

Sarah Turvill's the Chairman of that operation.

Allen Gribben is the CEO.

Working very, very well.

A couple weeks ago they had a sales conference in London, which was outstanding and we're really excited about the future.

We had other growth areas that we identified as our growth targets.

We had particularly strong results in these growth areas.

We identified employee benefits, when we talked about Shaping the Future at our investor day and that was up handsomely.

We said we were going to create an energy business, which we have.

It's in full swing and working very well.

Where all of our energy resources and our operations around the world are working in unison together, construction, fin ex, aerospace, I can go on and on.

We continue to identify other areas that we want to build as well.

All part of the Shaping Our Future strategy which we are leveraging where we leverage our specialist expertise across the retail operations of this company so that every time we face a client, we know we're in a position to do the very best job and our ability to win.

And we also maintain while we're doing all that needless to say a more than watchful eye toward expenses and maximizing efficiencies.

I think it's really appropriate that you, every quarter, get filled in on where we are with the Shaping the Future initiatives because it's so integral to what we're doing in the future.

So I've asked Grahame Millwater, our new COO to give you a little bit more of an update on that.

Grahame?

Morning.

Morning.

Thank you Joe.

As you know, the Shaping Our Future strategy was first introduced to the investment community at our investor day in June last year.

This strategy is focused on executing a wide range of initiatives to insure the group delivers our stated objectives of breakout growth and margin improvement.

As part of this process, we've identified those segments that we really wish to drive both growth and margin.

And these segments have been selected by client size, industry specialism and chosen regions, countries, and cities.

We're not only giving the investment community a clear view of the direction that we're going, but we're also spending a lot of time giving our employees a clear picture of that direction.

Joe, Pat and I have recently completed detailed briefings to 5,000 of our employees in our major centers.

And this process will continue over the next couple of months to cover our entire employee population worldwide.

As a consequence of this and our relentless execution, we are building great momentum throughout the organization.

Now let me give you some specific highlights of some of these initiatives.

Firstly around driving our revenue, our client advocacy program continues around the world.

We're rolling out training to our client advocate population and we now have a formal accreditation program in place to make sure that people are actually passing this training.

Client profitability, we began with a pilot last year in our Global Specialty business.

And that pilot enhanced our revenue in the back half of 2006 by $9 million.

We're now rolling this program out globally and intend to get again specific targeted benefits as we do that.

We're also focusing on specific product and industry segments.

And that's come out through some of what Joe said earlier.

We've seen great growth in some of those targeted segments.

Employee benefits, energy, construction, financial institutions are just examples of where we're seeing the result of our efforts.

We're also looking at focus by client segmentation in terms of size.

Small commercial, middle market, global 500 are all segments that we're looking to drive aggressively globally.

And as a reflection of that, we've recently appointed leaders in each of those segments to drive those strategies across the world.

In reinsurance, we continue the process of evolving our reinsurance offering and business to deliver increased value in an increasingly volatile and sophisticated segment.

And you will continue to see us invest in this area in both our analytical capabilities and their capital market capabilities.

We're creating detailed business and growth plans for those areas that we have identified as growth segments.

And our recruitment policy and our acquisitions will increasingly be scientifically focused behind those plans.

Just turning to productivity and efficiency, in London we continue our program to remodel our London-based businesses.

We aligned our service organization from our Global operations to align with the actual business units themselves.

And this was really concentrating on aligning our service function with our client management function.

However, this not only served to do that, but we actually produced a saving of $4 million annualized saving of $4 million as we removed an entire layer of management.

We delivered our pilot operation of the new Eclipse system to our aerospace division on the first of December last year.

This was really focused on the front end.

We're intending to actually deliver the back office part of that on the first of April 2007.

This is the pilot and we're looking to actually roll that out to further areas in 2007.

Similarly, we continue our rollout of the Willis Client Service platform in North America.

This is the first U.S. wide technology platform and will lead to a considerable reduction in workload for our Client Service personnel over time.

We continue to implement our international retail efficiency review.

This has identified considerable benefits that we will begin to realize in 2007.

And on the back of that success, we're now also beginning a similar process in our North American retail businesses under the headline of Project Omni.

We've also begun a review of our retail office operating model looking at the optimum use of our regional servicing hubs to allow our retail branch offices to focus on sales and client management.

This review will not only look at our regional hubs, but will look at how our regional hubs interact with our offshore servicing center in Mumbai.

In Mumbai, we're also looking to increase our headcount by 20% by the end of 2007, which again is a reflection of the success of how we're using that center.

In terms of the Willis team and driving this change, we continue to make changes to the leadership to insure that we have the right people in the right place.

All our businesses have made significant changes in their leadership teams to enable them to drive the next stage of our growth and development.

Again, this is contributing to the enhanced sense of determination and momentum.

We're also following through on capturing the benefits from some of Shaping Our Future initiative expenses we captured in the third and fourth quarter of 2006 to enhance our efficiency.

For instance, nearly 500 positions have been identified as savings in that process.

The vast majority of these have now been spoken to and have potentially left the organization.

We also continue our Employer of Choice program which in 2007 is focused on improving the areas we identified following an employer attitude survey of our personnel worldwide in 2006.

So this activity, which is responding to those opinions, are focused in three main areas.

First the employee orientation, when people join to understand the Willis way of doing things; secondly, training; thirdly, performance management and career development.

Hopefully, all the above gives you a flavor of some of the substantial activity we're aggressively executing across the group to deliver our financial targets over the next five years.

And with that, I'll turn the call back to Joe.

Thank you Grahame.

We're going to do that every quarter and maybe later in the year, we might even do it on a longer basis so everybody can really get updated on everything we're doing.

Shaping the Future strategy is a very prominent part of our future.

And it touches everything we do in this company.

It is not just an initiative for North America or an initiative for London.

Everybody is participating from soup to nuts, technology, everything we're doing.

So it's very important you understand that.

But we understand more importantly that strategies are great, but execution is what it's all about.

And every quarter we expect to show the results of that execution.

So thank you Grahame.

Now, I'd like to turn it over to Pat Regan, our CFO, to review the financial results.

Pat.

Thank you Joe and good morning everyone.

I'll be discussing three topics today; underlying results for the quarter and the full year; capital management for 2006, and our thoughts for 2007.

And firstly, the two one-off items that affected our results in the quarter.

As we indicated last quarter, we've had additional one-time expenditures relating to the launch of our Shaping Our Future strategy.

In the fourth quarter, we recognized $17 million of initiative expenses, which primarily related to severance costs.

In total for the second half of 2006, we recognized $101 million relating to these initiatives.

Also we have increased our estimates and now believe that these expenditures should lead directly to annualized benefits of approximately $65 million pre-tax by 2009, up from our previous estimate of $60 million.

The majority of which will be direct cost savings.

Indeed we've created efficiencies as Grahame said that have led to the identification and elimination of nearly 500 positions, up from the 400 positions we previously announced in the third quarter.

Net of incremental value buildings, the annualized net benefit should be approximately $20 million in 2007, $30 million by 2008, and $45 million by 2009, representing significant initial steps towards our five-year margin target of 28%.

Secondly, we had a large one-off tax gain of $71 million or $0.45 per diluted share in the quarter.

This gain was primarily because we received complete clearance from the tax authorities on complex tax issues that were connected with the original acquisition structures set up at the time of the KKR buyout.

We had previously reserved against these items because of the ambiguities and the relevant tax laws.

However, now that we have received these tax clearances, these provisions are no longer required.

Excluding this one-off tax gain, our underlying tax rate for the year remained at approximately 30.5%.

I would expect the underlying tax rate to remain at about 31% in 2007.

Obviously somewhat impacted by the geographical mix of income.

Now let's run through the underlying financial results for the quarter and the year.

Excluding our Shaping Our Future costs and the tax credit, earnings for the quarter were $86 million or $0.55 per diluted share up from $55 million or $0.35 per diluted share for Q4 2005, a 57% increase.

For the full year 2006, excluding the built in sale gain, the Shaping Our Future spend, and the one-off tax gain, earnings were $355 million or $2.25 per diluted share up from $309 million or an 18% increase on the $1.90 per diluted share for 2005.

For the fourth quarter, total reported revenues were $621 million, up from $562 million a year ago, representing a 10% reported revenue growth.

Foreign currency translation increased reported revenues by 3%.

And as Joe mentioned earlier, organic revenue growth in commissions and fees was 7% for the quarter.

The 7% organic revenue growth reflects the continued strong contribution from each of our business units.

We've 9% growth in International, also 9% in Global and 4% in North America.

Organic revenue growth for the full year was 8%, our highest level since 2003.

Again we had strong contributions from each of our business units, with International at 8%, Global also at 8%, and North America at 7% for the full year.

Excluding the Shaping Our Future spend, the adjusted operating margin for the quarter was 23.5%, up from 17.6% in 2005.

The quarterly paid incentive compensation positively impacted that year-over-year comparison of the fourth quarter 2006 operating margin by approximately four percentage points compared to the fourth quarter 2005.

Excluding this and the reduction of market remediation, the underlying operating margin improved by approximately three percentage points in the quarter.

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

On a similar basis, salary and benefits for the quarter were $362 million or 58.3% of revenues compared with 63.3% a year ago.

Again after adjusting for the impacts of phasing of incentive compensation and market-derived income, the underlying S&B to revenue ratio decreased by approximately 200 basis points in the quarter.

Another way to look at these trends in productivity is to look at our revenue per FTE.

Net headcount at December 31, 2006, was just under 13,000, up 1% from year end 2005.

This translates to revenue per FTE of approximately $186,000 in 2006 compared to $174,000 in 2005, a productivity increase of approximately 7%.

Excluding the initiative costs, other operating expenses for the quarter were $96 million or 15.5% of revenues compared to 16.5% of revenues a year ago.

For the full year, excluding the gain on the building and spending on initiatives, the adjusted operating margin was 22.7%, up from 21.2% in 2005, an improvement of 150 basis points.

Again that improved margin was positively impacted by the increased net new business, accretion from the recent hires, and the lower pension costs.

On a similar basis, salary and benefits for the year were 57.7% of revenues in 2006 compared with 59.8% a year ago, with an underlying improvement of over 200 basis points.

Also on a similar basis, other operating expenses for the year were 17.1% of revenues compared to 16.6% in 2005.

Foreign currency translation had a negative impact of approximately $0.02 on earnings per share for the full year 2006 and a $0.02 positive impact in the fourth quarter.

Turning now to capital management, in summary we have a very healthy balance sheet.

We've generated strong cash flows, which we used to buy back our stock, create a pension surplus in the UK and continued to make acquisitions during the year.

Now let me cover that in a little more detail.

During the quarter we continued to buy back our stock and purchase $179 million or 4.5 million shares, with a total buyback for the year amounting to $211 million or just over 5 million shares.

We have $789 million remaining on our $1 billion buyback authorization.

We expect to complete that buyback over the next couple of years or sooner if possible.

The strength of our balance sheet allows us the ability to utilize additional leverage if we so desire to fund the buyback.

We also used $34 million of cash in the quarter to make additional contributions to our UK pension plan.

We have made total cash contributions of $268 million through our UK and U.S. pension plans in 2006.

In fact, our UK pension plan has moved from a deficit of $186 million at December 31, 2005, to a surplus of $166 million at December 31, 2006.

We believe this represents sensible proactive steps to address our defined benefit plans.

There was $288 million of cash and cash equivalents at December 31, 2006.

During the quarter, in addition to the buyback and pension funding, we used $37 million of cash for dividends and $26 million for acquisitions.

At December 31, 2006, total debt was $800 million, including a $200 million short-term draw down on our line of credit.

Total stockholders' equity was approximately $1.5 billion, giving a capitalization ratio of 35% at December 31, 2006.

We've closed a couple of small acquisitions in the quarter.

And during the whole of 2006, we spent a total of $98 million on acquisitions, including $25 million on the additional 5% in Gras Savoye we acquired in the third quarter.

We still intend to acquire approximately $50 to $100 million of revenue per year over the next five years, focused on targeted geographies and growth areas such as employee benefits.

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

Thank you Pat.

We wanted to give you-- well as much as information as we possibly could because we've got a lot of things going on here and we wanted to make sure you understood why we were pleased with the quarter, why we're pleased with the year.

It's all about a strategy.

The strategy's Shaping the Future.

It's all about executing on that strategy.

And the results every quarter should be an indication of how well we're doing in that execution.

We're optimistic about the future and our strategy going forward, especially in an environment that we considered to be soft and continue to be soft.

But we're optimistic about our ability to be able to manage through that and still continue to grow the things that we think are important; earnings per share, organic growth, margin expansion, decline in our ratio of salary and benefits to revenue.

And if we do that quarter in and quarter out, we'll continue to do the things that we said we were going to do.

Which leads to the future and what we hope to be looking like in 2010, which was leading our industry in organic revenue growth, our salary and benefits expenses as a total revenue to be below 54% and adjusted operating margin of 28% or better.

So every year modestly growing our margin until we get to our goal which has been laid out I think very, very clearly.

Each quarter is simply a checkpoint as to whether or not we're gaining on that strategy.

So we're well under way to Shaping Our Future and obviously we're very pleased with the quarter and very pleased with the year.

And we're very, very glad to answer any questions that you have.

Operator are you there?

Yes I am. [OPERATOR INSTRUCTIONS] Our first question from Keith Walsh with Citigroup.

Your line is open.

Good morning everyone.

Good morning Keith.

How are you?

I'm good.

Thanks a lot Joe.

Two questions.

First on the Florida legislation, what kind of impact do you think that's going to have on your reinsurance brokerage business?

And then secondly, employee benefits, maybe if you could just touch on little bit about the progress in growing that business and what kind of pricing trends we're seeing in the group disability specifically?

Thanks.

As far as Florida is concerned, we looked very, very closely at that impact.

And I will tell you that the impact is negligible on our business.

It's an area where we did a decent amount of business but when we reviewed the numbers, it was really negligible.

I can get into more if you want me to.

Peter Hearn is with us who runs our reinsurance operation, but it's negligible to answer your question.

As it relates to employee benefits, our employee benefit business is growing well into the double digits on a worldwide basis.

We created a practice which we're very proud of where we brought in a lot of people.

Middle market is still where we're concentrating but we're also concentrating on our multinational business.

And all of that's growing concurrently around the world.

The disability pricing that you make reference to Keith depends upon where we are and I'll tell you but that disability pricing has been stable a lot more on a worldwide basis.

But as you know, that's something that-- usually look at country by country.

Okay, thanks a lot Joe.

You're welcome.

Thank you.

Our next question from Chris Neczypor with Goldman Sachs.

Your line is open.

Good morning.

Good morning.

Joe, I wanted to get your viewpoint on the new supplemental compensation programs by Chubb and St. Paul.

We've heard some companies speak very positively about the programs.

But I've also heard some market participants basically refer to the programs as contingent commissions just wrapped up in a different box.

So I was hoping I might be able to get your opinion on what you think of the programs and what they might mean to Willis?

Well first of all I'm not sure that I know what they are.

We're trying to get some clarification from the Attorney General's office and from the Department of Insurance in New York to really understand what this is.

If this turns out to be a rose by any other name and it's a contingent, we're not interested.

If it turns out to be something else that's creative, that doesn't suggest a conflict of interest between ourselves and the client, and gives us the ability to go about our business in a way that we believe is the right way to do it, then certainly it's something we'll look at.

But I would tell you first of all, I don't understand it clearly yet.

I'd like clarification.

And secondly, if it is a contingent, then we're not going to take them.

But I have to understand what they are.

I'm not-- I ask people what they are and I get different opinions based upon how many people I talk to.

Okay, that's fair.

And then my second question, with what appears to be some sort of weakness in organic growth in the North American segment, I was hoping you might be able to give some color as to what's going on.

If that's rate or if that's competitors out bidding you for deals or what that might be?

No, I don't think-- thanks for the question.

I don't think it's weakness at all.

I want to quickly say that that's not weakness.

Well I just mean looking at the past couple quarters' organic growth rates and then a bit of a drop off, that's all.

Well this is a not a progressive business.

I would love to see every quarter progressively get better.

But that's not the way it works.

What we really learn-- like to look it is every year getting better than the last.

And I think what you have to hone on-- in on is the 7% versus the 4% year over year, which is really what we're pleased about.

I think in the fourth quarter there were timing issues and things of that nature.

But I don't-- I didn't see anything that would suggest to me that it's weakness or things that we have to worry about or we got outbid or rates, etc.

I do think that the bidding market out there remains fierce as I've always said.

There are some things that we could have done if we dropped our prices.

Things like that.

But I was very pleased with the quarter.

Okay, thanks.

Thank you.

Our next question comes from Jay Gelb with Lehman Brothers.

Your line is open.

Thanks.

Good morning.

Hi Jay.

Joe, in terms of the Shaping the Future expense benefits, the $20 million by 2007, how much of that do you think will drop to the bottom line this year?

Jay, hi it's Pat.

We expect really pretty much to capture all of that benefit as we go through 2007.

So we see the investments we made in Q3 and Q4 2006 really kind of directly benefiting our bottom line in '07/'08 and then further in '09.

Okay.

Great.

And then in terms of your guidance, I mean it seems perhaps conservative on the third-- in the third quarter release you said salary and benefits would be less than 59 and it actually came in below 58.

And that was through nine months.

So when you use the same tone in terms of modest margin expansion, with that being an improvement of 1.5 points for the full year '06 versus '05, I'm wondering if we might see something at least that high or at least that pace of improvement in 2007, including the $20 million of expense savings?

It's Joe, Jay.

First of all, I don't think we gave guidance.

We were just trying to give you direction.

That's different than guidance.

And the direction is as we believe it still is, is that modest margin improvement.

Look, we're doing we think all the right things.

But you got a soft market out there.

We got a lot of head wind.

And for me to sit here and say that it's going to be dramatic would be silly.

It's modest.

You know we're going to do everything we possibly can to be more than modest, but right now all I can tell you is, is that if we have modest improvement, we would be happy with that given the conditions.

But this is a place that always tries to have its reach exceed its grasp.

What can I tell you?

And so the differences are positive than from what we told you.

So that's a good thing.

But I think for now, when you look at the 28% where we want to be by 2010, that's a gradient that is not drastic.

It's not a hockey stick.

But one that has resolve to it.

One that's thoughtful.

And one that suggests that we have great execution on a week-by-week, quarter-by-quarter, year-by-year basis and we think that's good.

There will be times when it's better and if it-- that's the case then so be it.

But we always try to be better.

Okay and my next question is on the potential for levering up the balance sheet.

You mentioned that debt-to-capital is around 35% currently and you could increase that to accelerate the pace of the buyback.

To what level would you be comfortable levering up the balance sheet?

I'm not going to give you a level that's specific.

But obviously we have room to go higher.

We'd be very comfortable of being higher.

We're very pleased that S&P, when we told them our plans were to buy back more stock, increased our rating, which was good because it suggested to us that they're very comfortable with our operating procedures and the way we run the business.

So we don't really have a target Jay, but obviously we have some room in our balance sheet.

We're going to take advantage of it to buy back stock.

Thanks very much for the answers.

Thank you.

Thank you.

Our next question from Adam Klauber with Cochran Caronia Waller.

Good morning.

Thank you.

Hi Adam.

Could you talk about the rate environment in the U.S. and in London and what type of impact that's had on your business in the last couple months?

The rate impact is as I said, it continues to be soft.

In some areas, it continues to be drastic like aerospace for example, the rates are down 20%, some times higher.

But across the board, they're soft.

If I was to throw a number out, it's certainly 5 to 10%, some places more, some places a little less, but they're definitely soft and even trending more so.

As it relates to our business, I think in the fourth quarter and all of last year, you were talking about an impact of maybe 1% across the board, not much more than that.

But that 1% is a net, not a gross number.

Okay and one follow-up.

How's the-- how's your U.S. middle market business doing?

Has it grown it faster or a slower rate than the overall unit?

And what initiatives do you have going forward to continue to get that growing?

I will tell you that our middle market is something we concentrate on.

We have a middle market strategy.

We-- that represents what I think for us in North America to be one of the real components of our growth in the future.

Don Bailey is here, who is the CEO of North America and I'll let him chime in.

Don?

Yes, the middle market as you know has been a huge part of our success historically.

It's a significant part of our business in North America.

We've made substantial enhancements to that over the past several months and our focus going forward very much is an industry specific focus.

So you'll see us going forward, capitalizing on some of these very, very strong industry-specific initiatives that we have in place to date beyond healthcare, beyond construction, beyond financial institutions and getting into other very specific industry niches where we can grow and expand that business as well.

Okay?

Thank you very much.

Thank you.

Thank you.

Our next question from Meyer Shields.

Thanks.

Good morning.

Morning.

Joe, can I start with you?

Can I press you for a little more detail on why you don't see Florida's recent changes having material impact?

I'm going to ask Peter Hearn to answer that question.

Peter Hearn is responsible for our reinsurance business.

Peter?

In any situation such as this, there's both threat and opportunity that's created by reform such as this.

And for whatever minor impact we see on our numbers in Florida, we also see an equal amount of opportunity given some of the aspects of how the Florida hurricane CAT fund is expanded and what threats that creates for clients relative to credit risk relative to cash flow relative to assessment risk.

So while there is an initial impact from the legislation, in the layers that we are involved with there is less impact and there's also opportunity.

Okay, that's helpful.

Also, if I can defer to Pat really quickly, I know this is simplistic, but given the fact that the dollar weakened against the pound, I would have thought that you'd have a net negative impact from foreign exchange in the quarter as opposed to a positive impact.

What am I missing?

There's a few moving parts in that Meyer.

One is obviously we benefit from our non-dollar generated income translated into dollars.

Also against that within our London businesses, we have a small negative impact.

But we do, against both of those, we do have a moderate kind of hedging program we carry out to try and-- really to try and offset big swings in the FX.

So there's some level of offset against that.

Okay, so on a net basis, then it was the hedging in the quarter that made the difference?

The hedging in the quarter made us a small gain, yes.

Okay, thank you.

Thank you.

Okay.

Thank you.

Our next question from David Small with Bear, Stearns.

Your line is open.

Yes, good morning.

We've heard from some that in the London market brokers are starting to get compensated for some of the services that they historically had provided for the underwriters.

Could you just give-- maybe comment on that trend and are you participating in that?

And is that going to impact revenue in '07?

I'm going to let David Margrett, who run's our London businesses for us, comment on that.

David?

We're not seeing a huge change in the way in which we seem to be compensated.

We've always stated that where we do specifically represent underwriters in a particular way and are transparent with our clients, we would expect to get paid for it.

But our remuneration is upfront, clear to our clients and declared in each and every transaction.

So our commission earnings, yes we're expecting those to go up.

But we are seeing some people trying to get paid for other services which we consider to be part and parcel of the transaction with a client and inappropriate.

And just a second question would be in terms of competition for talent, has that changed at all recently?

And I guess that-- I guess the question there is that are you still seeing a lot of people moving around?

And do you expect that to continue?

The competition for talent I believe will be something that is a label in this business.

I don't think that'll ever go away.

It's one of the components of growth.

I will say though in the last quarter, it seems to have died down a little bit but that's on a relative basis.

I said about a year ago that I thought it was maniacal what people were paying for this talent.

I still think that there's a level of activity that will always be a part of this business.

The last quarter it seemed to slow down a little bit.

Great.

Thank you very much.

You're welcome.

Thank you.

Our next question from Brian Meredith with UBS.

Your line is open.

Yes, good morning Joe.

Hi Brian.

How are you doing?

Good.

Hey a couple of just quick questions here and then one more business focus.

First on the short-term debt, I assume that was just funding for the accelerated share repurchase and should we expect that to start trending down here in the next couple of quarters as cash flow comes in?

Yes.

Okay.

Second question Joe, historically you had provided us with some figures on price versus new business and how that fits into the components of organic revenue growth.

Do you have those figures?

Yes, I do.

What do you want to know?

Just rate versus net new business and what was the components of the organic revenue growth?

Well what we had was is the components of our growth were basically all in.

Rate had very little effect.

I said this earlier on our business.

Usually what I tell you is, is our growth was X minus the rate and that gives you the net.

That you look at the growth of 8%.

It was very little impact from rate.

So the rate was about zero.

I said earlier about 1% at most.

Okay.

That's a moving target.

Okay, great.

Then quickly, tax rate for 2007?

I expect it to be somewhere around 31%.

It's a similar kind of level to '06 but around 31%.

That's 31%.

And then last question Joe, can you talk a little bit about your large account business?

I mean Aon has done some I guess reorganization recently to really focus on that business.

I know Marsh wants to keep their dominant position there.

How competitive is that business and what is your kind of view towards the large account business?

Well first of all and we talk about dependent upon business, I don't know that we're dependent upon anything.

If you look at our Shaping the Future initiatives, what it basically calls for is a direct assault if you will on the Global 550.

We hired Carla D'Andre a couple weeks ago or month ago from Aon to lead that up for us.

That's a big strategic initiative in Shaping the Future.

Our large accounts business is a big Shaping the Future initiative.

The middle market and the small commercial business are all part of those initiatives.

In the 550, we truly believe that our strategy as we said in Shaping the Future is to take those accounts and look at those accounts against where they are located and are specialisms or things-- the things that we are specialists at.

And attack those accounts from the things that we're good at like aerospace and construction and energy and oil, those things, rather than say Global 500 be all things to all people.

That's not what we're doing.

So the crux of Shaping the Future is to identify the need, look at our specialists or specialisms, the things that we're good at, the things that we believe anybody would say, they're really good at that and approach our clients from the point of view of servicing those needs that way, by country, by client, by need against the specialism.

Great.

Thank you.

You're welcome.

Thank you.

Our next question from Charlie Gates with Credit Suisse.

Your line is open.

Hi.

Hi Charlie.

My first question.

In one of your earlier answers, you referred to maniacal competition for talent.

I had thought that when you had used that term it referred to pricing among insurance brokers.

Could you elaborate on how you see that competition among insurance brokers from a pricing standpoint?

I think that I made reference to that maniacal both in terms of the competition for brokers and pricing as well.

You're right.

I think that continues.

I will say that lately it doesn't seem to be as severe as it was.

It's almost as if people are looking at the cost of talent, the cost of recruiting, the cost of giving away the business against profitability and studying the profitability and saying, I think, I'm making this up but, looking more at the profitability of clients and what things cost seems to be taking center stage over some of the issues that I saw last year.

So there seems to be more sobriety than there seems to be the maniacal behavior of a year ago.

So I think things have become more sober in the quest for maybe greater profitability.

Nobody's told me this.

But it kind of seems that you can't do all those things and expect to grow your business properly.

My second question.

I've been on the entire call and I know the question was asked, that is that organic growth had slowed from 7% in North America in the third quarter to 4% in the fourth quarter.

But if somebody asked me why or what was the explanation, someone made reference to timing differences.

But what was the answer?

That was the answer.

I mean--

What would be an example of the--

It's not a progressive business Charlie, you know that.

You don't have a progression quarter after quarter.

We look at the entire year and we're very happy with the year.

My only other question, as you look at the list of the five highest paid employees of company 2005, three of those people, to the best of my knowledge, are no longer associated with the company.

Now, it's my understanding that your contract, to the best of my knowledge, runs up next year or expires.

How should we look at corporate governance?

First of all the people you're making reference to were Tom Colraine and Richard Bucknall were two of those people.

They were co-Chief Operating Officers.

They decided-- Richard decided to retire and Tom's decided to do other things, both all very amicable, very, very helpful in the first couple chapters of loss.

And like any business, you go to different chapters, you get to the next level and you try to arrange the people to fit that chapter.

The other one was Mario Vitale.

He decided to go to the underwriting side of the business, which is where he grew up.

Those things are all coincident with where their decisions are in their life and where the company is.

And I think we wish them all well.

But I think that the company hasn't missed a beat because everybody that we replaced those people with had been with the company a very part of our culture.

We didn't have to go to the outside.

So it is a continuing here and a stream.

As far as I'm concerned, my contract goes till the end of-- or October of 2008.

But you need to know, I don't look at contracts.

Contracts to me are meaningless.

I look at the passion that I feel in my heart Charlie.

It's the way I run a business.

You know that.

I get a kick out of people when they tell me they're going to retire in two years or four years or five years.

And then they-- I ask them, do you love what you do?

And they say yes, yes.

I love what I do and then I tell them if you love what you do, how could predict when your heart runs out?

I find that amazing.

I don't look at contracts.

I'm enjoying what we're doing.

I'm enjoying chapter three.

The governance of this business is in great hands.

This is a, I believe, a very tight, well-run business.

The people that are in charge of the business today are very schooled in Willis ways and I couldn't be happier.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question from Meyer Shields with Stifel Nicolaus.

Your line is open.

Thanks.

I had a couple quick follow-ups.

First of all, can you talk about whether there have been any trend in client receptivity to splitting accounts between brokers?

That was a big issue last year.

Haven't really talked about it in this quarter.

I don't think that that's changed much.

I think most clients like to cover themselves.

They like to think that they have different advisors.

That's fine with us.

When you have market share that's not as big as some of our competitors, we'll be very happy to take any piece of the business that we're allowed to take.

It gives us an opportunity to get in the door, show them how good we are.

So yes, I think the trend continues to be splitting brokers.

And for us, that's good.

Okay.

And with regard to the commission and fee split, in the soft market, I guess the theory out there is that fees are a little bit less volatile than commission based business as rates decrease.

Are you seeing that?

And is 65-35 still the right split?

I think our split's about-- still about that.

I'd like the fees to be greater as you've heard me say in the past but not greater because it's a fee but greater because we do large account business or Global 550 business more, not as a result of the fee.

But I haven't really seen that it has affected our business.

Obviously you're growing at 8% revenue growth, there's not a great effect in our business because of that split.

But I would like to see it more 60-40 if you will than 65-35.

Okay.

Thank you.

Okay.

Thank you.

And I'm showing no further questions at this time.

Great.

Thank you very much everybody.

Thank you.

This does conclude today's conference.

Thank you for your participation and you may disconnect at this time.