Willis Towers Watson PLC (WTW) 2007 Q1 法說會逐字稿

Welcome and thank you for standing by.

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

(OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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

Now we would like to introduce your host for today's call, Ms.

Kerry Calaiaro.

You may begin.

Thank you and good morning everyone.

And welcome to our earnings conference call and webcast at willis.com for the first quarter 2007.

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

This call will be available by replay starting at approximately 10 AM this morning ending May 10, 2007 at 11 PM Eastern time by calling 866-508-6479 or 1-203-369-1901 outside the U.S.

with no pass code or by accessing the website.

Certainly if you have any questions after the call send me an e-mail or call me at 212-837-0880.

Before 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 Securities and Exchange Commission from time to time.

Thank you.

And I will now turn the call over to Joe.

Welcome and thank you for joining us today for our first-quarter earnings call.

Joining me today are Grahame Millwater, our CEO, and Pat Regan, our CFO.

Well, it was a nice start to 2007.

As you know, we are in the midst of executing relentlessly our Shaping the Future strategy and I'm very, very pleased that the first quarter is an example of our execution of that strategy.

I'm very, very proud of our people around the world being so disciplined in executing that strategy and it's really exciting times for Willis.

Our team is in place.

We're all going in the same direction and this is really a good day because it makes us all very proud to be in business together.

Our financial highlights as you have already seen on an earnings basis, earnings per diluted share rose 25% to $1.10; 6% organic growth in commissions and fees; and each business unit, North America, global and international, contributed to our success.

The full 6% organic growth came from net new business and retention which we were again very, very happy with although rates continued to decline in the first quarter and we certainly expect that will continue as you've been told by many people before me.

This impact was offset by changes in other market factors such as higher commission rates and changes in limits and retentions and higher insured values.

Our operating margin was 32.2% for the first quarter, nearly 2% higher from a year ago.

Our closely monitored ratios of salaries and benefits expense to revenue declined down to 51% and we said that over the years in our Shaping the Future initiatives and estimates, that we would be -- continue to get that salary benefit revenue ratio down.

And that comes through a lot of disciplines that we have in place and hiring practices that we have in place and just running a good business.

We issued, as you know, $600 million of 10-year senior notes at very favorable terms, 6.2%, with the rating agencies affirming our investment-grade ratings.

We are really proud of that because we were able to take that obviously and buy shares back while our ratings continued to stay high.

And as a continued vote of confidence, we began, as I said, we bought back 457 million of our stock in the first quarter 2007 under an accelerated share repurchase program.

And I've asked Pat Regan in his presentation to explain to you what that is because I think it is somewhat misunderstood the way we executed that.

Including dividends and share repurchases, we've now returned and we are very, very proud of this, $1.9 billion in capital to shareholders since 2003.

And that is what we try to do is obviously run our business to return that.

I think is interesting that since 2003 we've returned $1.9 billion to our shareholders and I remember back in 2000 when I was hired, KKR bought this company for $1.6 billion in total.

So it it's an interesting statistic to look back on.

Now our growth in North America global and international I want to talk about it just a little bit.

Our results were strong because of the contribution of almost every business unit, operating in a soft rating environment.

You've got to know that we pride ourselves in operating and growing in all environments.

Eighteen out of twenty years, the market environments historically have been soft.

So if you grow a business and build the business based upon hard markets, you are never going to win or succeed in this business.

So you have to be able to navigate most of the time with wind at your face.

That is a historical fact.

So what we try to do is to set up the disciplines, the executions, the strategies and everything we do especially working together to operate in soft market environments.

We expect them.

And when hard markets come, it's a bonus.

So we set our business up to operate in that environment.

Competition, capacity, strong balance sheets are the key factors I think driving property reinsurance prices and increasing competition in other lines.

Let me talk about North America.

We are proud of all of our areas and proud of North America; organic growth and commissions and fees was up 6% for the first quarter 2007.

It was up 4% in the fourth quarter of 2006 and I said to everybody that we thought that that was timing and that we'd continue to grow and are very, very happy and proud of our people in North America.

Regionally we did very well, New York, Southeast, the West, but every quarter seems to be another region, another practice that chips in and that is what teams are all about.

Our practices did very well.

I always hate to point some out but I like to point a few out so that they could be recognized, programs, employee benefits especially.

Employee benefits is something that we are striving to work very, very hard to improve.

Our past recruiting efforts are paying off.

We said that it would take 18 months to two years for them to be fully accretive and I think you are starting to see the benefits from those good hires that we made 18 months to two years ago and they are becoming very accretive.

So we are very, very happy with that.

And I will tell you we have great management in place in North America as well.

They operate as a team.

We like to say that Willis across the globe is a team sport and we are very passionate about that.

So my hat is off to North America.

Global, again, I know this is going to sound like a routine.

I'm going to do this all over the place but our global businesses are doing especially well.

Now global comprises -- our global specialisms and also the insurance -- our UK and Ireland business, retail business is now in the international division.

In our global business, the organic growth in commissions and fees was 3% for the first quarter of 2007, and our global specialties, particularly strengthened marine, energy, [finance], niche businesses, construction, I can go on and on.

And even think our aerospace business did very, very well given the fact that they are really looking down the gun barrel of very, very soft rates.

I'm proud of them.

I'm proud of all of our people and in specialisms and I congratulate them.

They are the best in the business and I couldn't be more proud.

And the reinsurance growth was modest simply due to all the things you already know.

I mean it is a very volatile business now.

The rates have declined; retentions are higher, lots of things going on.

But I think even our reinsurance people did a very, very good job considering everything that is going on.

You've got -- no pun intended -- but a perfect storm in the reinsurance area but when we take global and reinsurance and we put all that together, just outstanding growth.

And now I get to international which comprises all of our retail businesses outside of North America and a lot of countries.

And when you can grow 8% in the first quarter of 2007 compared to 5% a year ago and 8% in the last quarter of 2006, when you've got declining rates all over the place and you are dealing with so many different countries, it just goes to show you the team atmosphere that exists in this company and this is a great example of what I'm talking about.

We see good growth in Europe; we see good growth in Latin America; we see good growth in Asia; all across the board.

So the report is good and we are very, very happy and I want to thank all of my colleagues all over the world for just a terrific contribution.

The discipline, the hard work, the ability to understand that we want to operate in all market environments and to operate together as a team is just terrific.

Now let me turn the call over to our CEO, Grahame Millwater, to update you now on Shaping the Future and how it is progressing.

Mr.

Millwater.

Thank you, Joe.

As Joe has outlined, we continue to execute on our Shaping Our Future strategy that was initiated in the middle of last year.

As we have outlined in previous calls, this is a whole series of interconnected initiatives to drive both growth and margin improvement.

We began this process in the middle of 2006 and we can already see the benefit coming through in both increased efficiency and enhanced revenue.

This stimulus to revenue and productivity is obviously particularly important in the tough market environment we find ourselves in as we enter 2007.

Now rather than go over all the initiatives that I've highlighted in previous calls, let me give you a flavor of how some of the deliverables of the program are actually manifesting themselves.

Starting in the sort of productivity and efficiency area, we continue to drive our projects in the global businesses of fundamentally changing the way we work in London platform.

This involves a program of systematic change to our organization, our process and our technology and our senses of London, (inaudible) and Mumbai.

A key milestone in this quarter has been the delivery of the pilot eclipse technology, our new end-to-end process for our London-based businesses.

This was successfully implemented in aerospace, our pilot division, on the April 2 this year and will now be systematically rolled out over the other divisions in London in the next two years.

Just to give you a flavor of what this means, it has eliminated certain functions completely and reduced our premium billing cycle from 30 days to 1 day and so as we roll this out, the benefit both in terms of productivity and in terms of service will be substantial.

We are also seeing $4 million worth of annualized benefit in 2007 from just the organizational realignment we made in this project.

On the back of this success in London, we are not initiating a similar process for our global retail network around the world.

In the meantime in international retail, our tactical initiative to improve the cost base, known as Avanza, has already delivered $1.8 million worth of net benefit in the first quarter.

We continue to roll out our first U.S.-wide technology platform known as the Willis Client Service Platform, and this will over time allow us to reduce workload for our client service functions across the U.S.

We've also initiated an all embracing review of our corporate functions.

As our business vision develops, we need an efficient functional organization to support it with different focuses and different skills.

We've already put new leaders of our many of our functions into place including a new general counsel, a new head of HR, and a new head of marketing and communications.

And we will work with all these leaders to drive this initiative.

Finally, 80% of the headcount reduction we initiated in third and fourth quarters last year as part of our restructuring charge is complete.

This is a key factor in allowing us to continue to invest in the key strategic areas we've identified but yet further efficiency and also critically to drive continued revenue growth.

Now just turning to that revenue growth, as outland previously, our plan to enhance revenue growth focuses on key industry segments and regions.

We continue to invest in areas such as employee benefits, construction, energy, financial institutions, reinsurance, as well as key cities in the U.S.

and countries internationally.

This investment continues to drive significant growth in our chosen areas, again particular important in the current market environment.

We've appointed leaders in the first quarter for the global 500, the middle market and the small commercial sectors to drive these segments globally and we continued to make disinvestment and also deliver our margin improvement largely due to the benefits flowing through from the simultaneous efficiency improvements I have just identified.

We also continue to improve our overall sales and client management processes.

Again, let me just give you a few examples.

Our sales process.

We have a plan for systematic rollout of our chosen sales process and affiliated technology support driven by the sales leaders we've now put into place in all our businesses.

Client advocacy.

We continue to roll out the training and there's a formal assessment of each of our individual client advocacy skills post the training.

Let me just turn to client profitability.

After delivering to date $12 million worth of annualized profit improvement in our global businesses through a regimented client profitability program, we are now rolling this out to the retail network on the back of this success.

But just to conclude, that hopefully gives you a flavor of the activities and associated deliverables of the Shaping Our Future strategy.

It is a continual rolling process of efficiency and revenue enhancing initiatives which are driving us toward our vision of the insurance broker for the modern world.

While some of this activity is laying the foundation for long-term change, you can also see we are driving these activities that will deliver immediate benefits in 2007.

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

Thanks, Grahame.

Now let me turn over to Pat Regan, our Chief Financial Officer, who will go through the financial results.

Pat?

Thank you, Joe, and good morning everyone.

Today I will talk to our results for the quarter and our recent capital management activity.

Firstly the financial results.

Earnings for the quarter were $169 million, up from $140 million for Q1 2006.

This equates to earnings per diluted share of $1.10 for the first quarter of 2007, a 25% increase on the $0.88 per diluted share for Q1 2006.

Of this increase, foreign exchange positively contributed $0.04, primarily arising as we closed down some existing currency contracts.

On revenue, for the first quarter 2007, total reported revenues were $739 million, up from $671 million a year ago representing a 10% growth in reported revenue.

Foreign currency translation increased reported revenues by 3% and net acquisitions increased reported revenues by 1%.

As Joe mentioned earlier, organic revenue growth in the commissions and fees was 6% for the quarter.

The 6% organic revenue growth reflected the continued strong contribution from each of our business units with 8% growth in international; 3% in global; and 6% in North America.

As you are aware, we merged the UK retail business into international and out of global from January 1 this year.

For ease of comparison, the restated organic growth numbers for the full-year 2006 now become international at 7% and global at 10%.

Kerry can provide you with the full quarterly splits afterwards.

The operating margin for the quarter was 32.2%, up from 30.4% in 2006, an improvement of 180 basis points.

This improved margin was achieved against a backdrop of a very difficult trading environment with softness in most of the markets in which we operate.

Overall the improved margin was driven by net benefits delivered by the Shaping Our Future investments we made in the third and fourth quarters of 2006, accretion from our recent hires, and by lower pension costs.

These productivity improvements are somewhat offset by continued investment in some targeted areas.

These include but are not limited to energy, construction, marine, financial institutions, [niche] technology in London, that Graham referred to, reinsurance analytics and employee benefits.

Salaries and benefits expenses for the quarter were $377 million or 51% of revenues compared to 51.9% a year ago.

The 90 basis points of improvement again reflects good cost control, the benefits from our initiatives and lower pension costs somewhat offset by those continued investments for the future.

Net headcount at 31 March 2007 was just over 13,000, relatively unchanged since the year end.

This represents the net of our continued productivity improvements and headcount efficiencies against those continued to target investments in growth areas.

This translates to revenues per FTE of approximately $189,000 for the 12 months ended March 31, 2007, compared to $177,000 for the same period 2006, a productivity increase of approximately 7%.

Other operating expenses for the quarter were $111 million, or 15% of revenues compared to 15.6% of revenues a year ago.

Again, this demonstrates the benefits of our continued focus on costs.

Other operating expenses included $3 million of rent on the leaseback of our London building which is a direct offset against the $3 million gain on disposal you see in the income statement for the quarter.

Other operating expenses in the quarter were about $7 million below their run rate for the rest of the year as the incremental cost of our new buildings will not start until the second quarter 2007.

As I mentioned earlier, foreign currency translation had a positive impact of approximately $0.04 on earnings per share in the quarter.

Given the current dollar rate against Sterling and the hedging gains we achieved last year, I would expect that for the full year we should see a small foreign exchange decline compared to 2006.

Overall FX had an immaterial impact on the operating margin in the first quarter 2007.

Our underlying tax rate for the quarter was approximately 30.5%.

I would expect the underlying tax rate to remain at about that level throughout 2007.

Obviously this is somewhat impacted by the geographical mix of income.

We have also completed our review of the implications of adopting FIN 48 accounting for uncertain tax positions and there are no material adjustments to report.

Earnings from associates [increased] by $5 million in the quarter due to higher profits at Gras Savoye and our higher ownership percentage of Gras Savoye.

Minority interest increased by $1 million in the quarter reflecting our recently acquired 51% ownership in Gras Savoye Re.

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

We continue to generate strong cash flows which allows us great flexibility in our capital management plans.

During the quarter, we successfully completed a bond issue, the proceeds of which allowed us to buy back our stock and eliminate our short-term borrowings while at the same time maintaining our rating and our financial flexibility.

Let me cover this [slide] in a little bit more detail.

In the quarter we announced a $600 million bond issue.

The issue was a great success achieving an excellent interest rate of just 6.2%.

And as Joe mentioned earlier, the rating agencies affirmed our investment-grade status.

Indeed as you remember, Standard & Poor's have actually upgraded us to BBB in full contemplation of this bond offering.

The proceeds have been used to make additional share buybacks and a full repayment of our debt drawdown on our revolving credit facility.

Going forward we should still maintain very strong credit ratios.

Out debt to EBITDA ratio which should return to about [1.5] times over the next year or so and interest coverage should remain close to double digit throughout.

During the quarter, we continued our buyback program and purchased $457 million of shares or 11.5 million shares under our accelerated repurchase plan.

This brings our total buyback to $668 million since September of last year.

We now have $332 million remaining on our $1 billion buyback authorization which we expect to complete by the end of 2008.

Just by way of note, the way the mechanics of an ASR work, at quarter end, a 10 million share short position shows up so this created by JPMorgan as we purchase shares from them on that date.

This will decline as they cover that position over the next few months.

There was $253 million of cash and cash equivalents at March 31, 2007 and during the quarter we used $36 million of cash for dividends.

Total debt was $1.2 billion and total stockholders equity was approximately $1.1 billion.

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

Thank you.

So so far in 2007, we've seen diluted earnings per share growth of 25% for the quarter to $1.10; organic growth was 6%; margin expanded to 32.2%; and salary benefit expense to revenues declined to 51%, all the trends that we intended to achieve, we achieved.

We are optimistic about the future and our strategy going forward despite the fact that we are in a softening market and will probably get softer.

But we think we can still continue to grow and continue to expand because after all as I said earlier, that is the whole point.

The point is to be able to grow despite the market environment.

We fully expect to continue our organic commissions and fees growth.

We expect modest operating margin expansion in 2007 compared to last year and we expect earnings per share to continue to grow.

We still expect to deliver breakout financial performance due to the Shaping Our Future initiatives by 2010, with financial targets that are industry leading organic revenue growth; salary and benefit expenses as a percentage of total revenue to be below 54%; and adjusted operating margin of 28% or better.

We are well underway as this quarter indicates with our Shaping the Strategy and achieving those goals.

Our profitable growth will be driven by our sales culture and the continued successful execution of our Shaping the Future strategy but most notably I think we have great people, made even greater because they work together as a team and that is the hallmark of this company.

I would be glad to take any questions that you have.

Thank you (OPERATOR INSTRUCTIONS) Jay Gelb, Lehman Brothers.

Thanks and good morning.

Joe, I was hoping you could comment on the market for talent as well as a pace of requests for proposals among clients in the marketplace.

I think talent is -- you know, our strategy is to be selective about the talent that we recruit.

But more importantly, not only to find good people with what they do, Jay, but people who fit into this culture.

This is a very different culture that we are basically building here that not only suggests that people should be very good at what they do but they fit in by fitting in by working with everybody else.

That is really important to the culture.

In this case two people need to feel like it is 20, like the result is 20 people.

So as a result we believe that not only are we selective about the talent that we bring in but we're also very selective about their ability to understand that this is a different place and we are asking people to work with each other.

We think there are plenty people out there that would like to join us but again we are very selective given those criteria.

Okay.

And then on the request for proposals directionally?

Directionally the request for proposals are not an issue.

We could be doing RFPs almost every day.

The issue is being selective about the RFPs.

And that is really the most important thing that we do.

We have a screening committee that looks at it and basically we go through the RFPs with the idea of whether or not we can compete favorably, whether we think they will be profitable to us, and they are consistent with the core products that are inscribed in Shaping the Future that says these are the things that we are good at against the segment that we want to apply what we are good at to and decide whether we want to go after that business.

Okay.

And then in the prepared remarks, I believe you mentioned higher commission rates.

Can you talk about the benefit that is happening and whether that is -- is that due to a soft market environment where carriers want to pay more to attract business?

Well, I just think that across a board it's a combination of softer market, it's a question of working together, it's a question of working with our market partners, it's a question of working with our clients in a transparent environment.

All of that has a great deal to play with in terms of how the mix works.

But, yes, it is all of the above.

And then finally on mergers and acquisitions, I think you mentioned the number historically of a goal of 50 to $100 million in revenue from mergers and acquisitions.

Can you talk about that environment and then also how that ties into Gras Savoye potentially?

Okay.

Well, the 50 to $100 million, none of as you remember when we talked about our goals and our modest improvement in margins and our revenue growth has to do with the 50 to $100 million.

We don't have that number in there because it is very hard to predict whether we will do the M&A business in any one year.

So the 50 to $100 million is not included in any one of our projections, if you will.

That is still something that we target but we are not going to challenge ourselves to comply to achieve that target if we don't think that there are deals out there that make sense -- that don't make no sense.

For example, because you've got so much money as you've seen, people are willing to pay what I believe are outlandish prices for companies.

And just because we have a target out there, we are not going to compete with that kind of foolishness.

You just don't pay multiples like we are seeing being paid out there and hope that they are going to be accretive.

It just can't happen.

So, even though our goal is out there, I will tell you we are not going to try to achieve that goal just because we said we are going to do it in an environment that I think is very, very, very, very expensive, if you will, as it relates to M&A.

In terms of Gras Savoye, as you know, it has always been our intention when 2010 comes along to acquire the shares that we are entitled to acquire for controlling interest in Gras Savoye and that is still our intention.

Thanks very much for the answers.

Thank you.

Matthew Heimermann, JPMorgan Securities.

Hi, good morning, Joe, and everyone else.

Quick question.

First, would it be possible in your North American business to give us a sense of what the growth rate is in employee benefits?

I will tell you that our growth rates are well -- are certainly double digits.

We are very, very happy with our growth rate, employee benefits.

They are right on plan with where we want to grow.

And quite happy with what is going on there.

And will you remind us how in dollar terms how big that business is right now?

The business on a worldwide basis is in excess of $300 million, but that is one of the places in Shaping the Future where we've designated certain core products in certain areas where we want to grow and we expect by 2010 to that improve significantly.

Okay, excellent.

And then could you provide a bit more insight into your opening comment, the view that part of the factors offsetting a soft market are commission rates, exposure changes, coverage changes, by client?

Is that by client size or sophistication of client?

Are those factors different in terms of their ability to offset rate?

No, I think what happens is that you get the softness in the market, people say -- you know, it's a more affordable so I will take out more coverage.

I think it is that plus the fact that we are able to put different or more lines on because of our cross selling with the retentions are just higher across the board.

So as the result, there is a nice offset.

But I think the main ingredient here for the growth is not those offsets, it is simply that we are opening a lot accounts and we are retaining a lot of our business.

That is the thing you've got to concentrate on.

Okay, that is fair.

I guess just as kind of a follow-up to that, you are expanding your account focus to be a bit smaller than it has been in the past.

Any update in terms how penetration is going at this point?

I wouldn't say that we are focusing on our accounts to be smaller, I mean we are going after the following segments.

We're going after the global 500.

We are going after large national accounts.

We're certainly going after the middle market and we are going after the small commercial accounts.

Each one of those segments has strategy.

And it is not to say that one is more important than the other.

The reason why people talk about the middle market and small commercial accounts is because there is more of them.

But those are the four segments.

We know what products we want to apply to those segments and we have a strategy for each one of them.

The higher you go, the higher the touch gets.

When you start from small commercial, it's highly technological with very little touch and then you get to middle market technology and touch combined and then with the large national accounts, you've got a lot of touch processed by and our people aided and abetted by technology.

And then with the very large multinational accounts, the ability to be able to service those accounts globally with the help of our platform technologically around the world.

We look at technology in our business in the following way, that we look at systems platform and technology not instead of people but on behalf of them so that our people are better equipped to do their jobs.

No, that's fair.

I'm sorry, I might have implied something I didn't mean to.

I was just trying to get a sense of whether or not within the small commercial segment, if you felt like -- if you perhaps were winning a lot more business on the margin recently than you have looking back a year or two years ago?

I think in the small commercial sector we have a very good strategy that suggests that the future in small commercial led by technology and different ways of doing business are much more encouraging and I think will add much greater margin and revenue to our business than it did two years ago.

Okay.

Fair enough.

Thank you so much.

Charlie Gates, Credit Suisse.

Good morning.

My first question -- I think one of you said there was an offset to the $3 million gain on the sale of the building.

What was that offset?

Charlie, hi, it's Pat here.

When we sold the headquarters building in London, we going forward we had two things.

We had a deferral of a proportion of that gain on sale which is that $3 million you see in the income statements.

And then exactly offsetting that, exactly the same amount for exactly the same period, we have an equal and opposite rental amount that's included within other operating expenses.

So for that 18-month lease-back period, you will see the $3 million a quarter show up in the "gain on disposal" and then an equal and opposite $3 million included in other operating expenses.

But wouldn't you always have your rent expense?

It is just an arrangement with this particular deal, Charlie, where you've got that equal and opposite deferral of gain and rental period of TTS.

Okay.

My second question, I didn't understand why the -- excuse me -- $0.04 a share foreign currency gain didn't have an impact on operating margin.

It's just a bit of a mathematical thing really, Charlie, it's the way the numbers work out.

Basically you've got the $0.04 which mainly comes from the foreign currency hedges but equally -- which would have a positive margin impact.

For the way that the FX increased the reported amounts of both revenues and expenses, whilst that has no earnings impact, it actually -- it kind of dilutes the margin going the other way.

It's just the way the maths work really.

I guess the only other question, in percentage terms, roughly what percentage of your business is reinsurance broking both in this year's quarter and last?

Reinsurance is I think we've talked about before is somewhere around 20% of our overall business.

We talked about that when we did our investor day last year.

It is a greater proportion of the first quarter; reinsurance is proportionately more loaded into first quarter than any other quarter of the year.

So it is more like 25% in the first quarter?

Yes, it's a higher proportion in first quarter.

And it is certainly a higher proportion of global in the first quarter.

That's right, Charlie.

So it is about 25?

What would that have been last year, do you think?

It's (multiple speakers).

About the same.

That's why I said I was so pleased with our growth because that is part of our global business which just goes to show the strength of our global specialities in a quarter where the reinsurance was so volatile and it meant so much and we still did well which shows the balance of this company.

Thank you.

Meyer Shields, Stifel Nicolaus.

Thanks.

If I can focus, I guess, on the interest and earnings of Associates; that was up more than 30%.

I think Joe mentioned that it was from Gras Savoye.

Can you break down that growth between foreign exchange, revenue growth and margin expansion at Gras Savoye?

Meyer, I would break down broadly.

There is a little bit of foreign exchange in there, but it is about half -- you remember we increased our ownership percentage from about 33 to about 38.

Half of it is due to that and half of it is due to growth in earnings.

Okay.

When Joe was talking about mergers and acquisitions and pricing getting a little bit ridiculous, I guess we've seen some fairly aggressive pricing from private equity in North America.

Are you seeing similarly inflated multiples elsewhere?

No, not yet.

You know, we -- what I was talking about was mainly North America.

You've seen a couple of the deals that were announced, I guess, with Hubb and USI, and they were very, very heavy multiples -- you know that.

I don't know how with multiples like that they could be accretive.

And as a result of that, even private companies, they are raising their hand and say, give us more money.

All I can tell you is that I think that is expensive, and we are not interested in playing in that expensive environment.

We haven't yet seen that in other parts of the world; there is activity that is going on along all fronts.

But I was mainly making reference to what you obviously see is a very expensive environment in North America.

I might add, as well, as we talk about M&A, what we mainly concern ourselves with here, which is a little bit different maybe than others, is growing our company organically, making sure that our culture of working together, growing organically, again, shaping the future initiatives, is what grows this company.

If we are able to make acquisitions that enable us to be able to grow on top of that type of a philosophy and that culture and fits, we will do that.

But that is not mainly what we are doing here.

What we are doing here is growing the place organically in a disciplined fashion.

If we can make acquisitions that enhance that, we are going to do that.

Okay.

And lastly, but really quickly, can I get the stock option expense in the quarter?

For the quarter, it would be -- let me think -- a little above 6 million for the quarter.

Okay, thank you.

[Al Coppersino], [Madoff].

Thank you, and congratulations.

Thank you.

I had a question.

There's lots of moving parts on the interest expense, obviously, with the changes you all have made.

I'm curious if you think the -- first of all, I assume the second quarter '07 interest expense will be more of a run rate.

Will that number be much different than the first quarter '07 interest expense was?

Yes, the run rate for the remainder of the year will pick up slightly.

Obviously for the first quarter, we had our existing 600 million bonds in place, and then basically through all of the quarter, just about -- we had the 200 million drawdown on the revolver.

For the second, third and fourth quarters, we will have the new $600 million bond offering, so the run rate will tick up as we go through the rest of the year.

Okay.

My next question was the employee benefits.

Joe, you are obviously doing quite well there.

A couple of other companies have mentioned it as well.

Do you think that Willis and maybe some of your peers are taking share from the smaller agencies out there, or is employee benefits just an area where pricing is a bit positive or stable versus P&C, where prices are mostly --?

Well, I obviously -- you know, we are growing our employee benefits for a couple of reasons.

Then I will answer your question with regard to share.

We are growing our employee benefits business purposely because obviously there is a problem in the world with regard to companies trying to harness their costs by giving their employees the necessary benefits they need, but by the same token, training them and helping them take care of themselves.

Those are the needs that these companies have.

And we are gearing ourselves -- and it's a worldwide problem, it's even a problem -- it's going to be a problem in China.

So we have a problem like that and it is worldwide, you've got a worldwide business, it makes sense to construct solutions that apply in different companies to the same problem.

They might apply differently, but they are the same problem.

So that is the reason we are growing it and we are very proud of that growth.

I think the reason why we are gaining share -- and I don't look at share per se; we still have a long way to go -- but when you have the footprint that we have and the systems technology and packages that we have, most of the companies that we are doing business with are middle market companies.

And they don't have in their human resource departments the necessary wherewithal to be able to do the things that I just suggested their problems are.

So we will package for them a human resource department, we will package for them an employee benefit department, if you will, so that they have the ability to take the resources we have and apply them to their associates in the middle market or, in a lot of cases, we do multinational business around the world.

So, I think that is the reason we are able to grow.

Small employee benefit companies don't have the ability to do that.

So that is our mantra, if you well, as it relates to employee benefits, and I think that is why you see the growth.

Okay, thank you.

And just to try again on Charlie's question, on the minimal impact of foreign exchange on the margin.

I'm assuming that simply the foreign exchange caused revenues to go up more than it caused earnings to go up, and that is why the margin impact was not material.

Was that --?

It is because the revenue -- it reflects both the revenue number and the expense number, with no impact on earnings.

Because both numbers increased, so it just automatically swiped the numerator over denominator works; it means you have a lower margin.

And the same way, if you have two divided by four, it's a higher margin than 98 divided by 100, if you see what I mean.

Right, right.

Okay, great.

Hopefully I'm not overstaying my welcome, Joe, one last question if I could which is --.

You are always welcome.

Thank you.

Which is how early do you think we are in innings as far as higher commission rates, increased customer buying?

Is that just beginning?

Do we have a ways to go on that path?

That is really tough to say.

I mean we really don't track that.

I don't know that there is a particular cycle as it relates to that.

We don't have a tracking device that relates to that.

It is just a phenomenon I think of the soft market, you know, people will buy more, they will say, you know, it is a good time.

There is a lot of risk out there.

There's a lot of complexity out there, I think I will buy more because the rates are low.

And as a result of that if we are all working together and we are transparent, we are showing value, commissions manifest themselves so I think that is what it is about.

But I really can't give you a sense of trend because it is nothing that we track.

Great, thank you very much.

Steven Labbe, Langen McAlenney.

Actually my questions have been answered.

Thank you.

Good morning to you, Steven.

Good morning.

Adam Klauber, Cochran, Caronia, Waller.

Good morning, thank you.

Hi, Adam.

As rates are coming down particularly in the middle market, is that creating some more churn and some more opportunity for you guys to take accounts?

I think that any time there is opportunity, we look at movement as a good thing.

Our market share is not as big as some of our competitors so any time there is an opportunity where there is movement there is volatility one way or the other, that is a good thing when you want to gain market share.

So I would say, yes, generally speaking that that's an opportunity for us and any time we have those opportunities we are going to take advantage of it.

So I would say generally speaking, yes, Adam.

Okay, thank you.

Chris Neczypor, Goldman Sachs.

Good morning, thank you.

How are you doing?

Pretty good, thanks.

Most of my questions have been answered but, Joe, let me ask you an industry question.

What do you make of the recent focus by some of your competitors in the facultative business?

You know (inaudible) [Benfields'] team; [Integra] recruited away the guys from Marsh.

What is your view on this part of the business and how much does Willis Re participate in that market?

Well, first of all you will have to ask them why they are engaging in all of that.

I can't speculate to them because I don't know that that is fair for me to do.

But obviously as you are growing your retail business obviously there are large single risks that we place and the facultative business is all about the reinsurance of those large single risks.

And obviously we are in that business.

We are very good at it and that is something that simply is an extension of the way business is conducted.

If those other companies see an additional ability to gain revenue by virtue of being in that business, that is probably the way they view it, they say, you know, I will place some single risks and I will see if I can do the -- back on, back on the back of that which is I guess what they are doing.

But I don't know what their strategy is but that is what we do.

We do it very well.

Our retail and our reinsurance engage with each other very well and that is what we are doing.

I'll ask Grahame if he has got a different take on it.

No, I think again some parts of the facultative business are volatile as some of the rest of the reinsurance.

Our facultative account is very, very well spread across the world.

It is a very complicated area, there's very distinct types of facultative.

And our other facultative is driven by insurance companies in other parts of the world who won't have skills in terms of being able to write large single risk and require our specialist's knowledge to do that.

And at the same time some of that facultative is what we call [ceded fac] which is where we use facultative alongside treaties to provide capacity.

So it is quite a complicated area.

I think some of the volatility in teams moving around is due to some of those areas perhaps being less attractive going forward and some of the teams I think to some extent are just moving around and saying well we can start afresh.

So, it is volatile like everything else in reinsurance at the moment.

But as far as our facultative account is concerned, it is very well spread.

It's specialty line driven and we continue to drive it and it is very coordinated between the various parts of our company.

Okay, that is extremely helpful.

Thank you, both.

And then just one follow-up question, maybe I missed this.

But have you talked about what the magnitude of the commercial line decreases you're seeing in terms of P&C rates?

Say that again, Chris.

I didn't get that?

Right.

Could you just maybe give an order of magnitude as to what you are seeing in terms of commercial rate decreases?

Well the rate decreases are probably what you have heard across all lines.

I think in March we were looking at -- you've heard market scouts suggest that it was 12%, 10% to 12%.

And that it will probably get softer as the year goes on.

Okay, thank you.

Thank you.

Keith Walsh, Citigroup.

Good morning, Joe.

How are you?

Hey, Keith.

How are you doing?

Good, good.

Two questions around revenues.

First, organic commissions and fees is 6% for the quarter.

Is that a good indicator for '07?

And secondly, just around new business growth, trying to understand how much of an offset is this to the weak pricing environment?

In other words, what are new revenues as a percent of total?

Thanks.

Well, first of all the first question had to do with whether or not we could sustain 6% and trying to get an estimate from me.

I caught you, Keith.

Look, what we are trying to do is to every time we report a quarter, there's a couple of things we want to do is we want to make sure that we have achieved the highest revenue growth we possibly can and while we do that spend less than we make.

And if that happens, our margins will go up.

The second thing we want to do is to make sure that we are leading the [league] as it relates to revenue growth.

And a lot of times people say to me we watch our expenses so much that people think this company is a cost story and that we are constantly slashing and burning.

But we don't do that here.

We just watch in a very disciplined way how we spend money.

We are very, very proud even more proud of the fact that our revenue growth has outdistanced our peers for many consecutive quarters, 13, 14, 15 quarters.

So I think it is more of a revenue play and people working together to create revenue more than it is what is perceived to be a cost play.

I think that as the year goes on, we feel very comfortable whatever opportunities that we have to increase our revenue then grow, we will do that.

I can't tell you whether 6% is an indication of that's what it will be the rest of the year.

But you could be rest assured we are going to do the best we possibly can to enhance that revenue.

As it relates to whether or not that growth is integral to what we are doing, it is very, very integral to what we are doing.

Okay.

And then the second question on new business growth?

I think the business growth even though we talked about the commission offsets and all that sort of stuff, I think that that really comes with a soft market.

But I think what really allows you to grow in the soft market is continuing to do three things.

Number one, you've got to keep what you've got, which is retention.

If you retain your accounts, you're going to continue to get recurring business from them.

You've got to get more from what you got which is get more lines of business from the accounts you already have.

Which I think one of the things that we found in the last couple of years which is a question I always get, do you find clients interested in having multiple brokers?

The answer is yes.

And when you try and grow your marketshare like we have, that is a good thing.

And then the third thing is to get new ones and when I look at our statistics over the last couple of years, our ability to get business from new accounts, new new accounts seems to be pretty robust and we are very happy about that.

Those are the things that really blow your revenue, those offsets -- I wouldn't concentrate on too much.

Those are just phenomena of a soft market.

I guess just drilling down a little bit, new business as a percent of total revenues, what is that sort of tending at and where has it been historically?

Well, the new business as a percentage of total revenue comes from different areas.

It comes from our organic growth and it also comes from our recruits and what they are able to bring in.

But I would say that you are looking at all of the new business that is coming in is about 30%.

Okay, thanks a lot.

David Small, Bear Stearns.

Hey, guys.

You had mentioned earlier you had kind of gone through what needs to be done in small commercial, middle market, large national and multinational in order to grow in those areas.

Could you just help us understand how your business breaks down in those four segments at a percentage of revenue in each one?

I won't give you the exact percentage but the vast majority of our business is in what we define as middle market.

You've got a relatively small amount in the global 500 sector; there's a slightly bigger amount in the small commercial.

But a vast amount is in (inaudible) middle market or large corporate.

I would say if you want a hierarchy is the middle market is the biggest, and then it gets the next biggest is the small commercial and then the next -- the next biggest is our large multinational global 500 accounts.

Okay, thanks.

That is very helpful.

Andrew Bauer, Stonebrook.

Good morning, apologies if you've already given this number.

But could you break out the organic growth rate in between volume and price for us?

And if possible tell us what the differences are amongst the different segments?

Let me -- we didn't give a precise number on that.

When you are in a soft market and you've got those as Joe described, the offsetting factors of buying more volumes, buying higher retention.

It is hard to be absolutely precise on the rating impact versus the offsetting impact.

So what we would say is overall our net new business is growing positively.

It's growing at somewhat at the same clip as it has done previously and then you've got a rate and a market factors which is all those kind of buying factors, etc., which affects close to flat and it was probably kind of dragging us down a little bit.

So, you would expect the price component of organic growth this year probably to be somewhere in between flat and made negative 2%?

Is that a reasonable range?

It is hard to predict exactly.

As Joe mentioned earlier, the rating of (inaudible) is tough.

Now is all signs are it is getting tougher.

As we talked about I think before there is not a one-to-one match between what happens in the kind of 10% to 12% rate reduction as Joe talked to; there is not a 10% to 12% direct sort of a one-to-one impact.

It is a lower impact for all the reasons we talked through before.

It is hard to predict exactly because it will depend how the rating environment kind of plays out the rest of the year.

And then lastly, would there be much differentiation in that price to volume whatever it is in between your North American business and your international businesses?

I don't think so.

I mean I think there is little differences but nothing think that is significant enough to talk about.

Okay, great.

Congratulations on the good quarter.

Thank you very much.

I appreciate it.

(OPERATOR INSTRUCTIONS) Meyer Shields, Stifel Nicolaus.

Thanks.

Two quick follow-ups if I can.

One, you gave a breakdown of your business at least in terms of relative magnitude.

Can you talk about your growth whether you are seeing more growth in any of those particular segments -- middle markets, small commercial, etc.?

I think in terms of our focus, again, we see huge opportunity in the midmarket and that really comes through the fact that we have this fantastic footprint in terms of the network and a lot of our focus is connecting our industry segment knowledge and our specialty skills to that.

So I think predominately we still see the midmarket as the gold mine.

As far as small commercial is concerned, we have two focuses there.

One is how we -- the small commercial business that we already have how we can use new models, new technology, new platforms to handle that more profitably and also to grow it more aggressively.

And also we do see huge opportunity using the platform that we've got, try to target small commercial.

I think a lot of the large broker community that has never been done really effectively and we see using -- again our integrated platform, that is a tremendous opportunity for us.

On the global 500, what we are doing there we employed somebody to drive that, (inaudible).

And what we are doing is saying in that segment rather than have a generic approach to it because it is a battlefield in many ways between two of our largest competitors, we are going to actually focus on those industry segments and those clients that we really do believe that we have an opportunity of greater penetration in terms of products and services and winning.

And Joe referred to this RFP committee.

We're absolutely focusing on those accounts that we think we have a real chance of actually growing our involvement or winning.

So in all areas we see growth but I would say that still the midmarket is the area that we actually really see as the gold mine going forward.

Okay.

Can you just talk about how that was played out in the first quarter in terms of the contribution to growth?

I think the contribution you are going to see as time goes forward, the biggest contribution obviously is in the middle market.

I think and then you are looking at our large national and global accounts.

But I think the more as time goes by, the platforms we are building in the small commercial business will not only make our small commercial business that we have now as Grahame said more profitable, but we actually want to go out and attack that margin.

I mean common sense tells you that most of the accounts are small and midsized accounts, so figure out a way to do it.

And I think there's lots of platforms and lots of capability we have in that regard that we haven't even touched yet.

So we are really excited about that.

And we believe that our strength is the distribution system.

We think distribution which is what we have to our global network is terrific, made more terrific by the fact that when you have that distribution working in concert together to affect good value on our clients, it's a great thing.

And as we continue Shaping the Future, I think you see manifestations of that more and more in our one flag culture.

Okay.

And really quickly if I can, this $332 million remaining under the current repurchase authorization.

How much of that could be absorbed by I guess compensating JPMorgan should the stock price go up significantly from where it is?

You know the answer to that as well as I do.

Our stock price is relatively predictable in how it behaves.

But it won't be a material, of the $332 that is left.

It is unlikely to be a material amount.

Most of that will be left after the (inaudible) by JPMorgan.

Okay, thanks so much.

Thank you.

(inaudible).

Hi, Joe.

Hi Pat.

How are you doing, good to hear you again.

Yes, just a quick question.

I was just looking at the expense growth year-on-year this quarter.

Could you give us an explanation of what the components of that growth are?

The main single factor is foreign exchange.

You are comparing -- when you are actually looking at the nominal dollar values of it, the FX rates have moved quite a bit since this time last year, the single biggest factor is foreign exchange in the same way we had 10% reported revenue growth of which 3 came from FX is similar in our expense base.

Which is why when we go through this, we talk about the ratios of revenue to SMB to revenue and other expense to revenue.

Okay, great, great.

And the remaining growth is it all inflation related or is there a split of new hires as well?

We've got our overall headcount pretty flat versus December.

It is up a little bit from March of last year, so our headcount is up a little bit versus last year.

So it is a mixture of some of those targeted investments we talked about, some of the investment we've made in Shaping Our Future that Grahame talked about.

Oh, great.

Thanks.

I think just to follow-up on that question is that our expense growth is very disciplined, is very modest.

Obviously it comes from discretionary costs, it comes from salary and benefits, etc.

But in controlling the expenses, the idea is to be able to do it in a way where you still find ways to fund investment so you can continue to grow.

So this is not a philosophy where we are -- again, I'm going to repeat -- where we are constantly slashing costs just for the sake of it.

What we are doing is disciplining our expense growth so we can self-fund the areas where we want to invest, the outcome being higher revenue growth over time and still being able to spend less than we make.

That is the whole point and that works in all environments.

(OPERATOR INSTRUCTIONS) Tom Mitchell, Miller Tabak.

Yes, we know that last year there were -- or it has been reported there was some discussions of Willis taking a look at Marsh Mac as a possible acquisition.

I guess as recently as December or January as you were making your rounds talking to employees, it seemed like that had not been taken off the table entirely.

Can you tell us today that you are not interested and you won't be doing that?

That is a very interesting way of asking that question.

I applaud that.

If I say I'm not interested, that means that we will never, ever, ever discuss that for the rest of my life so that doesn't make any sense.

And if I say I am interested, then somebody is going to suggest that there is something going on.

I will tell you that there is absolutely nothing going on.

There is no discussions taking place, whatsoever.

We continue to run our business very, very well.

We're very content with where we are and we are happy with the way the world is today.

Okay, thanks.

At this time, you have no further questions, sir.

Thank you very much, bye-bye.

Your call has concluded.

You may disconnect at this time.