Willis Towers Watson PLC (WTW) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

All participants will be on listen-only until the question-and-answer session of the call.

I'd also like to remind participants that the conference is being recorded.

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

I'd like to turn the call over to your speaker, Ms.

Kerry Calaiaro, Director of Investor Relations.

Ma'am, you may begin.

Thank you, and welcome to our earnings conference call and webcast at willis.com for the second quarter of 2007.

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

This call will be available by replay starting at approximately 10:00 a.m.

Eastern standard time and ending September 2, 2007 at 11:00, by calling 888-568-0906 or 1-203-369-3788 international with no passcode or by accessing the Web site.

If you have any questions after the call, please leave me a message on my New York line at 212-915-8084 or send me an e-mail.

As we begin our call, let me remind you that we may make certain statements relating to future results which are forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995.

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

Additional information concerning risk factors that could cause such a difference can be found in the Company's documents filed with the Securities and Exchange Commission from time to time.

I'll now turn the call over to Joe.

Hello, everybody, and thank you for joining us today for our second quarter earnings call here from London.

It's kind of unusual to be doing this at 1:00 in the afternoon.

Joining me today are Grahame Millwater, our COO, Pat Regan, our CFO, and a number of our partners group members who are responsible for various businesses and parts of the Company and they will be very glad to answer any questions that you have.

We've said from the beginning that we're building a company that could be successful in all market environments.

This year is shaping up to be a good test of that model and I'm pleased to say that we are succeeding.

We continue to execute our Shaping the Future strategy, a strategy that we initiated, as most of you know, last year to deliver significant financial growth over the next five years.

The top line is growing nicely, I think, despite very soft market conditions and we're realizing continued cost savings that we identified last year, maintaining ongoing expense discipline, and managing, I think, our capital really well.

You can see the effects of all of this in our earnings and revenue growth and especially our margin expansion.

The results for the quarter and the first half of 2007, I think, are solid.

The earnings per diluted share were $0.54 in the second quarter, up 20% from last year and this becomes, obviously, $0.57 when you exclude the foreign currency impact in the quarter, a 27% increase with that exclusion, $1.65 for the six months which is up 24% from last year.

On organic growth and commissions and fees, 4% for the second quarter, 5% net new business, and a negative 1% from declining rates and other market factors.

Now, as you are aware, the actual growth premium rate reductions were much larger ranging from 10 to 20%, virtually across all territories with the more specialist line seeing reductions of well over 20%.

We worked very hard to offset these rate decreases, with factors such as higher commission rates, client profitability studies, which we are continually engaged in, higher insured values, and changes in limits and exposures.

This has meant that even in these market conditions we have limited the impact from rate and other market factors to only 1%.

For the six months ended June 30, 2007 organic revenue growth was 5%, with 6% net new business, and a negative 1% from declining rates and other market factors.

Remember, just a reminder, when I say organic, there are no contingent commissions included in those numbers, and as I've said many, many times, more times than I guess you care to listen, that new supplemental commissions is not something we are going to take.

We think it's a conflict with our relationship with our clients, and we do not and will not take them.

Retention levels are holding steady which I think is terrific in the low 90s, given a soft market environment which is really a good sign and we're really proud of that and I might add that we continue to work on raising those retentions as really part of what we do every day.

Our organic growth and operating expenses this quarter was zero.

Let me tell you what I mean by organic operating expenses.

That is, is if we measure our expenses on a same-store basis excluding acquisitions and disposals, and the impact of foreign exchange.

We've achieved this from executing our Shaping of the Future initiatives because a lot of that has to do with better efficiencies through process and technology, cross-savings through charges that we took last year, and just good plain expense management which we think we have exhibited over a long period of time.

The result of all of this was an operating margin for the second quarter that was up 190 basis points from a year ago at 22%.

Operating margin for the six months ended June 30, 2007 was also up 190 points to 27.5%.

The ratio of salaries and benefits expenses to revenues declined to 57.5% for the quarter and to 54% for the six months.

Now, I want to talk a little bit about our businesses and our growth in our various areas, North America, international, and global.

We're very pleased with the progress of each of the business units in this market environment.

Each faced the rate headwind and reinsurance also continues to see higher retentions by healthy underwriters.

If I look at our retail businesses and I want to, for the first time, sort of break that out a little bit for you, that is North America and international, those are pure retail businesses, we had a great quarter with combined 6% organic revenue growth, and about 400 basis points of margin expansion between the two The heart of our shaping the future strategy is to grow and expand margins.

We are also building our retail businesses on the ground.

That is to say, wherever our locations are, build a strong businesses on the ground, and if we do that, we're able to do that by availing ourselves of the resources that we have all over the world, especially London and Bermuda.

We've had a great start to the year in doing that even in what is clearly a tough market conditions.

Let me talk about our business units a bit more in detail.

First, our retail businesses, then I'll do the global with reinsurance and the specialisms.

In North America, we were very happy with the organic growth in commissions and fees at 5% for the second quarter, and 5% through the first six months.

As you know, the markets scout data for the second quarter showed continued declines each month, averaging about 13% in the quarter, and there have been about 28 consecutive months of declining P&C rates.

Despite this, we had good growth in our southwest region, central, west and New York regions and our programs business was very good this quarter.

We also saw solid margin expansion in most of our regions which drove the increased performance in North America.

We also completed the acquisition of Insurance Noodle.

As you know, we have stated that part of shaping the future was to increase our small commercial business, or what's known as SME.

To be able to do that, and to build our SME business, and to do so in a very profitable manner, we needed to have a platform to be able to process that business, and we were very fortunate to be able to buy Insurance Noodle, which is an Internet distributor of U.S.

small business insurance, which gives us a great platform to continue to develop our small commercial initiatives under shaping the future.

What it will allow us to do is to grow their existing customer base and product base which they already have, with thousands of people on that network, or thousands of little companies on that network, provide very efficient platform for our own small commercial business, and develop our MGA strategy.

Their base revenues were about $6 million, and we're very excited about the ability of this platform to transform the way we do small account business.

We also looked to transport this platform outside the U.S., and it's very important that you understand that this is not just a U.S.

strategy but it's a global strategy.

It's a very transportable platform that we bought, and we're really looking forward to increasing our business around the world with the use of this platform.

Our international business continues to be stellar.

Organic growth in commissions and fees was a steady 7% for the second quarter 2007, and six months.

This was also in the face of, again, persistent headwinds in most countries, with rates down about 10 to 20%.

Our growth in international continues to be driven by very strong revenue growth in the emerging markets, particularly in Latin America and Asia, strong double-digit growth.

This growth was complemented by double-digit revenue growth in mainland Europe, especially in Eastern Europe.

Again, in addition to revenue growth in those areas, we expanded our margins in each of the regions.

We saw a modest decline in revenues in the U.K.

and Ireland, primarily due to soft market conditions and rates were down 15 to 20% there, but again, despite this, through the execution of our plans and good cost control, we still managed to grow the margin.

Let me talk about our global business, and before I do, when I keep mentioning that we're building a model that's good in all environments, what I mean by that is that this business is an unpredictable business.

I don't need to tell you all that.

We grow pipelines.

We spend lots of times on sales.

But it's still unpredictable, lots of our income is recurring income but it's not continuous recurring income.

It's not predictably recurring on a quarter-to-quarter basis.

That is the reason why we constantly watch our costs.

Our business is not as predictable as controlled as we'd like it to be, but our expenses are, and if we can constantly monitor our expenses against the unpredictability of what our revenues are, our margins are going to grow, if our margins grow our earnings per share grow and that's the way we run our business.

Let me give you an example.

In our global business, comprising reinsurance and global specialties, organic growth and commissions and fees was zero for the second quarter of 2007, and 2% through the six months.

Now, this business has more volatility and seasonality to it and let me give you an example.

The second quarter of 2006, on what is now comprised of our global business, our growth was 17%.

And in that 17% a year ago was some terrific performances in our London specialist businesses.

Our political risk business was formidable, our trade finance business, and there was a lot of satellite launches.

Now, all of those businesses, just to give you an example, are recurring business, but they're not predictably recurring on a quarter-to-quarter, year-over-year basis, but they do reoccur.

So what transpired in this quarter was that they did not recur this quarter so as a result when you look at the 17% against the results a year later in 2007, they weren't there.

It's very lumpy but the businesses are there, and they are recurring, but they're just lumpy and didn't recur this quarter.

So that is an explanation, so when we talk about timing, and we talk about those kinds of words that sometimes are amorphous, I just wanted to take the opportunity to give you just a little bit of an explanation of what that was.

Now if you throw in reinsurance, which, obviously, is in our businesses and reinsurance is going through a period where there is high retentions and lower rates because there's simply less claims and insurance companies are, obviously, much more healthier and courageous, you know, these (inaudible) has a lot to do with our business.

The business in reinsurance is going through a transition which we are very, very capable of enjoying the fruits of, especially the capital markets pieces, the analytics and all the things that are going along with it, but this was just a quarter where that transition is still occurring, but we think it's a great future in our business.

So I just wanted to give you an idea of what global was and I wanted to give you an idea of what we mean by timing.

Overall, our margins in global declined about 100 basis points, excluding the foreign exchange in the second quarter, but remain good in these specialized technical areas, as I said.

I think we're making great progress in shaping the future, which Grahame will go through with you, especially here in London.

Productivity improvements have been offset this quarter by the market conditions and the volatility that I mentioned.

But we're making great investments in areas like energy, which has grown significantly even though that area is soft, construction's growing terrifically, marine, financial institutions.

So we continue to expand our business across the board, and we're getting really good capabilities now in the reinsurance area and analytics.

Not too much more I can add about reinsurance than I already have -- or not too much more I can add to specialisms, although I tell you, there is good revenue growth in aerospace, our niche business in construction but, again, offset by that decline in the in space, where satellites don't go off, you don't get paid, and that's the way those things go, and it's simply unpredictable, which is why we watch our business.

In employee benefits, which represented about 15% of total retail revenues through the first six months of 2007, we continued to do well, especially in key targeted growth areas of Europe, Latin America, and Asia.

And we've made great progress in employee benefits as a practice, which is less susceptible to market volatility, and we're reporting double-digit growth with about a 5% market share and we expect tremendous growth opportunities here.

We also expect that the market to continue to soften in light of all of the things that I have been talking about, and during the Q&A, we can talk about it even more, but I think you've heard that enough from our competitors who have already reported earnings in that regard.

Now, let me turn this over to Grahame Millwater who's going to give you a little bit more of an update on shaping the future.

Grahame?

Thank you, Joe.

As Joe's already outlined, we continue to relentlessly execute our Shaping the Future structure throughout our businesses.

These are a series of interconnected initiatives and projects which we've already outlined to you but they continue to deliver both the revenue and the profitability improvements that we have targeted.

These (inaudible) benefits are proving more critical as you can imagine in the tough market and rating environment in which we find ourselves in 2007, proving essential in the helping us not only maintain revenue growth but also containing our expenses and improving our margin.

This program also allows us to focus our continual investment in these areas where we've targeted the appropriate returns, whether it be revenue growth or margin improvement.

Let me just focus initially on the productivity and efficiency areas.

Our program of change in London continues at a pace.

Following the successful pilot in our aerospace division, we're now rolling out in 2007 to our global markets business and our financial institutions businesses.

Just to remind you what this program is, it's a complete overhaul of our business model with particular focus on client segmentation and associated profitability.

The implementation of end-to-end process change and new technology and a focus on the optimal location of our work between London, our U.K.

service hub in Ipswich, and our offshore processing center in Mumbai, India.

This process has in fact proved so successful that we've now (inaudible) the opportunity for similar program of change and associated benefits in our global retail businesses worldwide and we're envisioning beginning a very similar program in the fourth quarter 2007 in those businesses.

We also completed the first phase of a process to look at our corporate central functions and review them in line with those to -- to make sure that we align those functions more closely to the business strategies we're embarking elsewhere in the world.

Other associated programs on the productivity efficiency line include the Willis client service platform, expansion in Mumbai and our international efficiency review under the title Avanza, and these are also all largely on target.

However, this is not just about efficiency, it's also about revenue enhancement.

We continue to execute a series of programs to drive our organic revenue growth, particularly important in this market environment.

Two critical projects to us at the moment are client profitability and commission enhancement.

In 12 months, our pilot plan profitability program in the global specialties has delivered $11 million worth of net benefit to the group.

On the back of this success, this program is now being rolled out to select countries and regions.

These include Australia and other major European markets such as Denmark, Germany, Italy, Spain and The Netherlands.

We've also commenced a similar program in our North American operations and a pilot's just been launched in our New York office.

We've also started a disciplined program to ensure that we are achieving the appropriate minimum commission levels with underwriting markets globally and also that we're capturing those commissions in the field.

This work is being done strictly in line with our core client remuneration principles of transparency, pure commission or fees, and no conflicts.

And as Joe pointed out earlier, this eliminates any consideration of supplemental or contingent commissions on a global basis.

We also continue our focus on segmentation in small commercial.

As Joe outlined, we've completed the Insurance Noodle acquisition which gives us a platform in North America.

There is a detailed plan of execution to ensure our current small commercial business is transferred to this platform, but that we also use our market presence and rich product line to actually substantially enhance the current Noodle offering.

We will also, as Joe said, look to use this platform outside the U.S.

In the U.K., we're focusing on the small commercial side and the further deployment of our U.K.

small commercial franchise operation, and also this is a core focus of expanding our use of MGAs.

Brendan McManus, one of the leading players in the underwriting of commercial business in the U.K.

market, has joined us to lead our U.K.

retail operation.

One of the core reasons for this was to utilize his knowledge of the small commercial sector and also his underwriting knowledge within the powerful distribution network of a global broker.

We continue to invest in our specialty skills to drive the mid and large national segment, and this includes hires in our specialist business such as aerospace, financial institutions, energy, construction, employee benefits, marine.

Not only are we hiring in these areas, but we're continuing to execute globally to connect these specialty skills to our retail distribution network.

We also continue to relentlessly drive our sales retention process, and we have an array sales programs under such exhaustive names as Bumble Bee and Gold Mine.

We're not quite sure who made those up, but anyway, they apply it a number of our sales programs.

And these together with a very disciplined RFP process for larger accounts are helping to drive our pipelines of new business.

We also, as Joe pointed out, have a core focus on retention.

Our client advocacy program has now resulted in 180 formal accreditation of client advocates and we have many more in the pipeline.

And this process not only involves extensive training but formal accreditation of the individuals to make sure they're up to our standards we expect.

We also track retention down the individual office and business team level and have instigated a reward program based on success in their performance and retention.

This focus has meant that we've been able to maintain group retention in the low 90s, even in a soft market.

The focus on all of the above has meant that despite rates falling by 10 to 20% in some areas, we've been able to counter this through increased commissions, increased client fees, and setting more insurance product, so that the net effect of the market conditions in this quarter has only been a negative 1%.

And new business generation on top of this has delivered the organic growth [tickers] that Joe has outlined earlier.

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

Thanks, Grahame.

I want everyone to know that we're working on another investor day for sometime in the fourth quarter so that we can give you even further review of how our shaping the future is going.

We introduced this, obviously, a year ago June, and we're trying to give you updates on each one of these calls, but we'll really get into more detail with a little bit more granularity sometime in the fourth quarter, and we'll give you plenty of time so that you can put it on your calendars.

Now let me turn the call over to Pat Regan, our CFO, to review the financial results.

Thank you, Joe, and good morning, everyone.

Earnings for the second quarter were $78 million, up from $72 million last year.

This equates to earnings per diluted share of $0.54 for the second quarter 2007, a 20% increase on the $0.45 per diluted share for Q2 2006.

As Joe mentioned, excluding the effect of foreign exchange, which had a $0.03 negative impact in the quarter, earnings per share were $0.57 representing a 27% increase on Q2 last year.

For the second quarter 2007, total reported revenues were $626 million, growth of 6% from last year.

Foreign currency translation increased reported revenues by 2%, while net acquisitions had no overall impact on reported revenues.

Again, as Joe mentioned earlier, organic revenue growth in commissions and fees was 4% for the quarter.

Our 4% organic revenue growth reflected continued strong contribution from our international and North American business units, with 7 and 5% growth respectively.

Despite the impact of timing of some of that nonrecurring income our global business units delivered flat growth.

The operating margin for the quarter was 22%, up from 20.1% in 2006, an improvement of 190 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.

Rate decreases varied from 10 to 20% in North America and international to over 20% in our global specialty units, such as aerospace and marine.

Despite this, we have managed to continue to grow our revenue per FTE.

Net head count at 30 June 2007 was just over 13,000, relatively unchanged since year-end and last quarter.

Our revenue per FTE was approximately $191,000 for the 12 months ending 30 June 2007, up from $180,000 for the same period 2006, an increase of 6%.

In our retail businesses, we saw an improvement in our revenue per FTE of 9%.

As Joe mentioned, this margin improvement was particularly driven in those retail businesses.

We've seen the benefits coming through from the cost savings we identified in Q3 and Q4 last year, good expense control, and delivery from the rest of our Shaping our Future initiatives.

In addition, the impact of lower pension expense was offset by the negative impact on margin from foreign currency translation in the quarter.

Reported operating expenses rose 3% in the second quarter, but with zero growth on an organic basis.

As Joe mentioned earlier, we internally track what we call organic expense growth.

Which is our growth and expenses, excluding the impact of foreign currency and any impact from acquisitions and disposals.

As I said, foreign currency translation increased reported expenses by 3% in the quarter, thereby giving a 0% organic growth rate.

We think this is a very important measure heading into the soft market.

Salary and benefits expenses for the quarter were $360 million, or 57.5% of revenues compared with 59.2% a year ago.

This 170 basis points of improvement again reflects good cost control, realization of [the] savings identified last year, benefits from the initiatives, and lower pension costs, somewhat offset by our continued investment for the future.

Other operating expenses for the quarter were $114 million, or 18.2% of revenues, in line with the 18.2% from a year ago.

We've also now assumed control in an accounting sense of the new headquarters building in London at the end of the quarter.

This is the accounting trigger to start recording an income statement charge for the building even though we don't actually move into the building until next year.

This will mean that the run rate of our lease expense will increase by about $7 million per quarter, starting in the third quarter.

This will equate to margin impact of approximately 100 basis points per quarter.

For the six months total reported revenues were $1.4 billion, up 8%.

Foreign currency translation increased reported revenues by 2%, and net acquisitions increased them by 1%.

Organic revenue growth was 5% for the six months.

Operating margin for the six months was 27.5%, up from 25.6% a year ago, an improvement of 190 basis points.

Again, the margin improvement was primarily driven by our retail business.

This margin improvement, again, was driven by the realization of those cost savings, execution of our Shaping our Future initiatives, good expense control, and lower pension expenses.

Salary and benefit costs for the six months were 54% of revenues compared with 55.3% a year ago, showing a continued improvement in this measure of 130 basis points.

Other operating expenses for the six months were 16.5% of revenues compared with 16.9% in 2006.

As I mentioned earlier, foreign currency translation had a negative impact of approximately $0.03 on earnings per share in the second quarter but also have a net positive impact of $0.01 for the six-month period.

Given the current dollar rates against sterling and the euro, and the hedging gains we achieved in the fourth quarter last year, I would continue to expect that for the full-year we would see a negative foreign exchange impact compared to 2006.

Foreign exchange negatively impacted the operating margin by approximately 110 basis points in the second quarter.

Earnings from associates decreased by $4 million in the quarter, primarily due to timing on earnings from Gras Savoge and some level of tax true-ups.

Year-to-date earnings from associates increased by $1 million.

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

I would expect the underlying tax rate to remain about this level throughout 2007, although this is obviously somewhat impacted by the geographical mix of income.

Turning to capital management.

During the quarter there were no additional share repurchases as the accelerated share repurchase contract is still in effect.

We expect to complete the accelerated share repurchase in the fourth quarter.

This means we have $331 million remaining of our $1billion buyback authorization which we expect to complete by the end of 2008 or earlier, if possible.

There was $142 million of cash and cash equivalents at 30 June 2007.

During the quarter we used $35 million of cash for dividends and $67 million for acquisitions, including a couple of examples buy an additional 17% holding in core Hamilton Willis, and completing the acquisition of the Insurance Noodle in the U.S.

Total debt was $1.2 billion and total stockholders equity was also $1.2 billion.

As I've said before, we have a very healthy balance sheet, we continue to generate strong cash flows which will allow us great flexibility in our future capital management plans.

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

Thank you, Pat.

So for the full-year of 2007, we expect continued growth in organic commissions and fees, modest adjusted operating margin expansion in 2007 compared to last year, and we expect earnings per diluted share to continue to grow.

All the things that we have said in the past, we reiterate now.

The Company still expects to deliver breakout financial performance by 2010, with financial targets of industry leading organic revenue growth, salary and benefit expense as a percentage of total revenues to be below 54%, and adjusted operating margin of 28% or better.

That's the reason why we have the Shaping the Future initiatives so that we can track the performance as we get to our goals on a yearly basis getting to 2010.

I'll be very, very happy, along with my colleagues to answer any questions that you may have.

Thank you.

(OPERATOR INSTRUCTIONS) Keith Walsh of Citigroup, your line is open.

Good morning, everyone.

Good morning.

Two questions for Pat, I guess.

First, in associates and other, that bounces around quite a bit and I know you've made some comments on the call about this.

Can you just give us some color of what else is in there besides Gras Savoge?

And then secondly, on the lease expense, the $7 million we're looking at, is there any offset to this?

And I'm assuming this $7 million is going to be in the operating expense line.

In associates it's virtually Gras Savoge, there's a couple of other bits and pieces we have an associate in the Middle East as well (inaudible), but it's mostly Gras Savoge that's in there.

In terms of the lease expense, yes, we talked last year about, obviously, about the savings we were going to make from all of the Shaping our Future investments we made last year net of the rental expense.

So the rental expense, the lease expense will nudge up the other operating expenses a bit.

The savings we're making are more predominantly on the S&B line, a little bit on the other operation expense line, but predominantly on the S&B line, so you will see kind of savings on S&B which, again, you can see coming through now what it's like tick up in the other operating expenses.

Okay.

That's very helpful.

And then just on the Gras Savoge part.

Why does that bounce around so much?

Is there a lot of seasonality with that business?

Yes, I mean there's a little bit of seasonality when they earn a predomestic amount of their income in the first quarter and then second, third and fourth less so.

Great.

Thank you very much.

Jay Gelb of Lehman Brothers, your line is open.

Thank you and good morning.

Good morning, Jay.

Joe, on the organic growth we've seen some of the other insurance brokers show accelerating growth from first quarter '07 to second quarter '07.

Willis did not post that this quarter.

I understand the tough comps in global versus a year ago, but can you give us a sense whether we might see some acceleration down the road?

Well, first of all, I think if you look back over the last 13, 14 quarters, I think if you look at the peer group, I think we out gained them almost every quarter.

I don't say that arrogantly, but you're looking at it off of a different base.

So I think that that's the first consideration.

Secondly, if you look at our retail businesses, for example, our North American operations in the last four quarters were seven, four, six and five, and in international, eight plus eight, plus eight, eight, and seven, more consistent.

That's why I went into the explanation of the lumpiness of some of the specialist businesses which you see reflected in the second quarter.

So I think that our organic growth given, you know, that lumpiness and given the fact that it's compared to 17% for that business in the second quarter of last year, you got to remember, also, that our revenues grew 10% in the second quarter of a year ago which, again, is outstanding.

So the comparisons, you know, we have to keep in mind, so I'm fairly optimistic given the market headwinds, you know, about the future of organic growth.

We've always grown organically very, very well in this quarter.

There was some lumpiness for the reasons that I mentioned, but you know, the headwinds are there, but I think we'll continue to grow the revenues nicely along with the margins.

Okay.

And then on the foreign exchange, just so I understand it, should that continue to be an impact in the second half of this year based on where -- based on movements in exchange rates?

Yes, Jay, I would expect that we're $0.01 to the good for the year to date and we'll end up, I would expect, negative for the full-year.

Okay.

And then, Joe, on the commission front, can you give us a sense in terms of how much or what the mix is currently between commission and fee revenue currently and how that's changed over time, and how it may look going forward?

I think, you know, it's always been our ambition to change the mix a little bit.

It started out, I guess, when I got here seven years ago, it'd be about 70% commissions, 30% fees.

I think we're now in the 60/40 range, and it was always our intention to get that to 50/50.

But, you know, that could change as well, because with our initiatives in SME and our initiatives in the middle market, which are all commission driven for the most part, plus MGAs and things of that network and building our network like we have in the U.K., which has been very successful, I would guess it would probably, I would say that 60/40 is something that you're going to see going forward.

Okay.

That's helpful.

Thanks very much.

Thank you.

Matthew Heimermann of JPMorgan Securities, your line is open.

Hi.

Good morning, everyone.

A couple of questions.

First, a lot of folks are talking about kind of pushing for better commission.

Is there -- can you just give us a sense of how that -- maybe what inning we're in and maybe quantify what the benefit you've seen so far?

I can't quantify the benefit but we have a very elaborate tracking system as it relates to the commissions that we get.

Not only by business but by country, by office, and by business line so that we ensure that we are getting the maximum commissions that we expect from carriers for the business that we're given, and we look to see if there are any discrepancies.

For example, in one part of the world for the same line of business with the same carrier, we might be getting, let's say, 8%, and someplace else we're getting something higher, and as a result, we're trying to become much more coordinated as it relates to what we're doing and where we're doing it, and we feel very comfortable even more comfortable every day that we're getting a good handle on it.

So it's not just, you know, Matt, you get up and say let's get more commissions and we just get them, it's much more scientific.

It's much more intelligent and it's much more focused and especially done on a globally coordinated basis.

So we're seeing good results from that but still early stages.

And I would think we're going to get better and better at it as we go along.

Maybe another way of asking that, like if you look at the mid market, for example, do you -- how big of a disparity do you feel like have you in terms of what you're getting paid versus a broker who's taking supplemental commissions?

What's the spread?

I don't know what they're getting but I will tell you that when we say we're not going to take supplemental compensation, I do not mean I don't want to get paid.

I want to make that very clear.

I just don't want to get paid that way.

I think it's a conflict.

I think it's wrong.

But that doesn't mean I don't want to get paid.

So anybody that wants to pay me with supplementals, I won't take them, but we certainly deserve more commissions up front and I'll be glad to take them, and that's what we're talking about as we go through this study that I'm making reference to.

Okay.

You gave the percentage of employee benefits for this quarter, I think you said 15%, can you give us what it was a year ago this quarter?

12.

12?

Okay.

And then the acquisitions you made this quarter, do you have an amount that you spent in terms of the consideration paid both to increase your stake in Coyle Hamilton as well as the Insurance Noodle purchase?

I won't split that out for you now, Matt.

As I say in total acquisitions is about $60 million and no single one of that made up more than half of that total.

Okay.

And then the last question was just could you touch a bit either Joe or Grahame, on the reinsurance business and just what the growth looked like specifically there?

And in particular, I'd just be curious if year-on-year you've really have seen benefit from some of the capital markets or alternative coverage placements?

I'm going to do even better than me or Grahame.

I'm going to let Peter Hearn who's the Chairman and CEO of Willis Re tell you that, okay, Matt?

All right.

Perfect.

Thanks, Joe.

Matt, to answer the second part of your question, our capital markets continue to advance and perform strongly since separating them out from our analytics unit at January 1, 2007 and quite frankly a lot of the growth that we've realized has been the nontraditional and capital markets area to offset the volatility we've seen in the reinsurance market as a result of primary rate decreases, retention increases, continued pressure on fees and brokerage consolidation, capacity and risk appetite, buyer and seller, and invasive regulation, as evidenced by Florida.

Our new business growth continues to be strong and on plan.

Unfortunately, there's been some increased retentions of business, and there's overall rate decreases in the reinsurance sector between 5 and 30% depending on the sector involved.

Okay.

And then what did that roll up to in the quarter on an organic basis?

1%.

1%?

Okay.

Perfect.

All right.

Thank you so much.

Meyer Shields of Stifel Nicolaus.

Your line is open.

Thanks.

Good morning.

Within Gras Savoge, I around that there's seasonality but other than the second quarter, should we expect losses from the unit going forward?

No, I wouldn't expect for full-year, Meyer, that we'll make more money out of our associates, most particularly out of Gras Savoge than we made last year.

As you'd expect increased profits from Gras Savoge partly due to higher profit at Gras Savoge and partly due to our slightly increased shareholding in Gras Savoge.

Okay.

So that should help for modeling going forward.

Within the reinsurance segment, I guess right now we've had this curious issue where reinsurance rates are going down and people are buying less of it.

Do you have an idea when that crosses over?

In other words, when reinsurance rates are low enough so that the actual volume starts increasing?

Meyer, it really depends on the sectors.

Some of our businesses are advantaged by decreases in the reinsurance pricing where buyers look at the delta between primary and reinsurance pricing and say now is the time to buy.

Others sit there and they look at the significantly strong balance sheets they have as a result of 2006 and 2007 and they feel more comfortable retaining risk.

As we all know, that's subject to change on a very rapid basis as a result of calamitous events or a realization of the inadequacy of underlying pricing.

Okay.

And I guess going back to the insurance carriers that are now playing supplementals, I understand that you've turned those down.

Can you give us any update in terms of how successful you've been to date in negotiating higher up front commissions with those guys?

I'm not going to quantify it for you, but I'll tell you that we've been successful at being able to get paid the way in which we think is the correct way to be paid.

Okay.

Thank you very much.

You're welcome.

David Small of Bear Stearns, your line is open.

Good morning.

Two quick questions.

The first is on your capital structure.

Could you just let us know where you're willing to let leverage go 'til?

And I think you said in the past you wanted to keep investment grade but just help us understand why an investment grade rating is important for your business?

Sure.

I'll take that one.

Good morning, David.

We continue to look at this, there's a couple of things.

In terms of our generic business model, investment grade, you know, it's not part of our core business model.

We think it's important but not critical in terms of maintaining some level of financial flexibility for us.

That said, you know, we think our business model is good, our cash flow generation is good, our consistency of cash flow generation is there for everybody to see over the last few years.

So we continue to look at what our leverage levels are, what we can afford, and we'll continue to look at trying to generate the best capital structure to create value.

Okay.

And then just on a different note, I think in some of the numbers you just gave, you kind of showed a mixed shift toward employee benefits.

Could you just kind of compare the margins of the employee benefits business, maybe, versus the other businesses?

I would tell you that they are in line with our retail businesses.

And I expect from a margin point of view in the future to give you a little bit more granularity with regard to that on an EBIT basis.

But I would tell you that, you know, obviously, our highest business is our global businesses, they're in the high 20s.

Our international is in the mid-20s, and our North America retail business is about -- is in the low to mid-20s.

And it's the employee benefits business is consistent with the retail businesses.

So, and we expect all of them, obviously, to be growing over the next, you know, several years to get us to our target 28% or better.

Great.

Thank you.

You're welcome.

Thomas Mitchell of Miller Tabak, your line is open.

Yes.

If we look at the overall insurance marketplace as a combination of decline in rates together with appreciation in the values insured, and together with propensity to insure or percentage of values insured, going forward, how does that equation look to you going, say, for the second half of this year and into 2008?

Well, I think you're looking at the same kind of circumstances that you're looking at right now.

All of the things that you described is exactly what we're experiencing, and a lot of the reasons why we've invested heavily in things like employee benefits, we've invested heavily, you know, in some of our other areas, and that has grown nicely for us.

Our retail businesses, we have grown nicely, as you see.

Where you can grow 6, 7%, or more in retail businesses, which we've concentrated on over the years and working together it's just for these kinds of occasions.

So if your question is, is what could we expect during this market environment, if everything stays the same, is I think you would expect, you know, a modest improvement in revenues but well enough so that we could grow our margins on a modest basis as well, and our earnings per share basically rather in line with what I've seen most people expect.

You don't actually see, I mean if you think about tall buildings, oil rigs, things in Latin America and China, and so forth, you don't see the combination of, let's say, appreciation in the values or the values being insured in the propensity to insure matching or significantly outpacing the effect of lower property and casualty insurance rates.

Is that correct?

That's not -- it's not something that's predictable.

I can't predict that.

I can tell you that if that happens, we will be in a great position to take care of it because in the places you mentioned, we have great presence.

We got great presence in China.

We have 20 branches in China.

And if the tall buildings keep going up and we keep building great businesses on the ground, and if you're right, and I hope you are, then we're going, then the amount of insurance will outpace the rates going down.

South America, as you mentioned, is a big area for us, and we run at high double-digit growth rates, you know, into the 20s in South America.

So I would expect that if you're right, and I hope you are, then we'll take full advantage of that, but it's nothing that I can tell that you is something that's predictable and I can hang my hat on.

Okay.

Thank you.

You're welcome.

Chris Neczypor of Goldman Sachs.

Your line is open.

Hi.

Good morning.

Pat, any potential impact in the second half from the tax changes in the U.K.?

No, we look to [lean pack] for us isn't going to be a big number.

It's not going to be a material number.

Okay.

Thanks.

And then you mentioned the timing impact on the earnings from Gras Savoge and, you know, not to beat a dead horse but does that imply the timing benefit was in the first quarter or it will come in the third quarter?

Overall for the full-year, we'll grow our earnings in Gras Savoge, first quarter was up quite a bit, a little bit down in the second quarter, but over the full-year, I would expect that we would grow our earnings from Gras Savoge.

Okay.

And then lastly, just Joe, following up on your margin discussion, could you help us understand how margins compare for Internet distributors in the small commercial market compared to the rest of your North American business?

I can't tell you how they compare because I don't know what their margins are.

I can tell you that if you take our margins which I think are pretty high and have been historically high, and we do a fairly considerable amount of SME business and low middle market business, and then you apply the Internet through the Noodle to that business and overlay it as a process, then you can only figure that our margins are going to be better off, you know, because we apply that system to something that was done heretofore manually.

So I would expect to see expansion over the course of the next year as we install that system first in North America and then around the world.

Overlay that with the MGA business that will be executed by the same function, and then overlay that with building networks around the world.

For example, in the U.K., we have a network of 72 brokers that are part of our network that is done systematically but not as elegantly as Noodle will provide, and I think when you do that, you're going to even have margins that are increasing, which is already a network that has very high margins.

So all of that is yet to come.

And if you take that and apply it to all of our Shaping the Future initiatives, we are quite excited about that.

If you take our small business around the world, which is a good 20%, you know, of our business, and low middle market, which is 20 to 30 in total, and you apply a system to it, which will increase our efficiencies and our margins, you can see why we're excited about margin expansion over the next couple of years.

Great.

Thank you.

You're welcome.

Josh Pechter of Cacti, your line is open.

Joe, looking a little longer-term maybe into late '07-'08 you guys use the word pipeline a lot in these calls and no one ever asks to you to kind of quantify or offer some insight on what are the people around the U.S.

and Europe telling you about what customers, or what the customer pipeline looks like?

Can you offer some insight into what the pipeline for Willis looks like?

Yes, we check our pipelines all the time.

As a matter of fact, we have Chris London who's here who works on the pipelines all over the world, and you know, under the names of Bumble Bee and Killer Bee, and all of these kinds of things.

But we track them, you know, very, very well.

And we track them by office with regard to close rates, and we can quantify that for you on the next call, but we have pretty clear indication of where we think we might be and what the close rates are, how long the gestation period is.

And Chris, you want to add anything to that, you could.

And it varies a lot by segment and by geography but it's improving consistently over the last two years and will continue to do so.

So looking forward, you're more optimistic that what you're hearing from the field is the pipeline is getting bigger and stronger as opposed to the environment which makes everyone on the call think it's getting weaker and more competitive?

Well, the environment is getting weaker but that doesn't mean we are.

You got to differentiate between the two.

I'm being honest you with when I'm telling you the rates are going down, but that doesn't mean that we can't overcome it by making more calls, you make more calls, you close more, this is not an industry.

And I don't mean this in an arrogant sense, but I think everybody will agree that grows organically by making calls to a lot of people and tracking the results of those calls and how long it takes to open accounts.

It's just not historically been the legacy of the business.

The legacy of the business has been more acquiring than it has been making calls.

But we believe that in the business where everybody's got to buy what we're selling, that if you make enough calls and you have a pretty good idea what the close rate is, you're going to improve your business.

And if you look back over the last several years, and people have said to me, why is your revenue growth always better than everybody's, I'll tell you, it's accountability through people making calls and wanting to know, you know, what they're doing and how they're doing it.

The easy part about the business is, is that everybody's got to buy what we sell.

The hard part is that somebody already is doing business with them and the rates aren't consistent.

And the way you overcome it is by good systemic calling programs that perform with great accountability, and everybody be engaged in the sales process, and that's the way it works.

But you're, I guess it came up because you mentioned the word lack of predictability in the business and you've got a pretty good eight-month window into what your thousands of people are telling you is going on out there with the customer directly.

We would think it would be pretty predictable in knowing, given your close rates, exactly where Willis is going to kind of end up and I guess that's why people are more or less excited about the business.

Well, I'm, as you know, Josh, I'm always excited about the business.

Predictably, though, we don't predict rates.

We have a pretty good idea in the next year or so where they're going to be, but that's unpredictable.

In a lot of cases have you one-off business that isn't predictable.

Construction, for example, and surety businesses and wrap-ups are unpredictable.

And some of the trade finance business we do is lumpy and unpredictable and one-off, but in a lot of cases recurring, we just don't know when.

That's what I meant.

Those things are unpredictable.

We have a great in space business, fantastic.

But we don't happen to get paid when they don't take off.

You know, they tell us it is going to happen in a certain quarter and then it doesn't, there's nothing much we can do about it.

That's unpredictable but the predictability of our retail business, which is the reason why I went through the consistency of the numbers is where the calling programs take place.

And if those businesses are built well on the ground and we're doing businesses across the board on a consistent basis, then our London businesses and the places where we specialize, which is our core strategy, be good at what we do well, our core businesses will go higher.

So the predictability comes in our retail businesses, through calling programs, the unpredictability comes, a lot of cases, in our specialism businesses because of the lumpiness of it.

Then you throw the reinsurance issue in there but generally speaking, I'm very upbeat about our capability, I'm upbeat about our organic growth, I'm upbeat about all of those things, but the environment is what it is, but you have to separate that candor with the excitement that I feel about the way we run our business.

Thanks, Joe.

Thank you.

Anybody else?

(OPERATOR INSTRUCTIONS) Meyer Shields of Stifel Nicolaus.

Your line is open.

Thanks.

Two quick questions.

Can you give us a numeric update in terms of how far along the accelerated share repurchase program is?

I won't give you precise number.

We expect it to finish sometime in kind of October- November time.

Okay.

And I guess in general, one of the theories out there is that insurance companies will be more disciplined this time around in contrast to previous cycles because the rating agencies are being stricter.

Are you seeing any influence of that when you negotiate rates?

Not that we can see.

Everybody at this table is listening to your question and everybody is shaking their head no.

Okay.

Thank you.

Thank you.

Thank you very much, everybody.

Appreciate the questions, appreciate you listening, have a great day.

Thank you.

That concludes today's call.

All lines may disconnect.

Once again, that concludes today's call.

All lines may disconnect.