Willis Towers Watson PLC (WTW) 2007 Q3 法說會逐字稿

Good morning, everyone.

Welcome to today's conference call.

At this time all lines are on listen only for today's conference.

(OPERATOR INSTRUCTIONS) This morning's conference is also being recorded and if have you any objections you may disconnect at this time.

I would now like to turn our conference over this morning to Ms.

Kerry Calaiaro Director of Investor Relations.

Ms.

Calaiaro, you may proceed.

Thank you very much.

They got it right!

Good morning and welcome to our earnings conference call and webcast at Willis.com for the third 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 a.m.

this morning and ending November 25, 2007 at 10 p.m.

Eastern time by calling 866-431-2816 or 1-203-369-0947 outside the U.S.

with no passcode or by accessing the website.

If you have any questions after the call, please dial me directly at 212-915-8084.

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 19895.

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.

Thank you, Kerry, and welcome everybody.

Thank you for joining us today for our third quarter earnings results.

With me today is Grahame Millwater, our COO; Pat Regan, our CFO; we also have a number of our partners group members to answer any questions.

All the colleagues that are with me today that run business units so any questions you have about anything, they are here to be helpful and answer your questions.

Obviously, we are very pleased about this quarter.

We have always philosophically said to ourselves that we're going to run this business based upon any market environment, spend less than you make, adhere to our Shaping the Future strategy, and this quarter is a great example of having accomplished all of that.

As you know, we'll be holding our Investor Day next Friday and I will be joined by all of the people who are responsible for, I think these great results and the progress we have made and we're looking very much forward to talking to you even more about the future.

I think these results again are yet another example of a quarter with good top line growth, margin expansion, and earnings growth, and basically delivering on what we said we would do.

Our organic growth in commissions and fees was 4% for the third quarter, but most importantly, 6% growth in net new business and a negative 2% from declining rates and other factors.

The market obviously continues to be soft with rates down double digit in practically every line and this softness is likely to continue through 2008.

Reinsurance has also been affected by significantly higher retentions and rates -- and lower rates at the same time.

But the 6% new business remains a testament I think to the sales culture and progress that we're making in those targeted growth areas such as in our specialist expertise and our emerging markets and I can go on and on with all of the progress we're making so we're really proud of that.

Our organic growth and operating expenses this quarter was 2%.

Now, that 2% also includes the increases in the rent in our new New York building, headquarters and in our new building in London, so if you subtract that, obviously our expense growth was rather low, and also that 2% is a reflection of, if you can look back to the beginning of 2006, when our expense growth was 8%, we brought it down to 2 anticipating the softness, anticipating the market conditions which is what you're supposed to do.

Going back to suggest that you run this business in all climates so we're really really proud of that and we have achieved that from executing our Shaping the Future initiatives, the cost savings which come from those initiatives and obviously the effect of the charges last year and I think what is great expense management.

The result of all of this was the adjusted operating margin for the third quarter 2007 was up 110 basis points from a year ago at 16.2%, in our seasonally latest quarter.

To highlight how well positioned we are to perform in a soft market, this is I think kind of an interesting comparison is that last year in the third quarter, we had 8% organic revenue growth with 4% organic expense growth and delivered a 15% adjusted operating margin.

So we're delivering 16.2 with 4% growth, not 8, 2% expense growth, not 4, and we grow 110 basis points which means Shaping the Future is working, the diligence of our expense management, and making us even more productive and efficient.

The adjusted earnings per diluted share was $0.46 in the third quarter, up 28% from last year's adjusted earnings per share.

We have $0.07 tax credit and FX hurt us by $0.02 so in all operating earnings were still $0.41, a 14% increase on last year's adjusted earnings per share.

Now let me talk about our businesses.

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

Each faced a rate headwind and reinsurance also continues to see, as I said earlier higher retentions by healthy underwriters.

The heart of our Shaping our Future strategy is profitable growth.

Grow the top line, spend less than you make and expand margins.

That's the strategy.

That's what we do.

That's what we look at every day and that's what we ask ourselves.

Now let me talk about our business units a little bit more in detail, first our retail business, North American International and then I'll talk about Global business with specialties and reinsurance.

In North America the organic growth in commission and fees was 2% for the third quarter and 4% through the nine months and obviously rates in North America have declined on average of about 15 to 20%.

Despite this we had good growth in the Southeast, mainly Florida.

I'm really excited about our growth in Florida.

It was phenomenal, Central, West, and New York, all of those regions did very, very well.

We're starting to come back I think very very nicely in the West as well, and our programs business this quarter was spectacular.

Now the top line was moderated somewhat this year for several reasons.

We slowed the pace and you got to understand the strategy and I'll be glad to talk about it later on and Don Bailey is here to talk about it as well.

2007 for us was to get our platform right, to get our P&L sort of in a row, and to harvest the hires or the recruits from 2005 and 2006.

That was what we set out to do, and so the face of hiring this year has been very targeted by geography and specialty and we didn't do a lot of that because what we wanted to do was now kind of take a breath and get the other stuff straight.

The best manifestation of all of that and the efficiencies from Shaping the Future and accretion from the hires has contributed to a significant improvement in adjusted operating margin in North America to around the 18 to 19% mark through nine months, so that's an increase of over 500 basis points from a year ago when you exclude the 2006 Shaping the Future expenditures.

So, with all of the things that we're doing, we kind of regrouped, said this is the year we're going to get the P&L's right, get the margins increased, get the platform right , and then start to take off again with a lot of the initiatives we have to grow our business which we are going to talk about later on so we're really excited about what's going on in North America.

International is a terrific story, in that unit, our organic growth in commissions and fees was a strong 7% for the third quarter of 2007 and the nine months, but more importantly, in our international division, they've consistently grown 6, 7, 8% quarter after quarter after quarter after quarter, and when you take such a diverse number of countries and disparate in a lot of different ways and you consistently perform that way, I couldn't be more proud of the results of international.

This was also in the face of persistent rate headwinds in most countries with rates down in the range of 5 to 20%.

Our growth in international continues to be driven by very strong revenue growth in the emerging markets we have targeted, and I might add that we have created new, emerging markets division which would have China and India and the Middle East and Eastern Europe and Russia, so we can start to focus on the growth in those areas.

We have great presence in all those emerging markets and almost none of the results that we're talking about have been impacted by any of those places yet.

So that's yet to come as we grow these areas and we're very very excited about that.

We saw a modest decline in revenues in the UK and Ireland, primarily due to soft market conditions where the rates were down 15, 20%.

The story here is consistent revenue growth and margins in the mid 20s.

I don't know of anybody else that can get international margins like that in the mid 20s but we did and we're very proud of that.

Our global businesses comprising of global specialties and reinsurance.

The organic growth in commissions and fees was 2% for the third quarter 2007 and nine months.

The margins in global remain around 30% for the nine months 2007 as we bring our technical skills and resources to our clients while continuing to invest to enhance specialist expertise.

Analytics and capital markets and reinsurance.

Now our specialisms, the organic growth in commissions and fees was double digits this quarter, and as we mentioned last quarter , the revenue stream can be more volatile in this unit.

You'll recall some people asked me about what was going on with specialisms and I say it's a business that gets patchy because you never know what happens with things like satellite launches.

The satellites just didn't launch in the second quarter.

They launched in the third quarter, and as a result, you saw double digit growth.

So that was good and we also had great performance in energy and FINEX and construction and niche.

Our specialist businesses are outstanding.

It's the core of what we do.

We're very good at those things and we're very proud of that.

We also are seeing great rate reductions in this area.

Aerospace and Marine are down at least 20% with FINEX, energy and niche, our niche business is down 10 to 15%.

Now, obviously in reinsurance, you had bad negative organic revenue growth in commissions and fees in the third quarter, as the reinsurance market has been hit by a combination of declining rates, insurers buying less and other changes such as the Florida Legislation.

Premium rate reductions of approximately 10% on average, so you got everything going on in the wrong direction but I will tell you that I am very very proud of our reinsurance operation.

None of this has come from losing accounts, it's simply the nature of the way business is today, but we have a very strong initiative on to open new accounts, to raise our level of business with the insurance companies that we do do business with.

We're very heavily involved in capital markets, so we continue to have very high retention levels.

This is all due to the environment, not the retention or the lack of retention of accounts.

So, we expect the market to continue to soften in light of favorable wash trends, strong reserves and ROE's achieved the insurance companies, but this quarter is just across-the-board.

I can't tell you how delighted all of us are.

We work hard at this and we work hard at delivering results like this, and so we're very very pleased with what I have just reported and with that let me turn the microphone over to Grahame Millwater who is going to talk to you a little bit about Shaping the Future although that will be the thrust of our conversation at

Thank you.

As Joe mentioned we continue to drive Shaping our Future across all our business units.

Normally on this call I would give you more detail to both what we've achieved both in terms of activities and associated benefits, however given we're going to spend considerable time on this at Investor Day next week, today I will be brief.

I want to leave you with a few key take-aways today.

All current initiatives are on track and delivering on target for both revenue growth and cost initiatives, cost benefits.

This is obviously manifesting itself in the things that Joe just outlined.

Building upon the success we're focusing in a few other key areas, fundamentally to drive revenue growth and enhance client retention in this difficult market.

These include focusing on our carrier strategy and investing further in our sales and retention processes.

Again, we will outline more on this next week.

We also continue to strengthen our program management structure to ensure we continue to execute and deliver revenue, growth, cost control and ultimately operating margin.

This is all about relentless execution.

And we look forward to telling you much more a week from tomorrow.

With that I'll return the call to Joe.

Thank you, and this is a hand off day.

Now Pat Regan?

Thank you, Joe, and good morning, everyone.

Reported and adjusted earnings for the third quarter were $67 million, up 18% from the $57 million adjusted net income for the same period in 2006.

As you will remember in Q3 2006, our reported net income was $89 million as we incurred one off shaping our future costs as well as a gain on the sale of our London headquarters.

Our comparisons to 2006 will be adjusted to exclude the gain and the charges.

This all equates to earnings per diluted share of $0.46 for the third quarter of 2007, a 28% increase on the adjusted $0.36 per diluted share in the same period 2006.

The earnings per diluted share included a positive impact from the release of tax provisions of approximately $0.07 in the quarter partly offset by a $0.02 loss from foreign exchange.

Excluding these items, underlying earnings per share for the quarter were $0.41, a 14% increase over last year.

Turning to our business unit revenues, for the third quarter 2007, total reported revenues were $574 million, growth of 6% from last year.

Foreign currency translation increased reported revenues by 2% and net acquisitions had a positive impact of 1% on reported revenues.

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

The 4% growth was driven by 7% in international, 2% in North America and 2% for other level business units.

International growth has been remarkably consistent with now six consecutive quarters of organic revenue growth at 6% or more.

This is driven by a number of our real growth engines such as Asia, Russia, China, and Latin America, all of which turn out very strong double digit organic revenue growth each quarter.

In North America, as Joe mentioned, we're very much focused on profitable growth.

In fact over the last two years in North America, we've grown our revenue per FTE to approximately $250 thousand, which has contributed significantly to the operating margin expansion.

In Global we enjoyed double digit organic revenue growth in our global specialty business which is partially offset by a revenue decline in the reinsurance business reflecting the tough market conditions in that sector.

On the operating margin, as Joe mentioned with the onset of the soft market we've planned ahead to ensure we're able to achieve margin expansion in a soft market with potentially lower levels of revenue growth.

We've been working very hard to drive productivity improvements throughout our business, and to lower our organic cost growth each quarter.

That is the same-stores cost growth excluding the impact of foreign exchange and acquisitions and disposals.

We've been very successful in achieving this.

Since the first quarter of 2006, we reduced our quarterly organic expense growth rate from 8% to now 2% organic cost growth in the third quarter this year.

And even after you factor in the incremental costs of the new buildings in London and New York, that it's about 150 basis points of the 200 basis points in the third quarter of 2007.

This has been a major achievement for us.

This has meant that despite the soft market conditions, with rate decreases across-the-board, we're able to achieve and generate margin expansion in six out of the last seven quarters.

Our consistent margin expansion through each quarter has allowed us to grow the adjusted operating margin from 21% for the full year 2005 to 24% for the last 12 months to Q3 2007.

The adjusted operating margin for the quarter was 16.2%, up from 15.1% in 2006, an improvement of 110 basis points.

Excluding the impact of foreign exchange, the margin would have increased by over 200 basis points.

Again, that 200 basis point improvement is driven by the 4% organic revenue growth exceeding the 2% organic cost growth.

Despite the soft market we've managed to continue to grow our revenue per FTE, a key measure of productivity.

Net headcount at 30, September, 2007, was just over 13,000, down slightly since the second quarter.

Our revenue per FTE was approximately $192,000 for the 12 months ended September 30, 2007, up 5% from the [$182,000] for the same period 2006.

As we've mentioned the adjusted operating margin improvement was again particularly driven by our retail businesses.

We saw a year-over-year adjusted margin improvement in the third quarter of approximately 200 basis points for our retail operations as we continue to focus on productivity and profitable growth.

We've seen the benefits coming through from Shaping our Future initiatives and good expense control.

In addition, lower pension expense aided the group margin expansion tempered by a negative impact from foreign currency translation.

Salaries and benefit expenses for the quarter were $352 million or 61.3% of revenues compared with 62.6% a year ago.

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

Other adjusted operating expenses for the quarter were $116 million or 20.2% of revenue in line with the 19.5% of revenues a year ago.

Our continued focus on cost control has offset the increase in the percentage of operating expenses due to the impact of our new building.

For the nine months, total reported revenues were [$1.9 million] up 7%.

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

Organic revenue growth was 4% for the nine months.

Adjusted operating margin for the nine months was 24.2%, up from 22.4% a year ago, an improvement of 180 basis points.

Again, that margin improvement was particularly driven by our retail business units which saw around 400 basis points of adjusted margin expansion in the nine months.

The margin improvement continued to be driven by execution of the Shaping our Future initiatives, good expense control, and lower pension expense.

Adjusted salary and benefit costs for the nine months was 56.2% of total revenues compared with 57.5% a year ago.

This shows a continued improvement in this measure of 130 basis points.

Other adjusted operating expenses for the nine month period was 17.6% of revenues compared to 17.7% for the same period 2006.

As I mentioned earlier, foreign currency translation had a $0.02 negative impact on earnings per share in the third quarter and a negative impact of $0.01 for the nine month period.

Foreign exchange negatively impacted the operating margin by approximately 120 basis points in the third quarter and about 70 basis points for the first nine months.

Given the current dollar rates against sterling and the euro and the the hedging gains we achieved in the fourth quarter of last year I'd continue to expect that for the full year we will see a small foreign exchange decline compared to 2006 and therefore we'll see a small foreign exchange loss in the fourth quarter.

Our tax rate for the quarter was approximately 15.8% due to the release of tax provisions following the resolution of prior period tax provisions.

Excluding the release of these provisions, and other one off items, our underlying tax rate for the quarter and the nine months was approximately 30.5%.

I would expect the underlying tax rates, again excluding the release of the provisions in the third quarter to remain at about this level for the full year 2007.

Turning then to capital management.

During the quarter, there were no additional share repurchases as the ASR contract was still in effect.

The ASR contract has now been completed post quarter end.

As we've just discussed before, the Company has very strong credit ratios and allows a good deal of financial flexibility.

We intend to continue to proactively manage our cash.

There was $210 million of cash and cash equivalents at 30, September, 2007, and during the quarter we used $36 million of cash for dividends and $5 million for acquisitions.

We also used approximately $37 million of cash for additions to fixed assets on our new buildings.

Total debt was $1.2 billion and total stock options equity was 1.3 billion.

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

Thanks, Pat.

I guess the best way to summarize is to again say that our Shaping the Future initiatives are working.

You'll hear more about that on November 2, and in the first nine months of 2007, as our industry experienced soft markets and higher retentions, we delivered adjusted diluted earnings per share growth of 25% for the nine months to $2.12, organic revenue growth of 4% with 5% in net new business, adjusted operating margin expansion to 24.2%, and salary and benefit expense to revenue improvement to 56%.

As you'll remember, that was one of the things we tried to do because our salary and benefit line got high after all of the recruiting, so we regrouped and made the place more efficient.

We remain obviously very optimistic about the future and our strategy going forward.

For the full year 2007, we expect as we have suggested all along continued growth in organic commissions and fees, a modest adjusted operating margin expansion in 2007 compared to last year to approximately 24%.

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

So we're well underway to Shaping our Future strategy.

We think it's working.

Our profitable growth will be driven by our sales culture, continued successful execution of the Shaping our Future strategy, and obviously always diligent expense management and we look forward to seeing everybody in person at Investor Day in person or again through the webcast.

We'll be very very glad to answer any questions that you have at this time.

Thank you.

(OPERATOR INSTRUCTIONS) The first question comes from Charlie Gates from Credit Suisse.

Your line is open.

Thank you, good morning.

Hi, Charlie.

My first question, could you elaborate on how you believe commercial lines pricing has evolved during 2007?

Evolved in what way?

You got to be a little bit more granular than that?

What kind of a decline did you see in the second quarter?

What kind of a decline did you see in the third?

That's what I tried to say.

Okay, I think if your question is, is that as the -- over the period of 2007 have we found it declining or stabilizing I guess is your question is I'd say declining.

I think it's been soft for the better part of the last -- the market has been soft for the better part of the last year, year and a half, but now what you're seeing is, I think a steeper decline in the softness and I think that will continue through 2008 at least, Charlie.

Could you elaborate, say if it was down X percent in the second quarter it's down Y in the third?

Well, obviously, as I said earlier, we had a net effect of 2% rate impact against our 6% revenue growth but I would say that you're looking at across-the-board around the world of rates down 15 to 20%.

There was my first question.

My second question, my only other question, to what extent do you believe Company is vulnerable to litigation similar to what Guy Carpenter is facing now in Connecticut?

I'll answer that question and then, well, I'll answer that question and if you want to get more granular, my Legal Counsel, crack Legal Counsel is here, Adam Ciongoli.

Obviously the first thing that we did when we saw that, as you can imagine, Charlie, is to look to see what that was about.

Obviously that was, I guess the reinsurance equivalent of bid rigging or something like that.

We have found nothing like that whatsoever that we do.

As a matter of fact in our reinsurance operation, we're very comfortable with everything that we do.

I mean, I can get more granular if you want me to be, but the answer is we don't think we're vulnerable at all.

Thank you.

Okay.

Our next question comes from Keith Walsh with Citigroup.

Mr.

Walsh, your line is open.

Hi, good morning, everyone.

How are you?

Good, thank you.

First question, Joe, just on the comp and benefits line.

I know you've talked about bringing that below 54% for quite awhile now.

What's the key driver here?

Is that really pension related or what are the pieces that we're going to--?

I don't think it's pension related.

I just think it's good management of people, recruits, raises, benefits.

It's all the above.

It's how you recruit and how selective you are in your recruiting, constantly looking at performance management in terms of the people that are doing well, the people that are contributing and those that are not.

I have found in my years of doing this, Keith, that you always got to look at the people and you got to look who performs, who contributes, and it's a constant thing that you do and we do that very very well here.

We don't recruit on a willie-nillie basis the way we pay.

As you know we don't make guarantees, we don't do the kinds of things that maybe some other people do.

It's just really good management of our headcount, of our people, of our resources, and what's important about that is not only the efficiency but this is a people business, and the whole idea is to pay the people that you have as well as you can while not having so many people that are not performing so we're looking at that all of the time.

Our benefits I think are very very good but you're constantly looking at that line.

I don't think it's just the pension.

I think it's all of the things that we're talking about.

Keith, as well we talked about for the nine months the ratio going down 130 basis points.

Whatever we gained in that from pensions was offset by FX, so as Joe described, it's the underlying stuff that drove the increase.

Okay, great.

And then just the second question on the reinsurance business.

It sounds like there's some pressure there but I think a lot of news articles recently like to talk about significant margin pressure potentially in this industry over the next several years.

If you could just give us your outlook and comment on that?

Well, I think first of all in our reinsurance business, we put that together with our global businesses, as you know, but the margins in our reinsurance are very high and we're very proud of it.

I think in the next year or so, you're going to continue to see that pressure but I'm optimistic about what we're doing.

I think that we'll gain market share which will offset a lot of the rate and retention pressure that we've seen.

I think we'll do more business in the capital markets area which we think we're very very good at, and I think we have made, in the course of the last couple of years very big investments, Keith, in analytics especially and in people and reinsurance, so I'm looking at 2008 to see the harvesting of our great analytics.

I don't think we were the greatest in analytics a couple years ago but I think we're very good now and probably better than everybody else and so when I look to see how that will affect our market share penetration, I'm pretty optimistic about that, so we made the investment, we spent the money and now I think we should start to see the investment pay off, which should give us some sort of a buffer against further rate reductions and retentions next year, and hopefully, I might add, that because rates are so cheap in reinsurance, maybe the insurance companies will buy more reinsurance.

Okay, thanks a lot.

You're welcome.

Our next question comes from Jay Gelb with Lehman Brothers.

Sir, your line is open.

Hi, Jay.

Thank you, good morning, Joe.

Joe, I was hoping you could take a step back and talk a little bit about why your organic growth has been stronger relative to some of the other brokers that have reported results so far, to have flat organic growth versus others are seeing sharp declines but maybe you can just talk about what you think you're doing differently from a new business and retention perspective.

Well that's a, that requires a long answer, but I'll give you the short version and you'll hear more about that in detail next week.

What we've done is to basically, Jay, take all the segments that we deal with, global accounts, large accounts, middle market accounts, small commercial accounts, personal lines, and we have strategies against each one of those segments, so you got clients on the left-hand side that I just suggested, you got solutions right in the middle, and then on the right hand side the platform that delivers it, and we copiously look at that all the time.

I mean, people are accountable.

We have pipelines all over the world where we're constantly opening new accounts.

You see the 6% increase in new business.

These are things that we've put in place for a long time.

We have a global 550 strategy, it's run by a lady who's very goodbye the name of Carla D'Andre.

We have a person who runs our middle market business, Eric Joost, where we're taking all of the things that we're good at which is our core businesses, our specialisms and we're looking to see how we can apply that against the world.

Our branches around the world work very well together in distributing our product.

That's what they're supposed to do.

They aren't supposed to be out there as outliers isolated from the rest of the world.

They're supposed to distribute what our people in our manufacturing plants which is our specialties are supposed to be making.

We just brought Insurance Noodle as you know which is a processing operation for small accounts which we're going to now transport throughout the rest of the world, and make small business, not only more profitable but we're going to grow that with networks around the world.

So in short order, we spent a lot of time on strategies rather than worrying about soft markets, hard markets, and all that kind of stuff, all we know is people buy insurance, and if we can figure out by segment what is it they need, against the platform we're going to deliver it on, our business is going to go up.

We have a client advocacy program where they're real client advocates.

We've trained close to 500 people that are Certified Client Advocacy which is where we say instead of being expert at all of the products, be expert at the client and then know where to go in the vast resources of Willis to find the solutions which is our global approach, the thing actually works, and I don't know if there's a more joined up operation as my friends in London like to say, which means people working together than this place, and it's a business traditionally where that's been very difficult to do.

So if you take all of that together and I could obviously give you the long version which will be on Investor Day, that's why we do well.

All right, and then separate question, can you talk about the supplemental commission issue and how Willis intends to address that?

Yes.

We don't take them.

I don't know what else to say.

I mean, we don't take supplemental commissions.

We don't take contingents and we don't take supplemental commissions.

We've said that before and we just don't take them.

We'll be very glad to be paid for what we do.

We'll be very glad to be paid up front for what we do, but it's not going to be based upon anything other than what we do.

Okay, thanks for the answers.

Thank you.

Our next question comes from Matthew Heimermann with JPMorgan.

Sir, your line is open.

Hi, thank you.

Good morning, everyone.

Good morning.

A couple questions.

First, I'm wondering if some of the turmoil that you're seeing in the U.S.

Might create some additional acquisition opportunities for I know recently your focus has been more international but I wonder if the market changes that?

I think that I've always said with regard to acquisitions and as you know, Matthew, we have not been an acquirer per se, we've been more of an organic growth builder but that's not to say that I wouldn't want to know what's available and I wouldn't want to know how that availability could help fill in gaps in our business, so net, we are not acquirers of businesses but that does not mean that we would not be sanguine toward looking at opportunities, so I'd love to know where the dance is.

I'd love to know who's dancing, and if the opportunity arises where it fits very well with our culture, it fits very well with our direction of organic growth and it fits very well with the way we think these companies should be valued, yes, we would be very interested making acquisitions.

Do you think broadly speaking there's more people going to the dance today than there have been in the past?

I think it appears that way.

I think as the market gets softer that may very well be the case.

And then in the U.S., the North American business you've got 2% organic growth.

You mentioned there's some softness.

I was curious if you could give us a sense of what the growth rate was in employee benefits versus traditional PNC?

Yes.

The employee benefits raise is double digits, or you just talking about U.S?

Yes.

Okay.

You can give me North America and then the U.S.

--growth rate was in the high single digit, it was double digits across the world and that's something that we've spent a lot of time on in employee benefits, we made big investments in the last couple of years in employee benefits and that's an area that we expect to grow a lot, and we're very, very excited about it.

We've got a great platform in employee benefits, and that should be something that bodes very well for us going into next year.

In North America that's 125 million $150 million business for us, it's 350 million 400 million around the world if we don't include Glacewau, which we usually don't in our numbers, so I think we're in a great position.

We thought a couple years ago that employee benefits investments would make a lot of sense because we saw the soft market coming and that would be a good buffer for us, so we're very enthused about our platform in North America to answer your question, and just as enthused globally.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Our last question at this time comes from David Small with Bear Stearns.

Sir, your line is open.

Yes, good morning.

Joe, you talked earlier about analytics and my question is about, do you think you're getting actually paid more for the analytics that you're delivering to your client today?

It seems like all the brokers, especially on the reinsurance side or even on the insurance side have to deliver more analytics, is that just a higher cost of doing business today or do you actually get paid more for those services?

I think that today, it's a generally accepted practice and expected that your analytics are going to be good, David.

I wish I could tell you you get paid separately for that but I think your analytical capability gives you the opportunity to be able to do more business, and that's become more and more important.

For us, I look at it as an enormous advantage because over the last couple of years, we have spent a lot of money and time and energy in building the analytics, so if we were good before and we were growing our revenue handsomely in reinsurance and we looked back and said, what do we have to do to do better, I'm really excited about our opportunities now because I actually think our analytics are better than anybody else's.

They're that good and our people are outstanding.

And then just in terms of the environment, are you seeing your competitors cut their fees to try to gain business?

Yes.

I'm not going to get into gory details but yes, I've seen that happen.

Okay, and then just finally, as you think about the business in North America, could you maybe break that out by a large account versus small account?

I'll break it out generally but most of it is middle market business.

One of the things which I think represents great opportunity for us is our ability to blow our global accounts as I said earlier in North America.

So that's still yet to come, but we do a great middle market business, and now, I think that our business in small commercial accounts is going to be outstanding because now, with the Noodle, we're not only going to take the accounts that we have and make them more profitable but now we're actually going to go out and find more small commercial accounts because we have a processing capability to put those through, plus I think the network that came with the Noodle which was 2,500 brokers that use the Noodle, we want to expand to 5, 6, 7,000, so when you look at all of that, it's really exciting, and we'll get into all of these great details next week but all of us are just, what do they say in my friends in England, "Over the moon"?

Okay?

Okay, great.

Thank you.

Thank you.

We have a follow-up question from Matthew Heimermann with JPMorgan.

Sir your line is reopened.

Hi, one more.

Just on, you mentioned Florida was a particular strength in the U.S.

I was just curious if you could just elaborate what type of growth you're seeing and to what extent its property versus other products?

I'm going to let Don Bailey answer that question.

Don?

We've got great leadership down in Florida, most notably from Jim Dunn who has done a fantastic job for many many years.

We've got a very unique operating platform down there but I couldn't necessarily point to anything in particular that's driving it.

It's across-the-board, across products, across industries, a very diversified growth effort, it's strong double digit, well into the double digit growth that we've got down in Florida and it's not something that we just produced this quarter.

It's 2007, it's 2006, 2005, it's been going on for a very very long time.

It's a very good opportunity for us going forward as well.

We look at Florida as one of our core growth opportunities for 2008 and beyond.

When Don says it's high, high double digit growth, he's not mentioning the number because it sounds too good to be true, but it's really high double digit growth.

How much is--?

They're doing a great job down there.

Can you just give a sense of how much of this is new products versus more products to existing customers?

Again, it's a little bit of both.

We've got a strong historic construction business down there.

We've got a very strong employee benefits business in Florida that are doing very well.

Part of the opportunity for us going forward in Florida is the fact that we will do a lot more cross-selling.

We will bring a lot more additional products, executive risk, and other products to the pathfront in Florida on a going forward basis.

So our market share in Florida is still not substantial, while it's a tremendous current growth opportunity for us, there's a lot of dividends we can get out of Florida for many years to come.

Okay, thanks.

We have no further questions at this time.

Thank you very much, everybody.

Have a nice day.

Appreciate it.

Bye-bye.

That does conclude today's conference call.

Thank you all for participating and have a great day.