Willis Towers Watson PLC (WTW) 2007 Q4 法說會逐字稿

Welcome to the Willis fourth quarter 2007 earnings release conference call.

All parties have been placed on a listen-only mode until the question-and-answer session.

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

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

I would now like to turn the call over to Ms.

Kerry Calaiaro, Director of Investor Relations.

You may begin.

Thank you very much.

Good morning and welcome to our earnings conference call and web cast at willis.com for the fourth quarter and full year 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 10:00 a.m.

through March 7th at 11 p.m.

Eastern time by calling 866-487-7599 in the U.S.

or 1-203-369-1656 outside the U.S.

with no pass code or by accessing the website.

If you have any questions after the call, please call 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 1995.

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

We refer you to the cautionary note in our press release and 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 would now like to turn the call over to Joe.

Thank you, Kerry.

Good morning, everybody.

Welcome to our fourth quarter and full-year 2007 earnings call.

Joining me is Grahame Millwater, our Chief Operating Officer, and Pat Regan, our Chief Financial Officer, and as usual my colleagues on the Partners Group are here with me.

Before I begin the call, I want to talk about the charge that you all read about.

That's probably something that stunned you a little bit.

That's simply us surveying the land, if you will, and suggesting to ourselves that we saw more opportunities to be able to save money.

This place always looks for ways to save money.

And we thought it was a great idea since we looked at these opportunities, saw them, that we could invest more money.

We told you back at Investor Day that we were going to invest $30 million to $50 million.

Pat told you that the number in his progression chart was $30 million.

We think it can be $50 million now.

And since we had the opportunity and are shaping the future as just that, the future of our Company and doing the right thing over the long term, we thought the ideal thing was to take the charge.

So, he'll talk about that in a little bit and we're going have great savings opportunities as this year and next year goes on.

And, that's the reason we did it.

We still expect to have margins of 24% in 2008.

We still expect to earn $2.85 to $2.95.

Nothing changes.

We just thought it was a prudent thing to do since we saw opportunities.

And, that's that.

We can get into that more if you want to.

Now let me share a few highlights with you for the quarter and for the year.

Revenue grew 3% for the fourth quarter and 6% for 2007, but organic growth in commissions and fees was flat for the fourth quarter, with 2% net new business and a negative 2% from declining rates and other market factors.

For the year, the organic growth was 3% with 4% of net new business and a negative 1% from declining rates and other market factors.

And so, we are very pleased with the 4% organic growth across the board.

Obviously, there's a lot of softness in the market.

We saw 1% negativity, but all in all we are very, very pleased with that.

We will get into the quarter more specifically as it relates to each one of our business units.

We have great geographic diversity which we are really excited about.

Our international branches comprise about 39% of our commissions and fees, North America 31% and our global businesses, which are made up of reinsurance and our great businesses in London, about 30% in 2007.

So the diversity as the economy changes around the world is a great thing that we think we have in our favor.

And our extensive network encompasses some of the world's fastest growing regions.

And, as you know, we just established an emerging markets region headed by Sarah Turvill that includes our great branches, 21 of which we have in China.

So, we have a great year ahead and I think a great future as we look at where we are.

Our adjusted operating income (sic -- see Press Release) was 23.3% for the fourth quarter and 24% for the full year just as we told you we would earn.

Our 2007 margin grew 130 basis points from a year ago in a much tougher market environment.

I am really, really pleased of our capability around the world and the leadership that our people show in being able to do that.

That wasn't easy.

And excluding the impact of foreign exchange, adjusted operating margin would have increased approximately 2 percentage points or 200 basis points for the quarter and for the full year of 2007.

So that -- the foreign exchange, we even have a better result than the 130 basis points.

We achieved the margin expansion with organic growth in commission and fees of 3%, organic expense growth of 1% in 2007.

I know I mentioned that before but against the backdrop of 2006, where it was 7% revenue growth and 4% expense growth, but you still grow the margin 130 basis points I think is a great achievement and I am really proud of that for our Company.

Both the revenue growth and the profitability improvements drove the margin expansion which contributed to adjusted earnings per diluted share of 23% in 2007 excluding the 2006, of course, tax credit.

Now, I want to talk about the growth in North America, International and Global.

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

First our retail businesses, North America and International.

One of the great strengths of our Company is not just the fact that we have retail businesses and branches all over the world, but the fact that they work together very, very closely with our specialisms, it is the nature of our model.

And, that's really working really well.

If we just take our retail businesses and just set them apart for a second, I thought you would be interested to know that the combined organic revenue growth of our retail businesses was 4% for the year and 300 basis point margin expansion just in our retail operations around the world, which is terrific, terrific result, a great team effort leveraging our global distribution network very, very efficiently..

Now let me talk about North America, if I could.

In North America, the organic revenue growth in commissions and fees was negative 7% for the quarter and a positive 1% for the full year.

Let me tell you what our goals and aspirations were in North America for 2007.

Over the past year the focus in North America was to improve profitability and improve the platform.

Improve the margins, that is, last year and for the year before that that was the same goal as well.

And we are succeeding extremely well although at the expense of some of the top line growth, but we did that consciously.

We did that on purpose because we needed to get our margins up in North America and I think we succeeded.

The pace of the hiring has been very measured over the past 18 months as we absorb the bulk of the 2004 and 2005 hires while continuing to aggressively manage performance.

If you recall, back in 2004 and 2005 we aggressively hired, recruited a lot of people.

Our margins shrank because the salary and benefit to revenue line increased.

But the results of that were very good as it related to the revenues in 2006 and the early part of 2007 for North America.

Obviously, when we stopped doing that to improve our margins, that came down.

But a great example of the health of North America and the way we have built our business and constructed our business is the number of producers declined over 2006 but the revenue per FTE rose 5%.

So as a consequence, the operating margin of North America was about 19% or 200 basis point this year and up 500 basis points over the past couple years.

So we succeeded in doing what we wanted to do, was to get our margins up and now we've stepped up our pace of not only recruiting in a very targeted manner in our key cities and growth areas as we highlighted at our Investor Day in November.

If you remember, we talked about large cities in North America we're beginning to do that.

So, we feel very, very good about that, and the quarter was not exemplary in terms of what will happen this year or over the near future.

And I'll talk about that in a second.

We also wanted to improve our platform.

We rolled out the world's client platform, what that is to say is that every branch is on the same processing system.

We combined two accounting centers into one location, closed several unprofitable offices in Canada and the western regions.

So, as we focused this past year on getting the platform right and making organizational and management changes, certain regions were affected more than others, particularly the northeast, western and Canada regions.

But we're pleased with the progress of these regions as we enter 2008 with enthusiasm.

We had great growth in New York, Central and the Southeast regions and in our program business and employee benefits.

Throughout all of this, our client retention levels have been stable while rates in North America have declined on average of 10% to 20% in the quarter.

Despite all of that, I think North America for the first quarter will be back on track and you can expect positive revenue growth in the first quarter from North America.

Our international division, or international units, organic growth in commissions and fees was a very strong 9% for the fourth quarter and 8% for the full year as it continues its record of steady growth across most regions.

The international segment represents close to 40% of 2007 and fees and comprises some of the fastest growing regions of the world, as I said earlier.

Sarah Turvill runs our emerging markets area including Asia, excluding Japan, eastern Europe, the Middle East and South Africa.

This focus is already showing positive results from these exciting and high growth markets.

We bring particular capabilities and scale in energy, construction, marine and aerospace in these regions.

Allan Gribben runs the rest of our international unit.

During 2007 we strengthened the team with new leadership in Europe, Latin America, and in the U.

K.

and Ireland which has helped add impetus to the business and positioned us better for the future.

We had good growth in the Nordic region, South America and Europe, especially Denmark, Spain and Italy, and especially and specifically in our employee benefits practice.

The good top line growth and efficiency that we reviewed during the course of 2007 contributed to margin improvement of 400 basis points in our international division.

So when you combine the efficiencies that we always look for and 8% revenue growth and you get 25% margin, for a very large disparate group of branches around the world, it shows that they work together and we all work and focus in the same direction.

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

Now, let me talk about our global business segments which comprises grocery -- global specialties and reinsurance.

Global specialties organic growth in commissions and fees was up nicely for the quarter and 6% for the year in a very tough rate environment.

We had very good growth in construction, especially in global infrastructure projects, marine, energy, and FINEX.

Business won jointly with our international network continues to provide a rich stream of opportunity.

That's really our strength -- our specialisms working with our network.

There was significant rate reductions in this area, aerospace was down 15% to 20%, energy and FINEX was down 20%, marine whole was down 10% to 15%, with cargo down 25% to 40%.

Now let me switch to reinsurance.

Reinsurance had negative organic revenue growth in commissions and fees in the fourth quarter and a negative 4% for the full year.

The fourth quarter is historically light, accounting for about 10% to 15% of the year's reinsurance commissions and fees.

The reinsurance business, as you know, has been hit by a combination of declining rates, at least 10% on average, higher retentions by insurers, they simply buy less in reinsurance, and other changes such as the Florida legislation.

But the retention of our clients has been very, very high and continues to be high, great as a matter of fact.

We have continued to make investments in reinsurance to strengthen capital markets and analytics capabilities which will drive future growth opportunities.

So, heading into 2008 the business pipeline looks good and we remain very optimistic about the outlook and again expect positive revenue growth not only in 2008 but in the first quarter.

Now let me turn over to-- turn this over to Grahame Millwater who is going to give you an update on shaping our future initiatives.

Grahame?

Thank you, Joe, and good morning, everyone.

We made great progress in 2007 on the Shaping Our Future program.

We highlighted the direction our program at our Investor Day in November together with a lot of specific detail on both benefits and progress to date.

So I won't attempt to repeat that today.

However, suffice to say the program has been key to us being able to hit our financial targets in 2007, particularly in terms of cost efficiency and margin, in a market that proved to be considerably softer than we thought as we entered 2007.

I would like to highlight, though, some of our focus as we enter 2008.

Firstly, our first area of focus is (inaudible) growth.

We continue to concentrate on driving our business in the individual segments of global, middle market and small commercial.

Our drive in small commercial is well on target.

Our two key initiatives in this area are the roll-out of our small commercial platform in the US post the acquisition of InsuranceNoodle and also the creation of our UK and specialty lines, facilities and MGAs.

We also have a very specific plan in the middle market for our sales process, our client advocacy program, and our retention targets.

This also includes our profitability drive which alone resulted in net benefit of $10 million in 2007.

We are particularly pleased with the impact of some of these efforts on our international revenues in 2007.

In international, we have also ensured we have the right leadership in place to continue to drive our growth.

This includes appointing Sarah Turvill as leader of the new emerging market division, Brendan McManus as the new leader of UK retail, and (inaudible) as the new leader of Europe, and Eugenio Paschoal as the new leader of Latin America.

Given that in 2007 we focused a lot of our efforts in building a solid, consistent integrated middle market platform in the U.S., we are very determined to achieve a good result in the U.S.

in 2008 by focusing on similar growth initiatives.

We have also been very focused on our investments in 2007, ensuring they've been in the areas that we've identified as high growth opportunities.

These have included regions such as China, India, Latin America, Italy, Spain, Russia, and also includes specialty segments such as construction, energy, FINEX, marine and space.

Again, now that we have achieved our platform of margin improvements in the U.S., much of that investment in 2008 will be focused in the key cities and specialty segments in North America.

Let me turn to the second area of focus, solutions and markets.

With respect to underwriting markets we now have put into place in the last quarter of 2007 a completely new global marketing organization lead by Dominic Samengo-Turner.

Under Dominic we have a global network of regional marketing heads.

Their role will be to ensure our businesses placed with those markets that benefit our clients and Willis.

This effort is also critically linked with our unique measure of underwriting performance, the Willis Quality Index.

Additionally, even though we only began this initiative in the fourth quarter 2007, we have already seen in that quarter alone over $5 million of revenue uplift from commission improvement.

Because we are completely transparent with our clients, each and every commission increase is specifically agreed with them.

We also continue to develop a suite of unique Willis products which we take to market by specific facilities or MGAs.

These include terrorism, U.S.

executive risk, A&H and international DNA.

We continue continue to develop and roll out such products which are not only great in coverage and terms for our clients, but also provide great efficiency and pay reasonable commission levels that the panel of underwriters pay us for distribution and service.

Finally, we are focused on developing new analytical and advisory capabilities.

Much of our progress and investment in this area has been Willis Re.

However, increasingly we are looking at how we may leverage these capabilities in our retail offerings, including enterprise risk management, capital market products, risk modeling and engineering.

Now let me turn to the third area of focus, the development of our platform.

This is the development of our platform infrastructure to ensure effective and efficient service levels at optimum margin.

With regard to our technology platform, our roll out of our new technology in London and the U.S.

continues at a pace.

We are also on target for all the associated benefit realization.

We also continue to grow our Mumbai operation which now has approximately 900 people, just over 900, at the first of January.

This is a unique operation advantage for us and whilst others focus on outsourcing client service to third party providers, we continue to focus on using our own low cost hubs while still maintaining direct control over our vital service levels to those clients.

Throughout the group we have kept headcount for the company relatively flat in 2007 despite increasing our headcount in Mumbai by 150.

This represents a considerable shift in work effort.

On the back of this success, in 2008 we intend to start a second site in Mumbai as well as looking at creating initial low cost service centers in China and eastern Europe.

We believe that with a combination of technology, segmented service models and regional and low cost service hubs, we have a real opportunity to continue providing industry-leading service and quality at industry-leading margins.

And, with that, I will hand the call over to Pat Regan, our CFO.

Thank you, Grahame, and good morning, everyone.

I'm going to talk you through the fourth quarter and full-year results today.

Firstly, I wanted to remind you of the one-off items affecting our results in 2006, beginning on the sale of our London head quarters, the Shaping Our Future costs in Q3 and Q4 last year, and the $71 million one-off tax credit in Q4 of last year.

My comparisons to 2006 will be adjusted to exclude these items.

Reported earnings for the fourth quarter 2007 were $95 million.

Excluding gains on disposals, adjusted earnings for the fourth quarter were $93 million compared to $86 million adjusted net income for the same period in 2006, an 8% increase.

Earnings per diluted share were $0.64 for the fourth quarter in 2007, a 16% increase on the adjusted $0.55 per diluted share in the same period 2006.

As I will explain in more detail later, the fourth quarter earnings per share was adversely impacted by $0.05 due to foreign exchange and positively impacted by approximately $0.08 due to a lower effective tax rate.

For the year, adjusted earnings per diluted share were $2.77, a 23% increase on the adjusted $2.25 per diluted share for the full-year 2006.

Turning to our business unit revenues.

For the fourth quarter 2007, total reported revenues were $639 million, growth of 3% from last year.

Foreign country translation increased reported revenues by 3% and, as Joe mentioned earlier, organic revenue growth in commissions and fees was 0% for the quarter.

This bit by business shows 9% growth in international, negative 7% in North America and negative 7% for our global business unit.

Total reported revenues for the full year were $2.6 billion, up 6%.

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

Organic revenue growth was 3% for the 12 months.

The adjusted operating margin for the quarter was 23.3%, basically flat against the 23.5% in the fourth quarter 2006 despite a negative impact of approximately 260 basis point on the margin due to the impact of foreign exchange.

Excluding this impact, the underlying margin increased by over 200 basis points in the quarter as we reduced our organic cost run rate by 3%, whilst maintaining flat organic brokerage and fees.

Adjusted operating margin for the full year was 24%, up from the 22.7% a year ago, an improvement of 130 basis points.

Again, excluding the impact of FX the operating margin increased by over 220 basis points.

We achieved these underlying margin increases in the fourth quarter and the full year by continuing to reduce our organic cost run rate.

That is, the cost-- the rate of our cost increase or decrease excluding the impact of foreign exchange, acquisitions and disposals.

Our organic cost run rate was 1% for the full year and fell to an organic cost decline of 3% in the fourth quarter.

As we described at Investor Day, and as Joe mentioned to you earlier, we have taken a number of proactive steps to increase our productivity.

These have included executing on the Q3, Q4 savings we outlined last year.

For the full year 2007 we achieved gross savings of approximately $40 million, in line with the target we set out last year.

The continued roll outs of our client profitability program which includes both client streamlining and repricing.

This program generated $10 million of benefits in 2007 alone.

We completed 300 mini projects as part of our international efficiency program, generating a total benefit of $12 million in 2007.

We closed a number of unprofitable offices and we exited a number of underperforming producers.

We have also worked very hard to reduce the cost of our pension plans.

By restructuring our defined benefit plans and contributing over $450 million over the last two years, we have reduced the cost of our pensions by over $35 million in 2007.

All other things being equal, I would expect the cost of pensions to come down by a further $10 million to $15 million in 2008.

As a result of all these actions and many others as well, and despite the soft market, we have managed to continue to grow our revenue per FTEs.

Our revenue per FTEs grew by approximately 3% to $192,000 for the 12 months ended December 31, 2007.

This productivity measure has increased by 10% since 2005.

As Joe mentioned earlier, the adjusted operating margin improvement was again particularly driven by our retail businesses.

North America increased its operating margin by nearly 200 basis points in 2007 and nearly 500 basis points over the past two years.

This increased margin was again particularly driven by improved margins in New York and our central region.

International increased its operating margin by over 400 basis points in 2007.

The increased margin was driven by both our fast growing and our more mature markets.

We saw strong profit growth in the U.K.

Ireland, Spain, Italy, Denmark, as well as Latin America and our emerging markets division.

While the margin in global decreased by 2% in 2007, this is virtually all due to the impact of foreign exchange, particularly the weaker dollar.

Excluding FX, the underlying margin was relatively flat compared to 2006.

Salary and benefit expenses for the quarter were $359 million or 56.2% of revenues compared with an adjusted salary and benefits to revenue of 58.3% a year ago.

The 210 basis point improvement reflects good cost control, realization of those savings identified last year, benefits from our initiatives and lower pension costs so more offset by continued investment for the future and the impact of foreign exchange.

Other operating expenses for the quarter were $119 million or 18.6% of revenues up from the adjusted other operating expenses of $96 million or 15.5% of revenues a year ago.

This increase was largely due to the impact of foreign exchange with our continued focus on cost control offsetting the increased cost of our new buildings.

Adjusted salary and benefit costs for the full year were 56.2% of revenues compared with 57.7% a year ago.

Since 2005 when we launched Shaping Our Future, we have seen an improvement of this measure of nearly 400 basis points.

Other adjusted operating expenses for the full year were 17.8% of revenues compared to 17.1% for the same period in 2006.

As I mentioned earlier, foreign currency translation had a $0.05 negative impact on earnings per share in the fourth quarter and a $0.06 negative impact for the full year.

Foreign exchange negatively impacted the operating margin by approximately 260 basis points in the fourth quarter and about 90 basis points for the full year.

All things being equal, we currently expect the impact of FX to be relatively mutual in 2008.

The underlying tax rate for the full year 2007 was 29.5%, excluding the tax effects of the dispose of our London headquarters, share based compensation and the benefits of the release of tax provisions related to resolution of prior period tax positions.

This is down from our previous expectation of 30.5%.

This reduction in our expected tax rate contributed approximately $0.05 per share to earnings for the quarter.

The effective tax rate benefited from, amongst other things, a greater proportion of earnings being outside of the U.S..

In addition to this, the tax line also benefited from a $4 million benefit related to the reduction of the UK tax rate.

Our expected effective tax rate for the year ended 31 December 2008 will again be approximately 29.5%.

Turning to capital management.

We completed our March 2007 $400 million ASR program in October with a final settlement of $23 million.

In November, the board approved a new $1 billion buyback authorization.

As we discussed at Investor Day, we intend to continue to proactively manage our capital through the stock buyback program funded by raising new debt.

We'd intended to execute the first charge of this in the fourth quarter.

The state of the credit markets at that time meant that we decided to temporarily postpone that activity.

As we have discussed before, the Company has very strong credit ratios and that allows us a good deal of financial flexibility.

We continue to closely monitor the credit markets and we intend to continue to proactively manage our capital.

In addition to this, the board has now increased the dividend by 4% to its new annual rate of $1.04.

There was $200 million of cash and cash equivalents at December 31, 2007.

During the quarter we used $36 million of cash for dividends and $5 million for acquisitions.

We also used approximately $10 million of cash for additions to fixed assets on our new buildings and $48 million for additional pension contributions.

Total debt was $1.25 billion and total stockholders' equity was approximately $1.3 billion.

Finally, as Joe mentioned earlier, to help fund the investments we intend to continue to make, we have recently started a very thorough review for further efficiencies and further cost savings across the Company.

The work is not complete, but we have identified a number of opportunities for cost savings in each of our divisions.

At this stage we believe these cost savings will generate benefits of $20 million to $40 million in 2008, a number that will increase as they reach their full run rate in 2009.

These savings, combined with the existing improvements in the underlying business units, will allow us to invest more in 2008.

On our 2008 margin walk that we did Investor Day, I showed we would invest in the improvements of 1% and invest 8% of the margin which equates to around $25 million to $30 million, as Joe mentioned earlier.

The savings we are now going make-- these extra savings we'll now make, will allow us to invest at the top end of the $30 million to $50 million range we outlined at Investor Day.

There will be some one-time costs associated with these efficiencies that we will incur beginning in Q1 2008.

These costs will include contract buy outs, property closures, lease terminations, greater use of Mumbai and adjustments to our stocking levels.

We expect that these one-time costs will total approximately $60 million to $90 million.

As Joe mentioned earlier, we tend to use these benefits to generate further investments in our business.

We will not, therefore, be changing the guidance for margin or earnings per share that we gave at Investor Day.

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

Thank you, Pat.

Let me close by just saying that we have worked hard this year and delivered on all the stated goals.

And I'm proud of the efforts of my colleagues.

Adjusted diluted earnings per share growth of 23% for the full year to $2.77 we think was very good.

Our organic revenue growth of 3% and organic cost growth of 1% I think showed great controls and great efficiencies and continued to grow revenue in a very difficult environment.

Adjusted operating margin expansion to 24%, which is what we predicted we would do.

Salary and benefits expense to revenues improvement to 56% and remember just a couple of years ago, some of you do, that that number was 60%.

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

Let me tell you for 2008 what we expect.

Positive organic revenue growth from all of our business units for the first quarter and for the year.

We are conducting a thorough review of all our businesses, as we have suggested, to identify additional opportunities for cost savings to help fund some of the Shaping Our Future investments.

That's what the charge is about.

That's what we're doing because we are running this business for the long term.

Excluding the anticipated charge, the Company continues to expect adjusted operating margins of 24% in 2008 as underlying business growth and cost savings are reinvested.

We talked about that at Investor Day.

And adjusted earnings per share, as we suggested and as we told you, would be $2.85 to $2.95.

And we will continue to look for acquisition opportunities that fit with our strategy and our culture.

Our profitable growth will continue to be driven by our sales culture, the continued successful execution of the Shaping Our Future strategy which, you can tell by Grahame's update, is moving along very nicely and continuing to monitor, as always, expenses and capital management.

We appreciate your listening.

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

(OPERATOR INSTRUCTIONS) Our first question is from Charlie Gates, you may ask your question and please state your company name.

Credit Suisse, Good morning.

My first question, Joe in your introductory remarks I believe you indicated an organic revenue growth in domestic in the fourth quarter was adversely affected by your margin effort.

Do you have an estimate as to what that organic growth might have been had you not made these efforts?

No, it is tough to say, Charlie, because there was a combination of things that went into that.

We closed a lot of locations, those locations would have created revenue growth, we didn't calculate what that would be.

We let go of underperforming brokers.

We didn't calculate what they would have contributed to the quarter had they still been around.

So, things like that, and there were a couple of cases in our large offices where there were some timing issues.

If we put all of those things together it would have had a very different effect in the fourth quarter but we did those things because we think the company, the business in North America, will be better going forward because we did those things rather than having not done them.

My follow up question I believe Grahame in his introductory remarks indicated the market was considerably softer than we had thought early in the year.

Would you elaborate on that comment?

Yeah, when we entered 2007 certainly we knew we were entering a soft market.

I don't think we ever anticipated the degree of decline would be as high as it was particularly in the second half of 2007.

Some of the rate decreases we saw (inaudible) as Joe mentioned, there's (inaudible) continued decreases in aerospace which have been in decline for a couple of years, took us by surprise.

So I mean we just-- we anticipated a soft market, we just didn't anticipate such a soft market, particularly the second half of 2007.

so, what you are referring to is that the competition in commercial lines insurance as well as reinsurance, more severe than you had foreseen early on.

Yes.

in 2007, yeah.

What do you think-- My only other question, sir, what do you think driving that?

What drives usually soft markets is the same thing as they traditionally have, Charlie.

There's really a lot of competition to gain market share by insurers and they're chasing rates down.

We think ridiculously so, but that's the case.

There's still a surplus, in a lot of these balance sheets, big surpluses and a continuing benign environment as it relates to claims.

You put all of those things together, there's nothing that has disturbed that.

That's the reason why the rates continue to come down in a few areas there has been increased capacity that has come into the market that has exacerbated the problem.

We found that more in the U.S.

than we have internationally.

Internationally is a little bit different, but not, not so much different.

So, you continue to have an environment that's not only the same but continues to get softer.

Thank you.

Thank you.

Our next question is from Keith Walsh.

You may ask your question and please say your company name.

Keith Walsh at Citi.

Good morning, Joe.

Hi, Keith, had how are you doing.

Good, good.

Just first the 2% net new business growth.

That just really stood out at me.

The lowest in at least 12 quarters and I would venture the lowest since you took the helm there.

What's really behind that.

I apologize if this is repetitive but I joined the call late.

But is this increased competition, what's driving that and really why are you confident that's going to turn and then I've got a follow up for Pat.

There's two things that make up those numbers, Keith.

One was the negative growth in North America in the quarter, in the fourth quarter and secondly, the negative growth in reinsurance.

Reinsurance, obviously, is a very influential part and very good part of our business and if you take those two areas, that's where we had the negative effect.

And, I explained why that happened in reinsurance because of the environment in reinsurance, the continuing high retentions, although we are seeing a little movement differently in that regard.

There are all the things we did in North America.

Had those things not been in there, the 2% would have been a much greater number.

Maybe I could just, add, as Joe said there was a number of office closures and a reduction in North America producers.

We don't expect either of those facts to exist in 2008.

So the-- we wouldn't expect a production-- producer decline in '08 or to (inaudible) our program of office closures as well.

Okay.

Just for Pat, is this new cost save program basically an admission you can't make your numbers without the extra expense saves because revenues are softer than you expected.

Why are we so surprised about revenues considering you guys stood before us in November and kind of talked about this in a very detailed way?

Thanks.

Keith, I think, if you remember, my margin walk slide for '08, page 196, of the investor day data.

It talked about 1% of underlying benefit improvements and 1% of investments which is around 20 to $30 million.

What we save by driving these new efficiency programs we can invest more than the 25 to $30 million and get higher up in the range closer to the $50 million number.

There's a lot of opportunities and a lot of things we need to invest in.

This is our way of getting to a larger investment number.

So no it does not represent in anyway less confidence about the underlying business (inaudible-over talking).

I want to follow that up, Keith for you and everybody else.

We are not looking at more cost savings because we are worried about the revenue growth.

We are look at more cost savings so that we can invest more money in the business.

And, that's in the best interest of our company.

The investor day was all about making investments and shaping the future so our platform, that our model is sustainable and grows over time.

We saw opportunities to do that, we decided to take them.

But, it wasn't in response to a lack of revenue growth that we feared coming on this year.

As a matter of fact I said earlier that we expect positive revenue growth not only in the first quarter but the year.

Okay.

Thanks a lot.

Thank you.

Our next question is from Bryan Meredith, you may ask your question and please state your company name.

UBS.

Good morning, Joe.

A couple of questions here, first I am wondering if you can go into a little more why you are so confident that North America and Global Specialties will return to positive organic revenue at the first quarter.

The only reason I am curious about it is that number one the reinsurance business you said is a small part of 4 Q '07.

I imagine it is a much bigger part in first quarter of '08.

I haven't heard that reinsurance marks are going to get any better in that first quarter.

Secondly, why aren't the office closures situations you had in the fourth quarter going spill over in maybe the first and second quarters of the year-over-year comparison perspective and one other follow up.

Okay, is that it?

Yeah.

Okay.

In the case of North America, the office closures simply hit us in the fourth quarter but they were not profitable offices.

That was the right thing to do.

When you go forward without that revenue there, on a comparative basis, we think a lot of things that we have done to shore up our revenue growth in North America will manifest itself.

As I said, the idea was to take the margins from 15%, where they were, where there was very nice revenue growth as you saw over the last eight quarters, great revenue growth but I didn't like the fact we were only make 15% on the business.

I said to Don Bailey we have to change that.

And, he did, he increased the margins 500 basis points

So I thought that was pretty good.

And as a result of that, we now focus our attention back on the revenue and we feel very confident that will take place.

We had a great sales conference a week ago, really I am really excited about what's going on in North America.

And reinsurance, I look at our business and I see that we-- we-- we have-- we retain our clients.

We didn't lose any clients that I know of, Simply the retentions were higher.

We are begin to go see people buying a little bit more, reinsurance at the rates being down here lower.

We won some very good business in the course of the last month or two and I look at that and I see that we are pretty positive or I wouldn't have made the comment we expect positive revenue growth.

If you look at those things and those were the two areas that affected our revenue growth for the quarter, I say to myself we are looking pretty good next year.

That's why I say.

Okay.

Your guidance for next year does that assume that-- do you have positive organic revenue growth in those areas?

Yes, I mentioned that in my presentation.

So it's got to be there.

Okay then the last question, unrelated topic, can we talk a little bit about M&A, with all the stuff going on in your company right now, do you have the capacity right now do a large acquisition and without naming names, is it possible to do it.

Come on, Keith.

Bryan, which one do you want me to answer first?

The capacity.

You knew you were going to get that shot in, didn't you.

I had to.

Try to do it in a round about way.

It is part of my job; right.

I have always said this, we are always looking at acquisitions.

It is my job.

If you had this job you would always look at opportunities, you're always looking at opportunities, possibilities.

So, if I said we weren't, I would tell you I wasn't doing my job.

Do we have the capacity?

What can I tell you?

I know we have the energetic capacity, I know we have the passionate capacity.

The answer is we are always trying to do what's in the best interest of the company.

We are always amenable, looking for opportunity, absolutely.

Whether that leads you to any other conclusions I will leave that up to you.

Great.

Thank you.

Thank you.

Thank you.

Our next question is from David Small.

You may ask your question and please state your company name.

Bear Stearns, good morning, Joe.

Morning.

How are you doing?

Just following up on the last comment you made.

Does your organic revenue growth forecast, jibe with what you are seeing in January so far?

Yes.

You have already--

I guess it would have to or I wouldn't have made that bold a comment.

That's, so already in North America in January you are seeing positive revenue growth?

Absolutely.

Then the second question was on the (inaudible) of the acquisition that you talked about in the press release.

Can you just help us understand what the revenue impact of that is.

Revenue impact.

By the time it happens will be in the $500 million range.

But does the extra percentage points you bought in January---

Oh, the--

Still shows up as an associate, David.

Thank you.

It is 42% now, David.

Great.

Thank you.

Thank you.

Thank you, our next question is from Myer Shields.

State your question and please state your company name.

Stifel Nicholaus.

Good morning, everybody.

Is there any, rough estimate for the production of the offices that were closed in the quarter.

Like what the revenues were?

No, I don't have it, I don't have it in front of me.

But there were several.

If you call Kerry, maybe she will get it for you.

I don't have it in front of me.

Okay.

I'll give her a call.

I guess in recent weeks or months we have seen a lot of news articles talked about some significant defections from (inaudible) competing brokers.

Can you talk about whether there's a trend there and what you are doing to address that.

I will tell you what bugs me.

What bugs me, everybody's got something.that bugs them.

I'll tell you what bugs me.

I read all of this stuff and I shouldn't.

That's the first thing.

Secondly I think there's a badge of honor or something when somebody, because we do so well, and I'm proud of our people, that recruiting somebody from Willis is a big deal and people make a big deal out of it.

It is just true.

I read articles of people that joined from Willis and I find that they were here four years ago, and took a vacation for four years.

But it is a big deal, to come from Willis.

I will tell you if you read all of that stuff you would think we had no brokers left.

I will tell you that we are net gainers from our competitors, I look at the numbers everyday.

I looked at them every week.

We are doing quite well in the war of keeping people and recruiting people.

So, a lot of this stuff gets overblown.

There are a few people that we have, that certainly we have lost.

There's no question about that, but the magnitude and the fear that accompanies a lot of these articles is nowhere near the reality.

that's helpful.

I guess clearly organic growth numbers in North America and Global were disappointing.

Now that the news is out there, do you expect to start acting on the share repurchase acquisition?

Stay that again, please.

I am wonder, whether now that the fourth quarter news is out there whether we would expect a change in actually completing share repurchases under the new authorization?

I don't think it quite affects.

One doesn't have anything to do with the other.

As you know, we were planning to borrow money to do the share buy back.

Credit markets were very tough in the fourth quarter.

We took the decision that it probably wasn't the best time to do that.

It will be merely a case of watching the credit markets and working out when it is best to do that.

(inaudible) We have great, a great story in terms of leverage ratio, coverage ratios, rating agency positions, all of that kind of stuff.

The only impact it has really is the state of the credit markets.

Okay.

Great.

Thanks so much.

Thank you.

Our next question is from Chris [Nisapour].

You may ask your question and please state your company name.

Hi, good morning, it is Goldman Sachs.

Just a quick numbers question and apologize if I missed it.

Can you tell us what the organic growth in employee benefits was for the quarter.

We didn't disclose that, Chris.

We don't routinely disclose that, but again, we had strong growth in employee benefits in both North America and particularly in internationals we have been all year.

In the past you said it was low double digits

Still double digit, yes.

Okay.

I guess could you comment on what you think the ultimate cost to the insurance industry is going to be from the fall out of the mortgage crisis?

There's a lot of--- a large range of estimates out there, but you are one of the biggest brokers I would imagine you have a pretty good perspective on how we should probably be thinking about that.

I have no idea.

I wouldn't venture a guess, Chris.

I mean obviously we're talking about something that as you know I was in the securities business and in the banking business.

I have never seen anything like this.

To venture any kind of a guess as to the severity, of the impact on the insurance business, I couldn't even begin to want to guess.

I wouldn't even know to calculate it frankly.

The reason we are seeing all of these continuous write downs is because nobody has been able to calculate it.

But, it has to have an impact of some kind and I would suspect it is more than mild, but I couldn't tell you.

What you could say Chris is that you would think that the investment income for insurance companies is going to go down and their return on (inaudible) will be hectic.

At some point in time, that will fluctuate.

Sure.

I was referring to it from a liability perspective but fair point.

Then I guess,

I guess the answer would still be the same.

Understood.

Is it safe to say you haven't seen too much of an impact on pricing.

The answer is we have not.

Thanks a lot, guys.

(OPERATOR INSTRUCTIONS) Our next with question is from Keith Alexander.

You may ask your question and please state your company name.

It is JPMorgan.

Hey, Keith.

I had a follow up to Bryan's question earlier about M&A.

If you are considering possible acquisition opportunities, what size, scope and geographies are you looking at?

I would say across the board.

I will tell you why I say that.

Our employee benefit platform as we discussed at investor day it is an important platform for us.

So, if we see opportunities around the world especially in North America and the UK, to buy employee benefits companies, we take a look at them.

If we-- , so, that would be an example of what we would be looking for.

Other than that to the extent that somebody is able to, a company is able to supplement our activity in emerging markets or where we are already good or any place in the world, we will take a look at it and as I said it is silly not to take a look at it.

So I think what's more important to us is that people or companies that respect our culture, and our ability to work together, which I think is our real strength,and any company that's willing to do that, you know, we would be willing to look at and have a conversation with them.

I don't know what else to say.

I think that's my

Okay.

Thanks.

Thank you.

We have a follow up question from Myer Shields of Stifel Nicholaus..

Your line is open.

My question was answered.

Thank you.

Thank you.

At this time I am showing no further questions.

Okay.

Thank you very much everybody.

Have a nice day.

Thank you.

This concludes today's conference.

Thank you for participating.

You may disconnect at this time.