Willis Towers Watson PLC (WTW) 2008 Q1 法說會逐字稿

Good morning.

Thank you all for patiently holding.

I would like to remind all parties your lines are on a listen only mode until the question and answer session of today's conference call.

Also this call is being recorded.

If you have any objections please disconnect at this time.

I'll now turn the call over to Ms.

Kerry Calaiaro.

Director of Investor Relations.

Ma'am, you may begin.

Thank you.

Good morning and welcome to our earnings conference call and webcast at Willis.Com for the first quarter 2008.

Our call today is hosted by Joe Plumeri, Willis Group Holdings Chairman and Chief Executive Officer.

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

Eastern time through May 29, 2008, at 11 p.m.

Eastern time, by calling 866-421-3814 or 203-369-0805 outside the U.S.

with no passcode or by accessing the website.

If you have any questions after the call, my direct line is 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 and they 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.

Welcome and thank you for joining us for our first quarter 2008 earnings call.

Joining me are Grahame Millwater, President;Pat Regan, COO and CFO; as well as other members of our Management team.

The first quarter of 2008 saw continued successful execution of the shaping our future strategy for profitable growth and I'm very very happy about the fact that all of our business units showed positive revenue growth as promised for the quarter.

The market remains soft but we continue to grow the top line while maintaining strict cost discipline, and we are managing our capital through buybacks and acquisitions.

We bought 75 million in stock for the first quarter, at about $33 a share, and bought an additional 4% of (inaudible) bringing our ownership in that associate to 42%.

The story this quarter is grow the top line, watch expenses, and invest in the future growth.

Let me share some highlights with you.

Revenue growth was 8% for the first quarter.

Organic growth in commissions and fees was 3% for the first quarter with 4% net new business and a negative 1% from declining rates in other market factors.

A real driver in organic growth was 100 basis point increase in client retention to 91% in the first quarter, up from 90% last year and as we like to say we pay a lot of attention to retention, very very important that we keep the clients we have and we're doing a very good job at doing so.

We really work at it.

We have great geographic diversity and that distribution network continues to be a strength and a competitive advantage for us.

In the first quarter, 75% of our business was outside North America.

With International making up 39% of commissions and fees and global at 36%, which includes reinsurance of course.

Our extensive network encompasses some of the world's fastest growing regions including places like China and Russia and India and Latin America.

As I indicated in our earnings call for the fourth quarter, we continue to expect full year positive organic growth in commissions and fees and each business segment.

Adjusted operating margin was 32.5% for the first quarter , an improvement of 30 basis points from a year ago and a much tougher market environment.

We achieved margin expansion with organic growth in commissions and fees of 3% and organic expense growth of 2% in the first quarter 2008 versus 5% revenue last year and 4% expense in the first quarter of 2007.

So again, we made the adjustment as the revenue growth was less because of the soft market.

We made the adjustment in expenses.

Both the revenue growth and the profitability improvements drove the margin expansion which contributed to adjusted earnings per diluted share growth of 20% in 2008.

Our guidance for margin in 2008 remains at 24% or flat over 2007 and as we suggested, we said we were going to do, we would reinvest underlying growth and cost savings so we're off to a reasonable start this year.

We also continue to use our capital effectively through our accretive buyback program and acquisitions.

Let me talk about the growth in North America, International, and Global.

In North America, organic growth in commissions and fees was 3% for the quarter.

The operating margin of North America was relatively flat versus the first quarter of 2007 although excluding acquisitions there was a modest margin expansion, as expected our Insurance New acquisition which we completed in June of 2007 is gaining traction and is on target.

We had especially good growth in our Northeast and Central regions.

Productivity continues to improve with a 2% rise in are revenue per FTE since the end of the year.

We have recently stepped up the pace of recruiting in a more targeted manner in our key city and cities and growth areas including Central, Southeast and New York regions and if you remember it was one of the key things that we suggested we were going to do when we talked at Investor Day.

Since the end of the year our producer headcount is relatively flat and we expect that to trend upwards over the course of the year as we make investments selectively in people.

Retention levels have improved to 91% from 90% in the first quarter last year but if you look at it on a full year basis, it's up a full 2% which is really terrific.

Rates in North America have declined in a range of 10 to 40% in the quarter, just huge declines and a big big range.

In our International unit, organic growth in commissions and fees was 5% for the first quarter as it continues its record of growth across most regions.

The International segment represents close to 40% of first quarter commissions and fees and comprises some of the fastest growing regions of the world.

In fact, the International segment has reported organic growth of 5% or better in each of the past 10 quarters, a real strength for Willis.

We had double digit growth in Latin America driven by growth in Columbia, Venezuela, Chile, and Argentina.

In Europe, we had double digit growth in Spain and Denmark and in our emerging market region, we had double digit growth in many countries including China, Indonesia, Singapore, Poland, and Russia.

This was in the face of persistent rate headwinds in most countries with rates down in the range of 10 in 15% during the quarter and most noticeably, in some of the emerging market countries.

Retention to remain high at 92% in the first quarter with improvement in a number of key countries.

The good top line growth and ongoing expense discipline have contributed to margin expansion of 130 basis points to 33% since last year, just an amazing number for a wide ranging International unit.

I'm very proud of that.

In our Global business segment,comprised of Global specialties and reinsurance, had a 2% organic growth in commissions and fees.

Global specialties had good growth in construction, marine, energy, and FINEX..

This was despite significant rate reductions in this area in the range of 5 to 20%.

The reinsurance market continues to be hit by a combination of declining rates of approximately 10% on average with continuing high carrier retention levels.

Retention levels improved to 90% from 88% a year ago.

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

I'm proud of the work that's been done in reinsurance.

Our analytics in my opinion and our marketing capabilities are better I think today than any of our peers.

Now, let me turn the call over to Grahame Millwater for an update on our shaping our future

Thank you, Joe, good morning, everybody.

As we outlined at our Investor Day in November we concluded 2007 with a very detailed plan as how we would deliver our financial targets for the next three years and what those financial targets were.

We entered 2008 with the first full year of execution and we continue to drive hard on all fronts and let me just point to a few highlights.

In terms of client and growth we continue to focus on driving our sales and retention processes.

I would like to highlight our focus on retention and Joe's pointed to some of the figures which is particularly important in a soft market.

Through constant client feedback, monitoring early warning sites of accounts in jeopardy, and the lines is not just a new business but to retention levels we continue to see an increase in retention across all of the businesses.

We're also ramping up our acquisition of individual and teams which we also outlined at Investor Day.

In the first quarter, we hired approximately 40 senior client facing individuals and these were reasonably spread around North America, International and Global and includes specialty areas such as construction, aerospace, financial institutions, and employee benefits.

We have also initiated many discussions which we hope will result in significant hires over the course of 2008.

We continue to make some additional head room for these hires, these new hires by managing out peer performers and redundant roles.

We have notified about 150 positions in the first quarter that their positions are being eliminated and these are all related to the charge in the first quarter.

We continue to rollout the client profitability work.

This contributed another $4.7 million of benefits in the first quarter and gathers pace as the organization gets more in tune to the goal and measurement of client profitability, not just client revenue.

In terms of solutions and markets as we reported last quarter we completed the construction of our new Global Markets organization.

This has three major focuses.

Firstly, revenue from increased commissions with markets.

This is through a combination of reaching our agreed minimum commissions with carriers in the field and also increasing those minimums when appropriate.

And just to remind you, we are completely transparent with our clients in each commission level is specifically agreed with them.

We also continue to rollout new facilities.

Terrorism, International DNA, U.S.

Executive Risk, PA are now all in place and the next major focus is marine cargo.

These are beneficial from a revenue perspective as carriers are willing to increase commissions for the focused distribution, but they also incredibly efficient as we do not have to engage in multiple carrier marketing.

And they also involve standard policy wordings but have been put together in a manner which ensures they provide the best coverage and services to our clients.

It's literally a win for the client, a win for the carriers involved and a win for Willis.

We also launched our pilot UK MGA in the second quarter.

Finally, last week we started rolling out our Willis quality index to clients for the first time.

This is a unique measure of carrier performance that's taken us two years to develop.

It's leading edge and we've had a fantastic initial reception from our clients.

It's been developed in conjunction with our markets and they 're also receptive as it merges the value of contract and claim service rather than just the issue of price.

By focusing on these measures we intend that general service levels to our clients globally will continue to improve overtime.

The combination of these global marketing initiatives has generated $10 million of additional revenue since we started at the end of 2007, and is on target to deliver approximately $30 million in revenue for the full year 2008.

Now let me just turn to the platform development.

We have started in earnest our shaping our future retail initiative.

This is on the back of the success we had in shaping our future London program which was focused on our London based specialty businesses where we completely overhauled our technology, processes and organization.

This continues to rollout in London, but we are now focusing on our retail branch network globally.

This will not only concentrate on how we do the work but where we do it.

We will look at use of regional service centers and also have a link with our wholly owned offshore centers such as Mumbai.

In general our retail offices should be focused on new business and client management with other work relocated for optimum effectiveness and cost.

We're focusing on two areas for this initially.

UK retail operation and Southeast North America.

And despite having 900 people now in Mumbai, additional movement of work is accelerating.

This is a critical and key component of us continuing to manage our expense base, despite continued revenue growth.

And we're not only expanding the breadth of our regional use of Mumbai, but also the depth and scope of activities we actually do there.

We also believe we continue to distinguish ourselves with some of our major competition by not outsourcing critical functions.

Particularly at a time when we believe that so many of the processes and technology underlying those functions need to change dramatically and with that I'll hand the call over to Pat Regan, our CFO, to review the financial results.

Thank you.

Thank you, Grahame, and good morning, everyone.

Reported earnings for the first quarter 2008 were $166 million.

Excluding the first quarter charge of $33 million, adjusted earnings for the first quarter were $189 million.

This compared to $169 million adjusted earnings for the share period in 2007, a 12% increase.

As adjusted earnings per diluted share were $1.32 for the first quarter 2008, a 20% increase on the adjusted $1.10 per diluted share in the same period 2007.

As I'll explain in more detail later, the first quarter earnings per share was positively impacted by $0.08 due to foreign exchange.

Turning to our revenues.

For the first quarter 2008, total reported revenues were $795 million, growth of 8% from last year.

Foreign currency translation increase reported revenues by 5% , and as Joe mentioned earlier, organic growth in commissions and fees was 3% for the quarter.

The split by business shows 5% growth in International, 3% in North America, and 2% for our global business unit.

Revenue was enhanced this quarter by a number of factors, including higher client retention, with everyone of our business units reporting retention of 90% or better.

Contribution from client profitability initiative of $5 million in the quarter and $3 million in the quarter from higher commissions from the early successes of our shaping our future marketing program.

The slight reduction in investment income was driven by the lower interest rate environment.

On our the operating margin, the adjusted operating margin for the quarter was 32.5%, an improvement of 30 basis points against the 32.2% in the first quarter 2007.

We achieved this underlying margin increase in the first quarter by maintaining a low organic cost run rate.

And it's a rate of our cost increase or decrease excluding the impact of foreign exchange, acquisitions and disposals.

The organic cost rate for last 12 months was 1%, including the cost of our new buildings in London and New York.

As we've described at Investor Day last year, we've taken a number of steps to increase our productivity.

These include the increased use of our facility in Mumbai, the rollout of our Eclipse technology in London, use of Insurance Noodle for our small accounts in the U.S., and our continued tight expense management.

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

Our annualized revenue per FTE improved by 1% to $188,000 on a trailing 12 basis.

This productivity measurement is increased by 7% since 2005, from $176,000 to $188,000.

The successful combination of positive organic revenue growth while at the same time reducing our organic cost run rate has been the key factor in our very consistent margin expansion over the past two years, despite the soft market environment.

As Joe mentioned earlier the adjusted operating margin improvement driven by our International and Global businesses while North Americas margin was relatively flat.

North America had strong contributions from the Southeast, Northeast, and Central regions, and excluding the impact of the purchase of the Insurance Noodle last June, the underlying margins in North America again increased in the quarter.

International increased its operating margin by over 100 basis points in the quarter.

This increased margin was driven in both our fastest growing and our more mature markets.

We saw strong profit growth in Latin America and the emerging market countries as well as in the UK, Spain, and Germany.

The margin in our global business increased by 180 basis points in the quarter, with strong contributions to this margin growth from marine, construction, FINEX, as well as reinsurance.

Adjusted salary and benefit expenses for the quarter were $396 million, or 49.8% of revenues compared with 51% a year ago.

The 120 basis point improvement reflects good cost control, realization of the savings identified last year, benefits from our initiatives and lower pension costs, somewhat offset by the continued investment for future growth.

Adjusted other operating expenses for the quarter were $131 million or 16.5% of revenue up from $111 million or 15% of revenues a year ago.

This increase was largely due to the impact of foreign exchange, investments in our buildings, investments in our initiatives, partly offset by the benefits of our continued focus on cost control.

As I mentioned earlier, foreign currency translation had an $0.08 positive impact on earnings per share in the first quarter.

This benefit was predominantly due to the increased dollar value of our euro zone profits as the euro strengthened significantly against the dollar.

Foreign exchange had a minimal impact on the operating margin as the dollar/sterling ratio was relatively stable.

All things being equal, we expect the net impact of FX to continue to be positive in 2008.

During the quarter we purchased a further 4% of (inaudible) bringing our ownership to 42%.

Our increased ownership along with a greater profitability of (inaudible) contributed a $7 million increase in our profit from associates.

The underlying tax rate in the quarter was 29.5% excluding the tax effects of disposal London recorded and share based compensation, and this is consistent with the tax rate for the full year 2007.

Turning to capital management.

Despite this being our seasonally lowest cash quarter of the year, we bought back 2.3 million shares during the quarter for $75 million, an average price of just over $33.

During the quarter the credit markets continue to be choppy.

Less than 10 issuances were completed in the first quarter and the U.S.

financial services sector in our rating category.

However, things have improved over the last few weeks.

Execution of of bond deals appears to be improving with more transactions coming to market now.

As we've discussed before, the Company has strong credit ratios that allow us a good deal of financial flexibility.

Absent an acquisition with a very strong strategic pick, stock buybacks remain our priority.

There was $195 million of cash and cash equivalents on March 31, 2008.

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

Included in the acquisitions was a 4% of (inaudible) for approximately $30 million.

We also used approximately $27 million for additional pension contributions.

Total debt was $1.4 billion and total stockholders equity was also $1.4 billion.

Turning then to our outlook for 2008.

For 2008, we continue to expect earnings per share in the range of $2.85 to $2.95.

With state of the credit markets we've delayed raising the new debt to fund the share buybacks.

Due to this delay the level of accretion expected from buybacks has lessened, yet this has been mitigated by the positive benefits from foreign exchange.

We also continue to expect 24% adjusted operating margin for the full year 2008.

As you might expect, there may be some timing mismatch between the extra spent on the initiatives and when we begin to see those cost savings flow to the P&L this year.

This may slightly impact our quarterly margins through the year but again, to reiterate we continue to expect to hit 24 % for the full year.

As I mentioned earlier we incurred a $33 million charge in the first quarter.

For the full year we now expect to record a total charge of approximately 65 million to $85 million, consistent with the range we provided last quarter.

We expect to achieve benefits this year of approximately 25 million to $35 million, increasing to the full run rate in 2009.

With that I'll now turn the call back to

Thanks, Pat.

So, in conclusion, we remain on track with shaping our future and our outlook for 2008.

Revenue growth positive for all segments in the first quarter and should remain so as I said earlier for the full year.

Anticipating by the way a question, we're always looking for an opportunity that fits our strategic and our cultural goals via acquisition route.

Our profitable growth will continue to be driven by sales culture, the continued successful execution of shaping our future strategy and a constant monitoring of expenses and capital management.

We now have a new share plan that was approved shareholders last week that is 100% performance based and will align managements compensation with our financial targets through 2010, the same targets that we've given you 24, 26, 28 margin over the next three years and the outlines Pat gave you of our targets for earnings per share are now aligned with the way we get paid in our management compensation structure, so everything is aligned not only in terms of the management and our Executive Committee but our top people around the world.

So we are in terrific position, we think, to execute our shaping our future strategy and also to be able to obtain the goals that we've laid out.

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

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Dan Johnson.

Your line is open and please state your company name, sir.

Thank you.

Citadel Investment Group.

Just a quick question on the benefits business.

Can you remind me roughly about how big that is and can we just talk about what's going on in the organic trends in that part of North America?

Ad then I've got a follow-up.

Yes, that business exceeds 300 million all around the world, if you don't include (inaudible).

If you include (inaudible) it's in the air was of $0.5 billion on a worldwide basis.

The growth has been strong single digits in the last quarter.

The growth has been very very good.

It's one of the mainstays of our business and part of our shaping our future strategy is by the end of 2010 have that business in between the 750 million to $1 billion range in terms of revenue on a worldwide basis so it's something that we have spent a lot of time on in investing in infrastructure and people and are very encouraged by that business on a worldwide basis.

Great.

And then the other one related to North America.

With the revenue sort of geography restatement with the other income item, the North American organic was about 3% in the quarter.

What was it last quarter and the year ago quarter?

4% the year ago.

And in the fourth quarter?

It was minus 7 in the fourth quarter.

Okay, so the restatement had no impact on the--?

No, the 3% has no impact on 39% at all, no impact on North America full year organic.

Oh, I'm sorry, I thought you said no impact on the 3%, if I'd left that 4 million in from a year ago it would have been less.

No, the 3% organic for this quarter is unaltered, so there's like-for-like basis.

I'm sorry, just one second on the math here.

If we had 4 million a year ago of the other income and 1 million this quarter, wouldn't, we had left the accounting the same, wouldn't we have had lower organic?

We mentioned the organic on a like-for-like basis excluding those items, and if you have included those items, the last years full year numbers for North America or indeed, for the group were unaltered.

If you included the 4 and 1 in the quarter it slightly alters your numbers but if you do it on the same like-for-like basis, it's still (inaudible).

You said this 4 million was a disposition of intangible assets, I'm assuming that was just the sale of some business ?

Yes, it's a (inaudible) books of business.

In last years first quarter supplement, there was no acquisitions or dispositions identified for North America.

Why wasn't this considered a disposition a year ago?

Because it's not a disposable business.

It's really just tiny bits and pieces.

Okay and then finally, in Florida, lots going on down there in the reinsurance sector.

Can you remind me how you guys feel about the market share in the Florida reinsurance business, in other words if things change dramatically down there, is that a big mover for your reinsurance business?

Thank you very much.

I'll let [Peter Hahn], who is Chairman of our reinsurance of Willis Re answer that question.

Stan, as you know, there's a lot going on in Florida right now, there's the ying and yang of what the state is now seeding to the private reinsurance market versus the private market reinsurance ratings which are continuing to reduce.

We have a strong position in Florida.

We see the reduction in the top layer of the hurricane cat fund as a positive to our growth in Florida but that's also offset by the underlying price movement we're seeing in the renewals of our Florida business which is anywhere between 10 and 20% so we look at it overall right now as sort of revenue neutral in Florida.

Great.

Thanks for my questions.

Our next question comes from Charlie Gates.

Sir, your line is open and please state your company name.

Hi, Credit Suisse.

Hi, Charlie.

Good morning.

Joe, in your introductory remarks I believe you opined that you saw pricing erosion 10 to 40%.

Would you be elaborate on that commentary?

And in your answer, would you comment on what coverage you you were speaking to where you saw a 40% pricing pressure.

Well, the range that I gave you had to do with the lowest increase that we saw which was 10% and the highest increase that we saw, obviously that's done by-product line in different areas of the United States, obviously you got big product declines in some geographies, mainly in the Southeast.

You got big, as it relates to property versus big product line declines as it relates to some areas of executive risk and D&O, and it's just across-the-board, Charlie, but the market continues to decline and as I said, most obviously, and most profoundly in the U.S.

Can you comment on where you saw the 40% go?

Charlie, this is Don Bailey.

Just backing up some of what Joe said.

You saw in the southeastern part of the United States some property particularly we're starting to see more significant rate decreases that starts to play out in the 40% area but again as Joe said, in the executive risk area outside of the financial institution spot where it's started to firm up certainly with everything that's going on, we still have been seeing significant 30, 40% decreases in that segment.

So that was executive protection so that's basically defined as D&O and E&O?

Yes.

And basically, the 40% erosion in what you called the Southeast, that's basically commercial property some

Yes, it is, Charlie.

Thank you.

Our next question comes from [Salvadore Samas].

Sir your line is open and please state your company name.

Hi, it's Bear Stearns on behalf of David Small.

Good morning.

Just a follow-up question to Dan Johnson's question.

Looking at the $4 million that he referred to, if you look on the footnote on pages 7 and 11, it looks like those charges were taken out of commission and fees and moved into other income for the previous year, so if you run through some of the math it looks like it was 0% organic growth in North America, if you consider the 1% for FX.

Could you just run us through the numbers one more time?

No.

The organic for North America for the quarter was 3%.

Each comparing like-for-like with last year.

The movement to the reclass doesn't affect the overall North American organic for last year, and it still comes out the same number, doesn't affect the quarters organic of 5% for Willis for last year.

So even if you do last years 184, right?

Yes, it's in the table on page 11, yes.

Exactly, so if you meet that 188 over 191, and you take 1% of FX, it's pretty much 0% organic growth.

No.

The organic is calculated on a proper organic basis, it's was 3%.

The 3 million you're talking to there, even if you adjusted for 3 million you wouldn't get down to 0.

You'd still be in the 2% range but property calculating it's 3% as we've published it.

Okay, thanks a lot for the clarification.

Our next question comes from Matthew Heimermann your line is open and please state your company name.

Hi, good morning, JPMorgan.

Good morning.

Quick question.

I just was curious at this point how dependent is your buyback activity on actually getting a deal done?

In getting the deal done, what do you mean?

Well, how important is incremental capital like I would speculate from debt to actually completing the share repurchase?

Matt, as you know, our historically we generated free cash flow broadly in like with our net income so we've got strong cash flows and we'll continue to generate strong cash flows.

The debt really is a timing thing so when we can do the debt deal, we can accelerate the share repurchase and that enables us to bring forward earlier some of that buyback which all things being equal we would probably like to do, otherwise it would just take us a little bit longer if we use free cash flow.

So the right way to be building on this quarter then the right way to think about it is normal cash flow net of dividends and acquisitions and that's kind of the right way to think about it?

Yes.

If we didn't do it (inaudible).

That's exactly right.

The other question I had was I was a bit surprised by positive reinsurance growth this quarter given some of the trends we're seeing and I guess could you speak maybe a little bit in more detail about some of the things that helped out in that quarter and how sustainable you feel like some of those things are?

I'll answer that question.

I said at the end of, at the last call when we talked about the fourth quarter and the year that we expected positive growth in reinsurance and that's what we got.

I think that it has a lot to do with our ability to open new business.

Our retentions are high.

Our retentions have always been high.

The issue in reinsurance has been how much of our insurance clients retain and reinsurance, but I think it's totally attributable to opening new business.

I'd mentioned earlier in my remarks that our analytics and our capabilities and the investments that we made over the last few years have really come to bear on our confidence levels and being able to open new business, so I think that's what it's attributable to, and given proper market environments, as I suggested and predicted, that we would have positive revenue growth throughout the rest of the year.

I think that's right, Joe.

Our pipeline is significantly increased over last year.

We continue to grow in the emerging markets in Brazil and India, and it's a function of new business gains versus the increase in retentions and underlying rate reductions that we're seeing throughout the world.

Okay, and could you maybe just dive a little bit deeper into when you talk about opening new business maybe just some insights into the types of products that that new business is coming from and you mentioned the geography so I don't think you need to rehash that but the product side would be helpful.

Matt, it really crosses all lines in our specialties business and our International business and our U.S.

business whether it be Main Street property and casualty, whether it be in our capital markets area, we just completed the placement of another bond, so when I look at our offerings across the world, I combine that with the very disciplined production model we've put in place, all of it is bought in fruit for the reinsurance business.

Would growth have been positive ex-capital markets transactions in the quarter?

Yes.

Okay.

Thank you very much.

Our next question comes from Keith Walsh.

Your line is open.

Please state your company name.

Hi, Keith Walsh at Citi.

How are you everyone?

Good, thank you.

One question, just on pricing, Joe.

I know you said you saw declines of 10 to 40% but just on the business that you didn't retain what was sort of the average price decline you saw there?

On the business we didn't retain average price per client, again, it's a range.

There's no specific number that I can hone in on.

I'm looking at Don Bailey to see if that, you agree, right, Don?

There's no way we can pinpoint a number.

You got a couple of issues there, Keith.

You look at not only just the rate decreases from a premium perspective but the broader issue is just fee decreases on larger business, on lost business.

There continues to be robust competition for the largest accounts that are out there and you're continuing to see fee compression on that basis, and as a brokerage firm, we're very focused on client profitability as Grahame talked about and you've got to look at these on a case-by-case basis and sometimes it just doesn't make economic sense to continue.

Keith, if your underlying question has to do especially with the fees, that there's a lot of compression and a lot of challenging if you will of the fees and competition, there's a lot of reductions going on out there, and a lot of cases we have walked away from business and not retained business because we didn't think the fee structure allowed us to be able to hit our profit margins the way we wanted to, so if your question has to do with that, yes, there's a lot of, the lack of retention had to do with walking away.

Our numbers in retention as good as they were North America and as I said year-over-year it's 2% would have been much higher if it had not been the case.

Okay, thank you.

Thank you.

Our next question comes from Meyer Shields.

Your line is open and please state your company name.

Thanks, Stifel Nicolaus.

Good morning, all.

Hi.

If I could dig into the guidance a little bit.

First of all for 08, does the 2.85 to 2.95 contemplate $1.32 or $ 1.24 for the third quarter?

$1.32.

Okay.

Also Joe if I can pin you down if you have flat or even negative organic growth in the back half in the remainder of this year, you can still have positive organic growth for the full year, and I'm trying to understand whether your organic growth guidance, I guess which way it falls down.

Are you expecting positive organic growth for the remaining quarters?

I'm expecting positive organic growth, I mean at this point in time, it's very difficult to say given the volatility of the market what's going to happen on a quarter to quarter basis, Meyer.

I mean that would be silly for me to predict at this point in time.

I mean, the volatility is incredible.

So I can't predict that but I can predict given our pipelines, given our faith in our retention levels, and the things that we're doing with shaping our future, again, I stand by the fact that by the end of the year, all of our revenue growth will be positive.

But I can't do it as microscopic on a quarter to quarter basis, business by business basis.

It's just too volatile.

Okay, that's fair.

With respect to (inaudible), a couple of quarters because of guess their seasonality, in some quarters they had contributed negative amount to earnings last year.

Would those negatives be bigger this year because you own more or would they be smaller because of improved profitability?

I think it's a combination of both of those things.

I think they're undergoing their own shaping our future strategy and doing a good job at it frankly.

As you know, we're preparing for what will be a consolidation, if you will, to 50.1% by 2010 and so it's nice when you know you're going to make an acquisition.

We're beginning the convergence process, and still looking very carefully at their numbers and doing A very good job at it.

I think that in concert with the fact that we own more, I think shows you what you're seeing.

Okay.

And last question if I can.

At this point in time, is there anything in the segment results besides commissions and fees?

Nope.

Okay.

Thanks so much.

No, it's just straight blocking and tackling.

It is what it is.

Okay.

Before our question from Brian Meredith (OPERATOR INSTRUCTIONS).

Your line is open and please state your company name.

Yes, UBS.

Good morning, Joe.

Hi, Brian how you doing?

Good.

I'm wondering if you could dissect the minus 1% rate a little bit more for us, just give us a sense of what the impact of the commission rate increases were on your organic revenue growth in the quarter?

It seems like it was probably pretty impressive given what you're talking about with respect to price decreases out there.

Well, obviously, that number has a lot to do with not only the raw rate increases but the insured values of the transactions, it has to do with volume numbers and that's how you come up with the net number, but we had very good for the circumstances that we find ourselves in, I think a combination of a strong new business under the circumstances, and our retention levels that we spend a lot of time on.

I mean, we constantly talk in this Company about what the 1% and what 2% means in those numbers against $2.5 billion are huge numbers especially as it relates to the bottom line, so if you take a combination of all of those things and a strict adherence to the numbers, that's how you get the minus 1 but more importantly, that's how you get the 3.

The 3 was actually 4 with the minus 1 gives you the 3.

Right, right, okay.

And then just following up on Dan's question on the benefits, any chance we can get what the organic revenue growth was in North America ex the benefits business?

It's still based on the same rate.

Yes, if your question is is that did the benefits have a big -- the questions I'm hearing is a surprise over the 3% increase in North America, and we did a good job.

Give us credit, come on!

It's a nice increase.

They did well, and if your question has to do with did that come from employee benefits specifically?

Absolutely not.

It was across-the-board.

It was a good performance in North America and I'm proud of them.

Excellent.

Thank you.

(OPERATOR INSTRUCTIONS) We have one more question from Meyer Shields.

Your line is open and again please sate your company name.

Thanks.

Stifel Nicolaus.

Hi, Meyer.

Hi.

Last quarter, Joe, you said you were seeing some early signs that maybe reinsurance rates were still dropping but people were buying more.

Is there any update on that?

I think that's probably the case but I'll let Peter answer that question.

Meyer, I think it's a question of in a declining rate environment for our client base is a question of how do you want your net income affected.

Do you want it affected by losses and deterioration in your underlying business or in reinsurance spend?

I would say that the significant rate increases, rate retention increases that we saw in 2007 have started to abate and people are looking at their underlying business and are looking at reinsurance as a way to stabilize net income.

Okay, that's good news.

And the $6 million that didn't go, the 6 million in M&A that tnt go to (inaudible) what was that spent on?

Oh, just small bits and pieces of stuff.

Nothing, there was some of that would have been earn out payments and that kind of stuff as well and buying out interest, that kind of stuff.

Okay, thanks so much.

That does conclude the part of the question and answer segment.

Okay, thank you very much, everybody.

Have a good day.

Thank you.

Bye-bye.

That does conclude today's conference call.

Thank you all for participating.