Willis Towers Watson PLC (WTW) 2008 Q2 法說會逐字稿

Welcome to the Willis second quarter 2008 earnings release conference call.

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

(OPERATOR INSTRUCTIONS).

The conference is being recorded.

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

I would now like to introduce Ms.

Kerry Calaiaro, Director of Investor Relations.

Ma'am, you may begin.

Thank you, and welcome to our earnings conference call and webcast at willis.com for the second quarter 2008.

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

A replay of the call will be available through October 31st, 2008 at 11:00 p.m.

Eastern time by calling 800-876-4 (inaudible), or 1-203-369-3997 outside the U.S.

with no pass code, 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 we may make certain statements relating to particular 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'll now turn the call over to Joe.

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

Here with me in London -- we're talking to you from London today in our new building -- are Graham Millwater, President, and Pat Regan, COO and CFO, and all of the top executives of our Company who have responsibility for the various divisions in our firm to answer any questions that you may have later on.

Today, I'm going to start with the second quarter and give you an update where we are mid-year and with shaping our future.

Then also I want to talk about an update on our acquisition of HRH that we announced on June 8th that I think is going very, very well.

Overall, we're very pleased with our performance through mid-year.

We said we were going to deliver industry-leading organic revenue growth, and have 3% -- and have, with a 3% increase in our revenue.

We said that we would have a flat adjusted operating margin this year, as we make savings from the charges and make investments, and we have.

We said we would see benefits from shaping our future initiatives coming through, and we have.

And Grahame's going to give you more detail on that; and they are starting to have a direct effect, and he's going to give you some numbers as it relates to those things.

So as relates to the quarter, we're very, very pleased, especially in an environment that you know has been very difficult.

Let me share a few thoughts and a few highlights for the second quarter and the six months.

First, the second quarter.

The second quarter of 2008 saw continued successful execution of shaping our future strategy for profitable growth.

The market remains very soft, but we continue to grow the top line while maintaining very strict cost discipline and making investments for the future.

Our revenues grew 6% for the second quarter.

Organic growth in commissions and fees was 3% for the second quarter, with 5% net new business and a negative 2% from declining rates and other market factors.

We are very pleased with the 5% net new business in this environment.

Traction from shaping our future initiatives, as I said earlier, and improved client retention to 91% in the second quarter from 90% in 2007, are both contributing to good organic revenue growth.

In these kinds of environments, you have to look at every nook and cranny and everything in your business to be able to get an advantage.

We continue to expect full year positive organic growth in commissions and fees in all of our business segments, which is what I said at the beginning of the year.

Adjusted operating margin was 21% for the second quarter, a decline of 100 basis points from the second quarter last year, including a negative 40 basis point impact from FX.

But again, we suggested to all of you that that was going to happen as we make the investments I'll talk about in a second.

We mentioned on the first quarter call that we had made investments in the early part of this year.

That means we slightly decreased our margin in the second quarter, and that's what generated that.

As more of the cost saving initiatives kick in in the second half of the year, we continue to expect to hit the 24% for the first -- for the full year.

These investments include key hires and spending to roll out shaping our future, London, client profitability, shaping our future marketing, and new hires in London, Spain, Denmark, China, Russia and most notably, North America.

Organic growth in commissions and fees was 3% and organic expense growth was 2% in the second quarter of 2008, as we maintain our expense discipline and recognize savings from the charges.

Adjusted earnings per share in the second quarter of 2008 were $0.59, up $0.09 from $0.54 in the second quarter last year.

Now, for the six months, organic growth in commissions and fees was 3% with positive growth of 1% in North America and Global and 7% in International, which I think is a fine achievement across the board.

Adjusted operating margin was relatively flat at 27% through the six months, which again, we suspected would happen, given the investments.

Adjusted earnings per share rose 16% to $1.91 for the first half, and we continue to expect adjusted earnings per share for the full year 2008 of 2.85 to 2.95, which is what we told you we thought we would do.

Now, let me talk about our business units in a bit more detail.

First, our retail businesses, North America and International.

In North America, organic growth in commissions and fees was a negative 1% for the quarter as we navigate this soft market.

But not surprisingly, while April and May were positive, June fell off a bit after the announcement, which I think caused a little bit of distraction and maybe a little disruption.

We were on the road for three weeks visiting Willis and HRH offices around the country, and kind of took us out of our rhythm and we think that had a little bit to do with June.

The Northeast, particularly in Pennsylvania and Boston, New York and Central regions, including Dallas and Chicago, continue to perform well, with strong growth in each region.

Productivity continues to improve with a more than 2% rise in revenue per FTE since the end of 2007, which obviously suggests that we're doing business, we're doing more business while we're maintaining our headcount.

Client retention levels, which we've spent a lot of time on, especially in North America, where we phrase it "pay attention to retention", have improved to 92% in the second quarter, up 4 points from the full year 2007, with great improvements in the Northeast, including Boston and Pennsylvania and Central, including Dallas, Milwaukee and Michigan.

Rates in North America have declined in the range of 10 to 40% in the quarter.

Adjusted operating margin in North America has declined to 16% in the second quarter and 15% through six months compared to the same period in 2007; again, due to the impact of the soft market on the top line, and again the strategic investment spending.

And obviously, that investment spending was halted when we made the announcement of the acquisition of HRH.

On an International basis, in our International unit, organic growth in commissions and fees was 10% for the second quarter, as it continues its record of very strong growth across many regions.

This is the tenth quarter in a row of strong growth above 5% in our International operations.

We had strong growth in Spain, Denmark, Latin America, especially Argentina, Chile and Peru, and Asia.

Within Asia, we had strong growth in China, Indonesia, Singapore and Korea.

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

Retention was steady at 91% in the second quarter, with improvement in a number of key countries.

This impressive top line growth and ongoing expense discipline have contributed to margin expansion through 22% in the second quarter and 28% through the first six months, which is just an outstanding achievement; and I have to really congratulate all of my colleagues in International -- just a wonderful achievement.

We've continued to make investments in our key growth markets in International and feel confident about our future prospects.

Let me talk a little bit about our Global business, if I may.

The Global business segment, comprised of Global Specialties and Reinsurance, had flat organic growth in commissions and fees.

Although Global Specialties had organic revenue growth and was positive, it was offset by negative growth in Reinsurance, which is navigating, again, through a very soft market and a very high retention cycle.

Global Specialties had good growth in Marine, Energy and in Space, and this was despite significant rate reductions in this area in the range of 5 to 15% in most specialty areas.

The Reinsurance market continues to be hit by a combination of declining rates in the range of 5 to 15%, with continuing high carrier retention levels.

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

We believe that we have the best people with the best expertise in the right positions and are clearly well-positioned when the market begins to firm.

There is promising new business driven by North America and International.

(inaudible) levels held very steady at 89%.

And Global operating margin expanded to 29% in the quarter and to 40% through the six months.

Again, these margins are terrific in our International divisions, in our Global divisions, and we couldn't be more pleased with the way all of the Company is working together to get the results that I've just described.

Now I want to turn this over to Grahame Millwater for an update on shaping our future initiatives.

Thank you, Joe.

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

We entitled this program Shaping Our Future.

Midway through 2008, we continue to see tangible results and are gaining real momentum throughout the organization.

We are ahead of schedule on realized benefits, comprising both additional revenue and efficiency gains.

Now let me just point to a few highlights.

Firstly, let me talk about increased retentions.

Through constant client feedback, monitoring early warning signs of accounts in jeopardy, underlining incentives not just with new business but to retention levels, we continue to see an increase in retention levels across the business.

For example, in the U.S.

as Joe said, this has contributed 4 points of improvement to 92% in the second quarter compared to 88% for all of 2007.

Client profitability -- this is the process of ensuring every client is profitable, and it continues to be rolled out across the organization.

It's very simple.

We either ask for more, handle the business differently or do not handle at all.

This initiative has contributed $11 million of benefit through the first half of 2008 and $30 million since we started the process in mid-2006.

We're far from completed, but we're starting to see the concept of client profitability totally embedded in our culture.

In terms of targeted producer hires, we've made a number of strategic hires in targeted geographies and regions, including the U.S., Europe, Latin America and China, and also specialist areas such as aerospace, construction, marine, employee benefits.

We continue at the same time to make additional head room for some of these hires by managing poor performers or redundant roles.

We have identified about 350 positions through the first half of 2008, and those positions have been or are being eliminated.

These are all related to the charges taken this year and will contribute to the savings.

Turning now to our Global Marketing infrastructure, we've now established a Global Marketing infrastructure throughout our businesses.

This is focused upon increasing original commissions, product development, and aggregation.

This includes facilities and MGAs to better and more efficiently serve clients while also at the same time targeting high commissions for the value that we provide.

This marketing organization has been in place since the beginning of the year, and already in the first six months of 2008 we have delivered $11 million of additional revenue from our existing portfolio.

Also importantly, the run rate benefit is increasing every month.

New facilities and MGAs include Executive Risk PA, Marine Cargo, General Aviation, Fine Art and Jewelry, Bloodstock, and Kidnap and Ransom.

These are not only vehicles which attract additional commission, but are also key to client profitability in that they are far more efficient.

Commission (inaudible) increases also, especially critical as we look towards the integration of HRH and replacing their contingents.

Our Global Marketing organization is also responsible for the development of our unique Willis Quality Index, which is now being made available through our client advocates to our clients and is both unique and of great value to both our clients and our markets.

Now, turning briefly to our platform development, Shaping Our Future London continues at a pace, and this is the complete overhaul of our technology processes and organization in London.

We have now completed the rollout to Aerospace, International Property, International Casualty, International Financial Institutions and Executive Risk.

And we're just starting energy in North American Property and Casualty.

It is on plan for all the associated efficiency benefits and on target to complete the program by 2010.

On the back of this success in London, we've initiated a similar process in our retail businesses in the U.K.

and the U.S.

at the beginning of the second quarter.

This is focused again on streamlining and standardizing process functions and roles, implementing leading edge technology solutions and optimizing their locations using hub and spoke and service centers such as (inaudible).

We have now completed the design phase and associated benefit plan for the U.K.

and we are initiating our execution of our plans in the U.K.

retail business.

In the U.S., we've turned the focus of this work to underpinning the integration of the HRH and the Willis platforms after closing.

Also at the same time, the movement of work to Mumbai continues.

We've started to reach the capacity of our current site of about 1,000 associates, having added 60 new associates in 2008 thus far.

But we are delighted to announce that we have signed a lease on a second Mumbai site, to start the first of January 2009, and this will give us capacity for a further 600 associates.

Hopefully this gives you a flavor of our execution and momentum within the program, with the associated benefits being particularly critical in this current soft environment.

And now, I'll hand the call over to Pat Regan, our COO and CFO, to review the financial results.

Thank you, Grahame, and good morning, everyone.

Reported earnings for the second quarter 2008 were $39 million.

Excluding the pretax second quarter charge of $62 million, adjusted earnings for the second quarter were $84 million.

This is an 8% increase from the $78 million adjusted earnings for the second quarter 2007.

Adjusted earnings per diluted share were $0.59 for the quarter, a 9% increase on the adjusted $0.54 per diluted share in the same period 2007.

Turning to our revenues, for the second quarter 2008, total reported revenues were $661 million, growth of 6% from last year.

Reported commissions and fees grew by 7% in the quarter.

Foreign currency translation increased reported revenues by 4%; and as Joe mentioned earlier, organic growth in commissions and fees was 3% in the quarter.

Split by business, shows a 10% growth in International, negative 1% growth in North America and flat growth for our Global business unit.

Despite the continued soft market conditions, revenue was enhanced this quarter by a number of factors, including: The higher client retention with the overall 100 basis point improvements over 2007, particularly driven by North America; contribution from the client profitability initiative of $6 million in the quarter; and $8 million in the quarter from the early successes of the Shaping Our Future marketing program.

Through the six months, International has grown 7%, North America has grown 1%, and Global has also grown 1%.

And we continue to expect positive organic revenue growth in commissions and fees for the full year in all three business segments.

The slight reduction in investment income was, as you would expect, driven by the lower interest rate environment.

On the operating margin, the adjusted operating margin for the quarter was 21%, against a 22% margin in the second quarter 2007.

Foreign exchange negatively impacted the operating margin by 40 basis points in the quarter.

As we talked about at Investor Day last year, we've made a number of strategic investments for our future growth.

(inaudible) headcount has increased by approximately 200 since the end of 2007, as we've invested in a number of key industries and geographies.

Key hires in selected U.S.

regions and target growth areas such as London, Liberia, Denmark, Colombia, Peru, China, Russia and Mumbai.

We've also made investments in support of Shaping Our Future London, Shaping Our Future Marketing, Shaping our Future Retail, as well as client profitability.

The organic cost growth rate for the six months ended 30 June, 2008, was 2%, including the cost of our new buildings in London and New York.

This was a result of the increased use of our facility in Mumbai, the rollout of our new Eclipse technology in London, use of Insurance Noodle for our small accounts in the U.S., savings from our 2008 charges and our continued tight expense management.

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

This productivity measure has now increased 7% since 2005 from 176,000 to $189,000 on a trailing 12 basis.

Adjusted operating margin for the six months was 27.3%, relatively flat compared to 27.5% in the same period last year.

This margin is consistent with our expectations mid-year, and we continue to expect a 24% adjusted margin for the full year 2008.

Our operating expenses, as I've just mentioned, we've made a number of investment hires for the future in the past few quarters.

Adjusted salaries and benefits expenses for the quarter were $377 million, or 57% of revenues, compared with 57.5% a year ago.

The 50 basis point improvement reflects good cost control, realization of the savings identified last year, benefit from our initiatives, and lower pension costs, somewhat offset by those investments for future growth.

Adjusted other operating expenses for the quarter were $130 million, or 19.5% of revenues, up from $114 million or 18.2% of revenues a year ago.

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

Foreign currency translation had a $0.01 positive impact on earnings per share in the quarter; and as I mentioned earlier, foreign exchange had a negative 40 basis point impact on the operating margin, primarily due to the weakness in the dollar versus Sterling.

All things become equal, we would expect the impact of FX to be a very slight positive to earnings per share in the second half of the year.

Effective tax planning enabled a reduction in the effective underlying tax rate from 29.5% to 28% during the second quarter.

This excludes the tax effects of the disposable (inaudible) quarters and share based compensation.

We expect this lower tax rate to be sustainable and to continue for the full year.

On capital management, there was $205 million of cash and cash equivalents at June 30th, 2008.

During the quarter, we used $36 million of cash for dividends and $6 million for acquisitions.

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

Total debt was approximately $1.5 billion, and total stockholders' equity was approximately $1.4 billion.

On the outlook for 2008, (inaudible) analysis for the purpose of our 2008 outlook, we've assumed that the HRH acquisition closes on December 31, 2008, although obviously we would expect it to close sooner.

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

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

As I mentioned earlier, we incurred a $62 million charge in the second quarter, with a six month charge of $95 million because we were able to identify more cost saving opportunities for the next year.

This was slightly in excess of our previous estimates, and we now anticipate that these charges and other actions will lead to benefits this year of 25 to $35 million, increasing to 45 to $55 million in 2009.

Finally, then, we revised the guidance at the time of the HRH announcement and currently expect an adjusted operating margin of 24% in 2009 and 27% in 2010 -- both of them obviously after the deal I just have mentioned, with adjusted earnings per share of $3.15 to $3.25 in 2009, and $4.05 to $4.15 in 2010.

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

Thank you, Pat.

I want to talk a little bit about the HRH acquisition, because I know you're interested in that; and before I open the call for questions, I want to give you a sense of where we are with HRH.

On June 8th, 2008, we announced the acquisition of Hilg Rogal and Hobbs, the eighth largest insurance and risk management intermediary in the United States.

Everything is moving along and we expect to close the transaction in the fourth quarter.

The day after the announcement, we commenced the three week road show -- actually the day of the announcement we commenced the road show -- by going right to Richmond, where HRH's headquarters is, and for three weeks after that visited 20 key Willis and HRH cities around the country, with Don Bailey, who heads Willis North America and will be the Chairman and CEO of HRH; Mel Vaughan, HRH CEO, and will become Vice Chairman of the Willis Group; and Mike Crowley, HRH President and COO, who will become President of Willis HRH North America.

And what I saw was terrific enthusiasm, wonderful passion, client focus by both companies and enormous compatibility that I didn't know I would expect to see because obviously I didn't have an opportunity to see the people before the deal was announced.

And I would tell you, as an overall reaction, I was enthused about the deal when we announced it and I became more enthused with every city that I visited for those three weeks.

It's been nearly two months since the announcement and we're even more excited about the opportunities.

We're excited about the opportunities to leverage our expanded presence in North America, double North America revenues, and more than double the employee benefit base.

It strengthens our middle market leadership, which is where we think the battle is going to be won or lost, reinforced the large account presence and add depth and breadth to key practice areas.

The integration planning process is going very well, and I thought I'd hit on that just a little bit.

The governance structures are in place with detailed work streams, key deliverables and daily meetings, which occurred with me every day at 8:30.

Key leadership has been announced already.

As a matter of fact, it was announced after three weeks into the process.

We announced who would run regions, what the regions would look like, who would run offices and practices, including employee benefits, so we could hit the ground running when the deal was closed.

We have done an extensive review of 210 combined North America retail locations and have a plan in each city for real estate locations already, and target synergies have been validated.

What that means is, is we told you we thought we could get synergies of $100 million by virtue of doing this deal over a two-year period of time, and we have more than validated that that number is accurate, and feel very comfortable with that number.

For example, we believe that Willis producers are about 20% more productive on revenue per producer measure.

That's not because the producers at HRH are not productive.

It has to do with resources.

It has to do with size of accounts.

It has to do with the practice groups.

It has to do with all the kinds of things that will now be available to both of our Companies, and we get very, very enthused when we look those possibilities.

The support network at Willis is more centralized and producers have broader access to the Global resources and practice expertise to serve clients that will now be available to everybody.

Key objectives are to retain associates and clients and to deliver the $100 million of cost synergies and position the combined Company for growth.

Now, many of you have had questions on the $50 million of contingent commissions HRH collects, especially with the recent hearings on the subject of contingents in New York.

We are confident that we will be able to convert this revenue stream.

I told you that on June 8th.

There was a lot of questions about that -- there had been a lot of questions about that -- and I'm very, very confident that we'll be able to replace it.

You heard Grahame in his talk with regard to our Shaping Our Future marketing, saying that already we have $11 million of uplift in our marketing program, and we've just begun that program.

It was $3 million in the first quarter, $11 million in the second quarter, and that's just going to continue to ramp up.

So we will deploy that same mechanism when the contingent period is over in three years.

So we're confident that we'll be able to convert the revenue stream.

We'll have three years to convert their contingents and supplemental commissions for existing clients with standard commissions.

From our due diligence and office visits, it appears that HRH is very decentralized in their approach to marketing, something we have worked on in Shaping Our Future, as I just mentioned, to consolidate and leverage with the markets to get the best terms and conditions for clients and appropriate commission levels.

HRH currently works with 2,000 markets, so we'll take a look at those markets and see if clients would be best served by placing that business elsewhere.

This would allow us to migrate HRH premiums to carriers we may have existing relationships with where we could get paid more.

And obviously, the New York hearings allowed us an opportunity to once again highlight the need for transparency and a level playing field where some brokers do not accept contingents and some do.

So what's the conclusion to what's going on at Willis in the second quarter?

We're very pleased with our performance.

We're very pleased with the way things are going with HRH.

We said we were going to deliver industry-leading organic revenue growth, and have at 3%.

We said we would have a flat adjusted operating margin this year as we make investments, and we have.

We're gaining momentum with our Shaping Our Future initiatives, as you heard in gory detail, while building a solid platform for future profitable growth; and again, we're very, very excited about our relationship with HRH.

They have wonderful people.

I was enthused before.

I'm ecstatic now after seeing all the 4,000 plus people at HRH, and I know our people, and it's going to be a very chemical as well as a M&A operation for both of us.

Now I'll turn it back to the moderator for questions, and thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

One moment, please, for the first question.

Thank you.

Our first question is from Keith Walsh.

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

Hi, Keith Walsh at Citi.

Good morning, everybody.

Keith, how you doing?

Good, good.

First off, congrats on the nice revenue number this quarter in a very, very tough environment.

I've got two questions.

First, for Joe, just on the HRH integration, if you could just talk about the challenge of not only integrating HRH but integrating the record number of deals that they did in '07 that that management team has clearly failed to integrate up to this point, based on their results last night, and then I've got a follow-up.

Well, first of all, as I said, Keith, you know, you make projections and you do your models before you do a deal.

You know that.

And I've done these a lot in my life at the very company you're with.

A lot of them -- 40 some of them.

And a lot of times you make those projections and you make the models in terms of what you think you can get out of integration; and I have to tell you, you make those before you announce the deal.

I did no differently this time.

But as we went out and saw the people and we got more involved and learned more about their business, I became more and more convinced that not only did we do a great deal from an economic point of view, be we did a great deal from a chemical point of view.

Every meeting I went to, every city I went to, the reception was terrific.

The understanding of what we could do together was really unbelievable -- one of the better road shows if not the best that I've encountered in my career.

So from that point of view and the integration, really no problem at all.

As it relates to the deals that you're making reference to, I saw all the people of all the deals that HRH had made.

I think they made great deals.

I think that with the combination of some of the synergies that we can make and the revenue increases that we can help them make because of the way we conduct business and the practices that we have that can help them, I don't have any reluctance whatsoever, and haven't had any reluctance since this was done.

Sometimes in the past, you know, you do something and you kind of think a couple of times well, should I, shouldn't I, et cetera; not one second did I have any regret about this deal whatsoever.

And as I said before, every city, I got more and more enthused by what I saw.

So I know you're hearing Joe Plumeri's usual optimism, but my optimism is usually correct, and I couldn't say enough about what I've seen there and what I think the HRH-Willis combination will mean for this Company.

Okay.

And then just on broker compensation, as far as, you know, maybe if you could talk about the differences in what an HRH broker gets paid versus a Willis broker, basically on the same account, and how quickly are you going to migrate the HRH brokers onto a Willis pay schedule?

Thanks.

There's a little bit of a difference in the pay scale; but like anything else, Keith, you can't compare an apple to an orange because they get paid differently than we pay.

They have segments of the way they're paid versus we're paid on a basis of retention of book and then growth.

When you look at it, the difference is not that much.

They get paid a little bit more, but nothing that I don't think that we can't blend in 2010 so that we maintain in effect the same level of compensation for both Willis and HRH at the same time.

As a matter of fact, I'm pretty confident of it, because I think we can make up any difference that we have by virtue of the fact that we get more synergies than I thought we would get when we first modeled this.

So the thing you want to do, what drives this business, is producers producing.

And the more producers that we can have producing, and motivated to produce more, we want to do.

So the highest that we can compensate them against the back drop of the best efficiencies we can get is what we're going to try to do; and so far, I believe that we'll be able, going into 2010 and beyond, sustain the levels of compensation.

I've already said to the producers at HRH that we will maintain their compensation through 2009; but I feel pretty confident that on a blended basis so we all have one compensation schedule, that the level of compensation will continue to basically remain the same as we find a blended system, because I think we can get synergies from elsewhere, Thanks a lot, Joe.

Thank you.

Thank you.

Our next question is from Meyer Shields.

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

Thanks, Stifel Nicolaus.

Good morning, all.

Hi, how you doing?

I'm okay.

How are you?

Good.

Matter of fact, great.

I'm sorry?

I said I'm great.

Good, good.

If the earnings guidance for 2008 is unchanged but the tax rate is going to be lower, then does that suggest that the pretax number is not as -- is a little weaker than you had thought originally?

The main reason is, you obviously remember when we did the original '08 guidance, we had anticipated doing stock buybacks earlier in the year or during 2008.

Obviously with the HRH acquisition, we haven't included the benefit we thought we would get from the stock buyback.

So what we lost on the stock buy buyback, effectively we gained back with the tax rate, and the pretax numbers and the margin numbers are unchanged.

Okay.

That's helpful.

And Joe, you talked a lot when there was more aggressive recruiting going on in 2004, 2005, you talked a lot about the ramp-up of their productivity and their effect on margins.

Could you discuss that with regard to the investments you've made so far this year?

Well, it's too early to tell.

Obviously, investments that we made in North America stopped when we made the acquisition of HRH, so we've got plenty to do there.

But there's no reason to believe that the level of activity or the level of the recruits won't breed the same kinds of results that they bred before, which as you know were slightly dilutive in the first year, slightly accretive in the second year, and the third year we were generating 30% plus margins.

That's the pattern.

That was the blueprint.

And I don't see any reason that shouldn't occur now with the people we've recruited.

In the rest of the world, the recruiting has been quite generous in the sense that we've recruited a lot of people because that's part of the investment strategy.

And I don't believe that we'll get any different results than we did in the past with regards to the recruits on an International basis.

Okay.

Great.

Thanks so much.

Thank you.

Matthew Heimermann, you may ask your question, and please state your company name.

Hi, good morning, everybody.

Hi.

Just a couple questions.

First, with respect to the HRH integration, and particularly the carrier relationships, have you started to -- have you started the conversations with carriers that you're considering both perhaps, you know, using more of or shifting away from?

No, I cannot do that.

We are not one company yet.

But I assure you, when we are, we will do that.

Okay.

And then within -- you know, in the HRH's numbers last night, U.S.

was pretty weak.

There's obviously been some headwinds in your markets as well.

I guess is that pretty much as expected, you know, based on the discussions you were having prior to the deal announcement?

Yes, it's pretty much expected.

I have to tell you that when -- especially in June -- and you could ask Mel this question when he has his call -- but June was a little bit distracting for us, and it had to be very distracting for him.

You know, you wake up on a Monday morning and, you know, you're told your Company is being bought -- who are these people, what's going to happen to me, and then everybody's attending road shows and calls and dinners and so forth, and it's very disruptive.

So I'm not surprised in the sense that people were not distracted and a little disrupted; but I will tell you that irrespective of the second quarter that HRH had, I'm really looking on a perspective basis about what's possible, and I saw firsthand what's possible and I'm excited about that.

Okay.

And then, just based on what you've seen so far in July, does it look like some of the distraction is starting to dissipate in North America?

I can't -- certainly the distraction is not the same as it was in June, that's for sure.

I can tell you that the road shows we had, the meetings that we've had, the breakfasts, the dinners, the lunches with producers, all across the company have been -- and the country, have been very productive.

People are very enthused.

They're very much looking forward to the future, and I'm very positive about the future.

Okay.

And then I guess last question, this might be a bit nitpicky, but in the Global segment, how much -- I mean, you know, not that revenue growth there has been strong as compared to International, for example, but, you know, we've seen more positive over the recent history -- but is kind of the flat more a function of same weakness in Reinsurance weaker specialty, or just more weakness in Reinsurance?

It's more weakness in Reinsurance across the board.

But again, that's to be expected because of high retentions and because of rates.

I will tell you that I think our Reinsurance operation is the best it's been in the almost eight years that I've been here.

Our analytics are better than anybody else's in my opinion.

Our people -- the amount of people that have joined us over the years, the way they conduct their business, the way they have structured themselves to comply with Shaping Our Future -- ironically, I think Reinsurance is in the best shape it's ever been.

It's just not manifesting itself simply because of the retentions in the market.

But I really believe that once we get a little bit of a break -- and we will -- that Reinsurance is really going to take off.

I really want to make a comment about the specialisms as well.

I couldn't be more pleased by specialisms.

I mean, our Marine business and our Energy business, two examples, are in terrific shape.

Marine's markets are not -- I wouldn't necessarily call hard, but because they're running -- the way they're running the business and what they're doing, it's exciting.

And they showed positive revenue growth in specialisms, despite the fact that there's a soft market, and despite the fact that one of the specialisms is Aerospace and you know how soft that market is.

So I couldn't be more pleased with what's going on here in London.

Appreciate it, Joe.

Thanks.

Thank you.

Mark Seraphin, you may ask your question, and please state your company name.

Thank you, Citadel Investment Group.

Quick one for Pat.

How are you?

Good, good.

Quick one for Pat would be, what's the year-to-date benefit so far from pensions that you guys have recognized?

And then a little bit more on the April, May were positive and June was negative, Joe, and just could you help me understand how one month can offset two?

Was it that April and May were modestly positive and June is just a larger renewal month?

And that would be helpful.

And I'll take the first one first.

In terms of our pensions, we're running year-to-date so far between the two schemes, the U.K.

and the U.S.

scheme, about $7 million lower P&L charge this year versus last year, which is as you would expect.

As you know, we've put quite a bit of time and attention into doing some restructuring in the pension scheme and also funding the pension scheme over the last couple of years.

So we're about $7 million lower year-to-date so far.

So would you expect the same kind of impact second half or -- ?

Yes, I would.

As it relates to the question about April and May and then a negative June, I think it was more in what you said in the latter part of the question, Mark, which was we had modest -- we had nice, I think, improvement under the circumstances of the market in April and May and then we had, I'd say, modest negativity in June that simply offset the two.

So there wasn't huge swings.

It just so happened that June outweighed what happened in April and May, and June happened to be the month where most of the business was conducted in the quarter.

That's seasonal.

That's the way it usually happens, and so as a result we had a negative one.

But I think all in all, when you look at North America and you look at our retention rates, which is an unbelievable 4% increase in retentions, and you look in terms of what we've achieved over the last couple years in terms of margins, I'm really pleased with what's going on, and obviously I'm very pleased with the way, you know, the integration process is going.

Thank you.

One last quick one.

Could any of it be a timing issue where some of that might be just pushed off into the third quarter?

I can't tell you that there's a lot of that.

There's some, but I don't see a lot of it like I've seen in the past.

But there's some.

Thanks.

Thank you.

Our next question is from Jake Cohen.

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

Good morning.

Jay Cohen, Merrill Lynch.

I've got two questions.

The first is just on the tax rate.

Pat, if you could just tell us what the tax rate was on the adjusted earnings for the second quarter, that would be helpful.

I think the effective underlying rate was about 25 for the second quarter.

And obviously, we've applied the year-to-date rate of 28%.

Right.

And then secondly, maybe a little bit bigger picture, how do you find the economy, certainly in the U.S., affecting the business?

What's been the impact of that?

And what would you think going forward?

Well, Jay, it's interesting, even though I've been here almost eight years -- I've known you eight years, Jay.

I asked the question of what happens in this business in the beginning of recessions, and I was told in the past that nothing much happens; and I looked at the numbers myself and I will tell you, so far I haven't seen any impact from the economy, either in the United States or the rest of the world.

It seems to not affect the business, the biggest effect on the business is rates.

Thanks for that answer.

You're welcome.

Thank you.

(OPERATOR INSTRUCTIONS).

We have a follow-up question from Meyer Shields.

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

Thanks.

Stifel Nicolaus.

Joe, with regard to Reinsurance, obviously rates are going to follow some sort of cyclical pattern, but do you also expect the trend of rising retentions to reverse?

Yes, I do.

I think that you've had not only an environment where rates are low, but you have an environment where claims have been pretty benign.

So it's a great opportunity to offset what you're not getting in premium by retentions.

And I think that's the phenomenon that you're seeing now, and I think that that reverses when rates go up and claims get more aggressive.

Peter Hearn, are you on?

Yes, Joe, I'm on.

Okay, do you want to add anything to that?

No.

We are just -- as I said to you last week, we are starting to see some indicators that the increased retentions have had an impact.

Obviously when companies come to you and start looking to buy aggregate covers because of the impact of net losses on net income, the increased purchasing effect, these are all indicators that it is starting to have an impact -- the increased retentions are starting to have a negative impact.

Okay, so early signs of maybe that trend slowing down at least?

It appears from what Peter's just said and what I've said, Meyer, that that may be happening.

Okay.

Second question for modeling purposes, is the 2009 guidance based on the 28% tax rate as well?

We haven't specifically given you a tax rate for next year, Meyer; and as I say, it's been a relatively recent development.

But we do think the tax rate is sustainable.

Obviously, when you factor in HRH, the overall change is slightly.

So the Willis stand alone you could assume is that kind of rate.

I need to tell what you the math was when you include HRH obviously there with the U.S.

tax rate to it.

So the math will work out a bit higher on a combined basis.

Okay.

Great.

Thanks so much.

Thank you.

We have a question from Brian Meredith.

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

Hi, UBS.

Two quick questions here.

First one, you haven't bought back any stock and I know the reason is the HRH acquisition coming up, but the question I guess is, are there any restrictions or anything from you -- preventing you from buying back your stock right now?

It's obviously incredibly depressed right now.

And would it make sense maybe to actually buy some of the stock back now?

Yes is the short answer.

Until we complete the deal, Brian, that we probably won't be buying back stock at the moment.

Is there any particular reason for that?

You've got the funding in place for the acquisition, right?

It's really for -- to get all the funding agreements in place that we won't buy back stock just yet.

Okay.

And then second question Joe, can you talk a little bit about getting commission rate increases and how that's been going during the second quarter?

Yes, Grahame -- I mentioned it, Grahame mentioned it, I mentioned it again -- Shaping Our Future marketing has generated in the first half $11 million in commission increases, 3 in the first quarter -- we just started the process, as you know -- and 8 in the second quarter and that ramps up every quarter.

Grahame, you want to add anything to that?

Just wanted to say that to do this effectively you undoubtedly have to put an infrastructure into place and you really have to (inaudible), and you have to analyze every account that's coming up for renewal.

You have to analyze it and say, is it where we want it to be in terms of our agreed rates with carriers?

And also, you have to make sure the field executes that.

We started that process at the beginning of this year.

And as we said, $3 million in the first, $8 million in the second, and we anticipate that run rate to increase as we expand that process --

Okay.

-- across the world.

Okay.

So we should expect that to continue to accelerate given what you've already put in place?

Absolutely.

We're very excited about that for the reasons that Grahame mentioned.

You need to put infrastructure in place to get that done, and the infrastructure that's being put in place is starting to yield results.

So we're excited about the fact that the infrastructure takes hold, the traction takes hold, the amount of commissions we're going to be able to generate is going to yield greater results.

So it's happening just like we said it would.

But Brian, obviously with -- the premium flows are not linear every quarter, so the third quarter is lower than the first quarter and that kind of stuff.

So it won't be quite linear quarter by quarter, but the trend will be in that direction.

Okay, thank you.

Thank you.

Thank you.

I'm showing no further questions.

Okay.

Thank you, everybody.

Have a good day.

Thank you.

This concludes today's conference.

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