Willis Towers Watson PLC (WTW) 2008 Q3 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session.

(Operator Instructions).

Today's conference is being recorded, if you have any objections you may disconnect at this time.

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

Kerry Calaiaro, Director of Investor Relations.

Ma'am, you may begin.

Thank you, Rosie.

And welcome to our earnings conference call and webcast at Willis.com for the third quarter 2008.

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

A replay of the call will be available through November 24, 2008 at 11 p.m.

Eastern time by calling 866-372-3809 or, outside the US, 203-369-0248 with no pass code or by accessing the website.

If you have any questions after at the call, my direct line is 212-915-8084.

As we begin our call, let 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'll now turn the call over to Joe.

Thank you, Kerry.

Our own Sarah Palin look-alike, here she is.

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

Here with me today are Grahame Millwater, President; Pat Reagan, COO and CFO; and Don Bailey, Chairman and CEO of Willis HRH.

Today I'll start with the results and I'll also talk about Shaping our Future, then I'll give you an update on the acquisition of HRH that we completed on October 1st.

Overall we're very pleased with our performance through the first nine months of 2008 -- 3% organic growth in commission and fees in a very soft insurance market we think is outstanding; relatively flat adjusted operating margin grew through nine months as we recognize cost savings and make further investments for profitable growth.

And I want to remind everybody, that's exactly what we said we would do -- we would be flat in our margins, we would invest and we would save money all at the same time and that's exactly what happened.

Grahame normally updates you on Shaping our Future, but we have a lot of material to cover today, but he's certainly here and he's available for questions after our remarks.

The Shaping our Future strategy for profitable growth is on track, something that we created, as you know, as a strategy for our future a couple years ago and it's working beautifully.

The initiatives continue to see great traction, especially client profitability, $19 million to date and Shaping our Future marketing $18 million year to date.

Our offsite in Mumbai is close to capacity at 1,000 associates and Mumbai was part of our Shaping our Future strategy in terms of putting a lot of processing in our centers around the world, mainly Mumbai, and there's a new site coming on board in January for a further 600 capacity, so that's one very well.

Shaping our Future is going very well.

We closed the acquisition of HRH on October 1st and we're off to a great start.

We're excited about the fact that we closed on October 1st.

We were surprised that it happened so quickly, so that's the reason why -- when we talk about consolidated earnings in the fourth quarter, etc., it's because we closed on October 1st.

Now we're looking at all of the aspects of our business in a time of great uncertainty, global economic uncertainty in the context of a soft market, so we're going to be looking at continuing to right size our business against the backdrop of what's going on in the world.

We're very good at controlling our costs, but you've got to look at the way the world is today and you've got to look at circumstances that exist and ask yourself, is the size of the Company and the things that we're doing against a backdrop of what's going on in the world all the right things to do?

So we're going to be talking about that as well.

So let me share with you a few of the highlights for the third quarter and the nine months.

In the third quarter of 2008 we saw continued successful execution of Shaping our Future for profitable growth.

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

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

So we continue to grow our business against that incredible headwind.

That 3% is probably the largest we've seen in a long, long time since the beginning of the soft market.

The traction I made reference to earlier from Shaping our Future initiatives and strong client retention is at 90% in the third quarter and both are contributing to that very good organic revenue growth that I just made mention of.

Adjusted operating margin was 12.1% for the third quarter which is a decline of 410 basis points for the third quarter from last year, but it includes a negative 260 basis points from an impact of FX.

I'm still trying to figure out how you control FX, I haven't been able to do that yet, but that's a major ingredient in terms of our margins.

Excluding the FX margin decline was 150 basis points, 50 basis points was due to lower investment income.

So I know there's a lot of noise in those numbers and Pat's going to talk a lot about that, but there are a lot of pluses and there are a lot of minuses that we'll try to sort out for you.

The impact of the soft market has tempered the margin and, especially in North American reinsurance, has moderated the top line growth while we continue to make investments for profitable growth in both of those areas.

These investments include key hires and spending to roll out Shaping our Future London, which we said we were going to do, client profitability, Shaping our Future marketing, and new hires in London, Mexico, Denmark, Germany and North America.

Exactly on plan.

Now the reported earnings for the third quarter in 2008 were $36 million, $0.25 per share but there are several items that affected that, so let me take you through it; Pat will do the same thing in more detail.

You take the $0.25 and then you've got $0.05 expense relating to the amortization of the fees for the bridge financing facility and integration costs associated with the HRH deal.

Again, back in June we did the deal, the credit markets changed a little bit so you've got $0.05 expense there, then another $0.02 loss on the disposal of small business and then a $0.09 loss in the quarter from foreign exchange, and a $0.04 gain from a one-off release of a tax provision.

And when you do all the math for that the underlying earnings were $0.37 per share.

Since we closed the HRH transaction on October 1st, HRH will not be issuing any stand-alone financial information, but I did want to give you a little bit of color on the third-quarter results.

Don Bailey is going to get into more detail as it relates to the integration and integration process and how well that's going.

But our organic growth and commission fees in the US retail division was a negative 1% which, again, in this environment we think is outstanding.

We're also pleased with this result given the soft market and considering the fact that we really asked the people at HRH to do the integration planning, the meetings, the training and all of the changes we've asked them to make.

So to have a result of minus 1% in the midst of all that, we really think that that's pretty good stuff and we'll talk a little bit more about that and answer any questions that you have.

So for the nine months organic growth in commissions and fees of 3% was a positive growth of 8% in international which continues to be outstanding for us and flat growth in global and North America.

The adjusted operating margin was 22.9% through the nine months, or 23.7% if you exclude the foreign exchange, which puts us right on target for the flat margins that we said we would achieve and still believe we will achieve on a stand-alone basis.

This margin was relatively flat year on year and consistent with our previous comments.

The adjusted earnings per share increased 6% to $2.24 for the nine months.

Now let me give you an outlook for 2008 because I know you're interested in that.

We are still reasonably comfortable with our previously stated Willis standalone earnings and margin targets, that is to say without the integration or the -- consolidation of HRH because we didn't expect that the deal would close this early.

With the HRH closing we want to set expectations for the impact in the fourth quarter from HRH fourth-quarter results.

We've also factored in initial dilution from financing costs, deal amortization, early synergies and no anticipated share buyback in the fourth quarter.

So we now expect adjusted earnings per share in the range of $2.60 to $2.70 with adjusted operating margin of approximately 22% excluding the impact of foreign exchange movements in the fourth quarter.

So on a consolidated basis that is what our expectation is; on a stand-alone basis we're very comfortable, again, with our previously stated standalone earnings and margin targets.

Let me talk about growth in North America international and global.

First let me talk about business units in a bit more detail.

First, our retail businesses in North America and international.

In North America organic growth in commissions and fees was a negative 2% for the quarter as we navigate the soft market.

I want to say though as we talk about that, that in a lot of our divisions most of our divisions, most of our regions in New York, Boston, Chicago, Knoxville -- a lot of our regions had very positive organic growth.

We had some restructuring in Canada, we still have parts of the country that are not what we expect them to be; but I would tell you we're very excited about the fact that most of our regions are doing very well.

And you throw in the fact that we have a pretty decent sized construction business which obviously is a business that, because of credit that we're watching very carefully, we think that there are a lot more positive things than this would suggest.

Productivity continues to improve with a more than 2% rise in revenues per FTE since the end of 2007.

So that the revenue per person, if you will, is going up, we just have a couple of places that we need to pay more attention to.

The client retention levels have improved to 91% in the nine months, up 3 points from the full year 2007 with great improvements in the Northeast, central Milwaukee and Michigan and Western and San Francisco.

Now the adjusted operating margin in North America has declined to 10% -- I appreciate the fact that when you see that that's bothersome to you -- in the third quarter and to 13% through the nine months compared to the same periods in 2007 due to the impact of the soft market on the top line and the strategic investment spending.

There are a bunch of things that have affected that anywhere from the investments that we made, the impact of the soft market, there are some severances in there, there's one-off pension expenses in there, some legal costs, medical costs.

But on a basis of where we are on a nine-month basis, flat growth in our revenue is something that I think that we will build on.

But again, there are a lot of things that go to that margin and we're looking at that margin just as you're looking at that margin.

While many regions in North America are performing very well, I would also include that it's affected the level of placement of our US business in London and Bermuda while Canada went through a major restructuring.

So most of our units in North America are doing very well.

Our margins are affected in this quarter by a lot of one-off stuff.

A little bit affected by the construction business.

But given everything we're doing with HRH, given all the integration that's going on that Don will talk about next, we're very, very pleased with the position we're in in North America and understand that another reason, aside from having more offices in the US and aside from having bigger businesses in a lot of the different product lines, one of the reasons we bought HRH was to affect these synergies that would give us higher margins in the US on an ongoing basis.

And I will tell you that those synergies are going very well.

That a lot of the costs that we have gotten as a result of the economics today and the borrowing costs are more than being offset by more synergies and so that's going to affect the margins on a long-term basis.

So we're very, very excited about that.

I want Don Bailey to talk about how Willis HRH is doing on an integration basis because now that we're one operation I've invited Don to the call.

So I want to welcome you to your first investor call, Don.

Thank you, Joe.

Since we announced the deal on June 8th, we immediately engaged an intensive integration planning efforts and I want to talk to you a little bit about that planning effort today.

First off, please know that Joe is actively involved in all aspects of the effort along with Vic Krauze, our COO of Willis HRH in North America, and myself who are driving the day to day.

There's an intense meeting schedule to fine tune the effort and to track all of the synergies that are part of this effort.

We've been engaged in this effort for over four months; this isn't something that we just started a few weeks ago upon closing.

We've got roughly 200 people from both organizations that are involved in the effort and there are 15 plus work streams to include every aspect of the organization.

Most notably, after announcing the deal on June 8th, we set out to answer what we quickly learned were the two biggest questions on the minds of most all of the Associates, and those were to whom do I report and where am I going to sit?

So on reporting lines, we announced all the office leaders, 200 office leaders; all of the regional leaders; all the practice leaders just 15 days after announcing the deal.

And it's an equal balance from both organizations, the best of both worlds theme was key to how we put this together and that unique characteristic is key to our early success and will be critical to our ongoing success.

On real estate, the other piece of this, where do I sit, we made announcements on all 200 plus offices by mid-August.

On all the other matters to include IT I can tell you that we are on track with our synergy targets.

Now let me talk a little bit about where we are with the producers from HRH.

I can tell you after having been around the country at least a few times, it's an aggressive collection of professionals and one of the terrific assets of the organization.

Simply put, we're thrilled so far with the retention numbers that we've seen.

We think this says something very positive about the compelling nature of the combination.

Producers tend to stay if they believe the combination is good for their clients and of course good for them.

They're clearly making a statement thus far.

To date since June when we announced this we have 98% retention on producers; on an annualized basis that probably comes out to around 94%.

Finally, as you can tell, I'm very proud of the efforts and the results that we've had over the past four months.

It's clear to all of us that these two organizations are even more compelling to clients as a single organization.

We've had many clients and prospects make clear statements in that regard to us already.

We're all very excited to reap the benefits of the new organization.

With that, Joe, I'll turn it back to you.

Thanks, Don.

Let me talk a little bit about international.

Obviously any questions that you have about the integration Don or I will be able to answer for you.

In our international unit organic growth in commissions and fees was 10% for the third quarter as it continues its record of impressive growth across many regions.

This is the 11th quarter in a row of strong growth of 5% or more.

We've had strong growth in Spain, Denmark, Latin America, especially Brazil, Venezuela and Peru and Russia.

This was the face of persistent rate headwinds and in most countries.

Retention was steady at 91% for the first nine months with improvement in a number of key countries.

The impressive top line growth and ongoing expense discipline have contributed to margin expansion to 16% in the third quarter and 25% through the first nine months which is extremely impressive when you have such a diverse number of countries all doing very well.

International continues its impressive track record of steady growth.

Let me talk about global now.

The global business segment, which, just to remind you, is comprised of global specialties and reinsurance, had negative 2% organic growth in commissions and fees in the quarter.

Global specialty's organic revenue growth was positive, but it was offset by negative growth in reinsurance navigating -- still navigating in a very soft market with very high retentions.

Our global specialties performed well -- Marine, FINEX, [Woodstock], Jewelry, Specie and Global Markets all showing very good growth.

This was despite, again, significant rate reduction in most specialty areas.

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

We have continued to make investments in reinsurance.

We believe very strongly in reinsurance.

We want to strengthen the capital markets and the analytics capabilities of reinsurance.

We want to drive the future of reinsurance and we're very excited about what reinsurance will be contributing to our company in the future.

We believe that we have the best people and the best expertise in the right positions and are clearly well positioned and I think very shortly you'll see that.

Client retention levels in global were 90% for the first nine months, up 1% from the full year of 2007.

I keep mentioning retentions because we spend a lot of time retaining our clients.

Global operating margin declined to 13% in the quarter, but remained high at 33% through the first nine months of the year.

I'll talk about financing, Pat will get into the details, but let me talk to you a bit about our balance sheet cash requirements.

And the reason I'm going to do that, and I usually don't, is because I know that it's an issue with regard to the bridge financing out there because Kerry has gotten a lot of questions and we've gotten a lot of questions about it so I want to talk about it.

As most of you know, we have a $1 billion bridge financing.

First, let me remind you that we have $175 million available on our term loan and we haven't used any of the $300 million revolver.

Second, it is our plan to access the public debt market as soon as possible.

However, on the basis that you always need a plan for the worst, we still have a lot of flexibility even if the debt market remains tight.

As I noted above, we have a total of $475 million of undrawn facilities.

Third, as a combined company we should generate post dividends in the present environment over $400 million of cash over the course of the year.

Fourth, we plan to dispose of a number of small non-core businesses that should generate over $150 million in gross proceeds.

So you can see if you add all those things up under a worst-case scenario, if we couldn't replace the bridge over a short-term period of time there's lots of things that we can do from a cash position and we have a lot of different options.

So I wanted to go through that with you.

Pat will do it, but I wanted to make sure that I threw my own two cents in because I know that it's an issue.

Let me talk about Gras Savoye because I know that's a lingering issue out there as it relates to cash.

Let me remind you of what our plans are out there.

We currently own 42%; we currently plan that by the start of 2010 we will own an additional 8% of Gras Savoye to move to 50.1% ownership at that point in time and no more.

It was never our intention to go to 100% in 2010 or the beginning of 2010.

So as a consequence of that, when we get to 50.1% we're scheduled for a $40 million payment for 5.5% in the fourth quarter of 2008, and this only represents approximately a further $20 million in cash in 2010.

So from a cash position, if you include Gras Savoye and you include all of the facilities that we have, we're very, very comfortable with the position that we're in from a financial point of view.

I wanted to get that squared away because I get questions about Gras Savoye and it's going to cost you $400 million in 2010 and you can't get the bridge financing done and all this kind of stuff.

So I wanted to make sure right off the bat that we addressed those things.

Pad's going to address them.

but I'll be very glad to come back in the Q&A to address them even more.

So with that, Pat Reagan.

Thank you, Joe.

Good morning, everyone.

Our results for the quarter are slightly more complex than usual as a result of unusually large foreign exchange movements and a few other items such as the cost of the bridge financing for the HRH deal.

I'll walk through each of these elements but focus my comments on the underlying margin and earnings.

Reported earnings for the third quarter 2008 were $36 million or $0.25 per share and adjusted earnings for the third quarter were $45 million or $0.32 per share.

The $0.25 reported earnings per share was after recording a $0.05 expense related to the amortization of the fees for the facilities and a very small element of integration costs both associated with the HRH deal -- a $0.02 loss on disposal of a small business, a $0.09 loss in the quarter from foreign exchange which I'll come back to later, and a $0.04 gain from the one-off release of a tax provision.

Excluding these four items the underlying earnings were $0.37 per share.

I will describe its all in more detail in a moment.

Adjusted earnings per diluted share were $0.46 in the third quarter of 2007.

Those results also included the release of a tax provision equivalent to $0.07 gain per share.

Turning then to our revenues.

For the third quarter 2008 total reported revenues were $579 million, growth of about 1% from last year.

Reported commissions and fees grew 3% in the quarter.

Foreign currency translation increased reported revenues by 1% and, as Joe mentioned earlier, organic growth in commissions and fees was 2% in the quarter.

The split by business again is 10% growth in international, negative 2% in North America and negative 2% in global business.

The soft market conditions continued with the impact of rates and other market factors at a negative 3%, its highest level since 2004.

But again, this quarter revenue was enhanced by a number of factors including higher client retention, as Joe mentioned earlier, contribution from our Shaping our Future marketing program of $7 million and contributions from our client profitability initiative of $8 million in the quarter.

Through the nine months our organic growth was 3%, international grew 8% and North America and global were both flat.

The reduction in investment income of $3 million in the quarter was, as you would expect, driven by the lower interest rate environment.

On the operating margin, as with earnings per share, the reported operating margin for the quarter was significantly impacted by foreign exchange.

The adjusted operating margin for the quarter was 12.1%, but that included a negative 260 basis point impact from foreign exchange movements.

Excluding the impact of foreign exchange the operating margin for the quarter was 14.7%, down 150 basis points from the third quarter 2007, of which 50 basis points was due to lower investment income.

The remaining 100 basis point movement in the underlying margin for the quarter is a result of the continued organic revenue growth and the realization of expense savings offset by a number of strategic investments to future growth.

As a result of a 2008 expense review we have eliminated 350 positions, yet total net headcount has increased by over 350 since the end of 2007 as a result of reinvestment of those cost savings through targeted hiring, exactly as we said we would do.

We've invested in a broad selection of key industries and geographies.

The hires include selected US regions and target growth areas including Spain, Italy, Denmark, Brazil, Mexico, Colombia, Peru, China, Russia and Mumbai, as well as a number of our London specialty businesses.

We've also made investments totaling approximately $30 million so far in the first nine months of 2008 in support of Shaping our Future London, Shaping our Future marketing and Shaping our Future retail initiatives as well as client profitability.

These will all [vastly improve] in the future.

The organic cost growth run rate for the nine months was 2% including the cost of our new buildings in London and New York.

As a result of all of the above actions and many others as well, and despite the soft market, we have managed to continue to increase our annualized revenue per FTE.

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

Adjusted operating margin through the nine months was 22.9% compared to 24.2% in the same period a year ago.

Foreign exchange had a negative 80 basis point impact on the margin through the nine months giving a margin of 23.7% excluding foreign exchange, relatively flat against 2007.

Operating expenses, as I just mentioned, we have made a number of investment hires for the future in the past three quarters.

Adjusted salary and benefit expense for the quarter were $359 million or 62% of revenues compared with 61.3% a year ago.

The 70 basis point increase reflects investments for the future growth moderated by good cost control, realizations of those savings [event types] last year, benefits from our initiatives and lower pension costs.

Adjusted other operating expenses for the quarter were $130 million or 22.5% or revenues, up from $116 million or 20.2% of revenues a year ago.

This increase was largely due to the impact of foreign exchange.

Turning then to foreign exchange, as I mentioned earlier, foreign currency translation had a 9% negative impact on earnings per share in the third quarter.

This impact was largely caused by the revaluation of our UK pension plan assets.

Let me explain that a little bit.

A portion of our UK pension scheme assets is held on the books of our primary UK trading company as a sterling denominated asset, as you would expect.

However, this trading company is a dollar-denominated entity for accounting purposes as it earns most of its income in dollars, our London market practice.

As the dollar strengthened very significantly during the quarter the revaluation of that pension plan asset gave rise to an accounting loss in the income statement for the quarter.

While we have a program to hedge our sterling cash outflows against that dollar income, we obviously do not hedge against the accounting revaluation of the pension scheme assets.

We hedge the pension scheme cash flows as they become due, but not the accounting revaluations.

Hence the extremely large movements in the dollar/sterling ratio in the quarter gave rise to an unusually large foreign exchange movement.

This together with some other smaller FX movement gave rise to a negative 260 basis point impact on the operating margin in the quarter.

All things being equal, we will probably expect that the FX have a negative impact on earnings per share for the full year as the dollar has weakened significantly again since 30th of September.

On tax, a combination of factors including effective tax planning and a change in projected geographical mix of income resulted in the reduction of the effective underlying tax rate from 28% to 27% during the quarter.

We've worked very hard to achieve this rate reduction.

In addition, following the resolution of prior period tax provisions we've released a tax provision of approximately $5 million or equivalent to $0.04 per share.

The other one-time item in the income statement for the quarter relates to the fees for the underwriting of the funding facilities relating to the acquisition of HRH.

The cost is amortized on the income statement over five months for the bridge facility and over a longer period for the term facility.

The amortization in the quarter amounted to $9 million pretax or $0.04 per share.

Turning then to the outlook for 2008.

Previously, for the purpose of our 2008 outlook, we assume that the HRH acquisition closed December 31, 2008 and, therefore, we assumed no impact on our 2008 numbers.

Now that we know the deal closed on October 1, we can factor in the impact of HRH for the fourth quarter.

As Joe said, we are still reasonably comfortable with our previously stated Willis standalone earnings targets.

As you would expect, the impact of HRH for the fourth quarter will be dilutive to the margin and the adjusted earnings per share as you have got a few factors; the amortization of the remaining parts of the bridge underwriting fee; we are not yet at our full run rate of synergies, obviously, in the fourth quarter; we are not assuming any share buyback in the fourth quarter.

We, therefore, expect that the adjusted operating margin for the full year will now be approximately 22%, which includes a negative 80 points of FX for the first three quarters.

We expect the adjusted earnings per share in the range of $2.60 to $2.70.

But both of those don't include the impact of any potential FX in the fourth quarter.

Looking forward, we now estimate that the full run rate of synergies will be $120 million, up from the originally estimated $100 million.

This higher level of synergies should somewhat offset the anticipated higher financing costs.

Turning to capital management, firstly a reminder of the funding of the closer of the HRH deal.

The purchase price of $1.715 billion with $942 million paid in cash and $773 million in shares.

That meant 24.4 million shares of Willis stock were issued.

[In fact] in final overall terms of 55% cash and 45% stock.

Funding for the transaction was completed as follows -- in addition to the $942 million used to buy shares, $400 million was used to assume the HRH debt and a further $180 million used for the repayment of the existing Willis line of credit and transaction costs.

The total debt of $1.525 billion was sourced with a $1 billion bridge financing and $525 million drawn down from our $700 million term loan facility.

Let me talk in more detail about how we intend to take out the $1 billion bridge financing.

Firstly, a reminder that it is a 364 day bridge financing facility.

Secondly, we have a total of $475 million undrawn on our existing facilities, $175 million undrawn on the term loan and $300 million undrawn on the revolver.

There was also $156 million of cash on hand in the business units at the 30th of September.

Thirdly, we have a good track record of accessing the capital markets.

While the debt markets have been short recently, there have been some more positive signs in the last few days that the markets will reopen soon -- soonish.

We anticipate we'll be able to make a debt issue in the region of $400 million $500 million in the reasonably near future.

Fourthly, we expect to generate EBITDA of close to $1 billion in 2009, a key free cash flow pre-dividend approaching $600 million with free cash flow post dividend of over $400 million.

Fifthly, our CapEx requirements going forward are minimal.

Other than the scheduled $40 million that Joe mentioned to acquire the further 5.5% of Gras Savoye in Q4 2008, we don't expect to be spending money on acquisitions for the future for the moment.

And as I mentioned earlier, our UK pension scheme asset still has an accounting surplus.

Sixthly, we have already identified a number of small non-core businesses we are in the process of selling.

We believe this will generate gross proceeds in the region of $150 million.

And lastly, should we wish to, there are other options available to us, not ones we'll necessarily pursue, but things like our convertible debt markets.

In summary then, it remains our intention to replace all or part of the bridge with bonds as soon as possible.

Having said that, we have a lot of financial flexibility.

We have $475 million in unused facilities, $100 plus million in cash, we're selling a number of small non-core businesses that will generate gross proceeds of over $150 million, and we anticipate we'll generate $400 million of free cash flow in 2009.

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

Thank you very much, Pat.

I know that that commentary is longer than we usually give, but there is so much going on we wanted to give you as much information as possible.

So as we conclude, what are we doing?

We continue to actively execute Shaping our Future which, we talked about earlier, is going very well.

We're driving the HRH integration and we're going to achieve a $120 million run rate in synergies by 2009 which is greater than we expected which will offset some of the higher costs of the financing.

We're going to continue to right size Willis for the current environment; that is to say, look at the world today, look at Willis and make sure that the size is right for the environment.

Let me talk about the outlook once again.

As I mentioned earlier, including HRH for full year 2008 we expect earnings per share of $2.60 to $2.70 and adjusted EBIT margin of 22% excluding the potential impact of foreign exchange movements in the fourth quarter.

I want to reiterate, we are doing everything we can to be able to continue to affirm or reaffirm the 2009-2010 estimates that we gave you.

And we don't want to do anything, though, that would impede our growth or do anything silly in order to attain those estimates.

We still feel that we're pretty comfortable in achieving them.

If we didn't feel comfortable with them I would tell you now.

As the year unfolds, as the economy unfolds, as the uncertainty unfolds in the world we'll reassess that outlook, but for now we feel pretty comfortable in being able to stick with those estimates, but believe me, we're not going to do anything silly that we think would harm the Company because we're proud of the high margins that exist out there and we've worked very hard to get them.

We're very poised in this environment to be able to grow and to do well.

We feel good about our game plan and what we accomplished so far and we're going to continue to execute that game plan which is working.

I'll be very, very glad along with my colleagues to answer any of your questions.

Keith Walsh, Citi.

First question for Pat, just on around the pension expense issue.

Can you explain the impact from pension expense we're going to see next year?

And I understand the assumptions are made December 31st, but just using current market returns and discount rates.

Also, what assumptions you could plan to modify maybe to lessen the impact of weak equity market returns.

And then the third piece of this, it also appears your asset allocation is weighted a little more towards equities than your competitors and would you change that allocation?

Then I have a follow-up for Joe.

Thanks.

Thanks, Keith.

A few points on that.

First off, we're still in an accounting surplus even as we sit here today.

As you know, we started the year in a very healthy surplus position.

And even factoring in the movements in the markets we're still in a surplus position today.

Our assets have gone down something in the region of 20 odd percent, so not bad considering the overall market conditions on that.

We do have a program redistributing our asset allocation over time that we've been working on for some time, we discuss it with Joe, on reallocating outside of pure equities into other asset classes and we'll continue to do that.

In terms of the cost going forward, obviously the reduction in the markets will impact cost going forward.

Difficult to be precise on that at the moment.

Probably you're looking at something that will be closer to last year's pension cost than this year's.

Obviously you've got a few moving parts in that.

We have done some stuff about it, we have worked already -- we've already put in place some of the changes to our UK pension scheme that will help reduce the cost next year.

So while the asset falls do push up the cost next year, and you know, probably you're looking in the $15 million to $20 million increase back towards what we were in 2007, we have made some changes that will help to mitigate the overall cost increases.

Okay, thanks, that's really helpful.

And then just for Joe and/or Pat -- regarding the outlook in the press release you alluded to global economic uncertainty and client buying behavior as a driver for pulling your guidance.

I'm really unclear how the economy would cause a material disruption to a property-casualty broker.

Even looking back at the 1980 and 1990 recessions we see property-casualty premiums rise every year and those were soft markets also.

And Joe, it just sounds to me that it's another way of you guys saying you're off track from your Willis projections in November as well as the Willis HRH projections given in June.

And if you could just comment on that and tell me why I'm wrong saying that.

Thanks.

It's not a question of right or wrong.

I've lived a little longer than you have; I've never seen anything like this -- ever.

And I was in your business for a long time.

There's no recession anybody dead or alive has seen like this or will see.

That's what we're talking about.

I don't know -- I know people have run studies, I've read them, that says in a recession people will continue to buy insurance the same way that they always do.

I really don't know with the depth of a worldwide recession like this that you're going to see buying power the same; it may be the same, it may change -- I don't know.

But nobody could argue the fact that what we've seen in the last few months on a worldwide basis is unprecedented.

That's why I say that.

It's not a hedge.

It's simply the reality of the way the world is today.

If I had a perfect opportunity, because of the air cover of all this uncertainty, to basically say we've got to throw out the outlook out the window and start all over again, I'm not willing to do that.

I'm simply saying it's very uncertain, we'll see how it's going, I still feel comfortable with the way the outlook is.

But no one can deny that this is a day-to-day process.

Who would ever believe that the markets would behave this way?

Who would ever believe that you'd have the nationalization of so many companies around the world?

Nobody would have believed that.

Nobody believed that AIG would be owned by the United States government.

So I don't think you can take history and apply it to the present-day situation; I certainly can't.

But I'm not willing to say at this point in time that our outlook is different.

We're still going to -- we hope to be able to attain our targets, a lot of the traction that we're getting from Shaping our Future, the integration of HRH in North America is going very, very well.

Our businesses in London are terrific.

Our businesses around the world, as you can see, are terrific.

And I think reinsurance is going to get better.

Our analytics are better -- we haven't lost any accounts, they simply retained more and I'm pretty proud of that.

So I'm very comfortable with all of that.

So it's not a question of right or wrong, Keith, it's just a question of looking at the world differently.

Okay, thanks.

Jay Gelb, Barclays Capital.

Thanks and good morning.

I had two questions, more broad, first on the cycle.

Joe, we've been hearing from the reinsurers that from their perspective they see high catastrophe losses and the impact of the dislocation in the financial markets could lead to a faster cycle turn.

What are your thoughts on that?

I think you probably would be more accurate to ask an insurance company what their thoughts are, but I'll give you mine from my perspective.

If you take the ingredients that make up for pricing, if you will, and not necessarily in this order is combined ratios.

I saw a report yesterday I think by Towers Perrin on September and I think the combined ratios were over 100%.

Whether that's accurate or not I don't know, I'm just telling you what I read.

Secondly, the investment income has got to be down a lot given the current environment.

Capacity has got to be down a lot because of Ike.

And then of course, who knows about the dislocations with regard to AIG.

If you put all those things together my sense is that you should start to see a turn in terms of the stabilization at least, the firming up at least of rates.

That's what my logic tells me.

And I guess the first place that you'll see that is in the reinsurance business and see where retentions are and see where rates are.

But if you look at those ingredients as a logical way of trying to approach whether there's turn or not, my sense is that at least it would be firm.

When you say you firming, do you mean a slowdown in the pace of rate declines or actually rates going to flat?

I would say that there would be rates going to flat or better.

Okay.

And is that limited to the short tail lines or are you talking about all reinsurance?

I'm talking about reinsurance.

Okay.

And then second, can you comment about the impact of AIG's dislocation on Willis' business?

We've heard of a number of risk managers that are going to potentially look to replace AIG on programs.

What does that do to the economics for Willis in terms of driving up costs, in terms of having to shop programs that maybe it wasn't anticipated that work would need to be done and whether Willis can get paid to do that?

We don't see any impact of that yet.

I know that there's a lot of talk about when renewables come up people might go elsewhere.

Obviously -- if they want to go elsewhere obviously that's their choice.

At this stage of the game we don't see what effect that would have.

The only effect I guess it would have, if it's a commission business it would probably -- if people want to try to compete for that business and with a lower rate that would affect us.

But right now I can't make any comment that would tell you on a positive or negative basis one way or the other.

And then just one last quick one.

How much of Willis' risk transfer business is placed with AIG currently?

How much of our risk transfer business is (multiple speakers)?

Yes, the business that's essentially from a premium perspective or commission perspective, how much of that goes to AIG?

I would say that it's our largest market as it is in most people's business, but it's in the -- I'd say it's in the 3%, 4%, 5% range.

Thank you very much.

James Ellman, Seacliff.

Good morning, thanks a lot.

Could you just allow us to drill down a little bit more on your text in terms of withdrawing the '09 guidance?

In terms of the financial crisis so far affecting your business, you mentioned that it could affect insurance pricing.

Have you seen any affect so far on insurance pricing due to the financial crisis?

And also you mentioned that the financial crisis might change buying decisions by companies to buy insurance.

Have you seen any changes in buying decisions as of yet?

We have not.

Obviously some of the financial lines -- you see firming in the financial lines because of what happened in the credit markets, but no, we have not seen that yet.

If we assume for a moment -- I realize it's a very large assumption -- that we have significant global healing in the capital markets starting by the end of the year and the financial crisis were over, and if we ex out or if we hold FX stable for a moment, if we take out the financial crisis would you say that your outlook for '09 would be similar to when you offered the '09 guidance last time you updated it?

Absolutely.

All right, very good.

And just in terms of some of the text that's come out from the sell side so far this morning before the call had said that the Company had missed by give or take 25% in earnings versus expectations.

Was there significant determination in earnings and operating power from the Company or was it that estimates were too high?

Could you give us some comments on why you think --?

What we said for 2008, we said we'd achieve a flat margin for 2008.

We did say in previous quarters that we didn't think it would be exactly flat every quarter because as we make some of those investments you're not going to be perfectly matched in terms of the pace of investment and the pace of our growth and revenue from initiatives and that kind of stuff.

So we were slightly less than flat in the quarter, but not a million miles.

We're, excluding the impact FX, almost exactly flat in the nine months year to date.

And as Joe mentioned earlier, we're still pretty comfortable with hitting that flat margin for the full year.

All right.

And last question.

The move from $100 million in cost savings to $120 million from the merger, would we expect to see that increase in the cost savings take place in the first half of 2009 or is it a 2010 event?

The $120 million is a two-year event.

We always said that that was a two-year event which was '09 and '10.

We think we'll get a very good chunk out of '09, but I'm not ready to predict that it will be half of it.

But you'll get a pretty good chunk out of it and we'll give you the update on a quarter-by-quarter basis.

But we feel pretty good about it.

Very good.

Very much appreciate the time.

Matthew Heimermann, JPMorgan.

This is actually Keith Alexander.

Good morning, guys.

I was wondering, what factors led to your belief that the initial HRH guidance might have been too optimistic?

Is any of it growth or buybacks?

How does that factor together?

When we've been talking about the guidance we've not specifically attributed anything to HRH.

The only thing we've said regarding HRH really is our (technical difficulty) expectations of synergies is higher now at $120 million than it was at the time of announcing the deal.

Don't confuse the outlook that we've been talking about with the HRH synergies, they're two different things.

Okay, that's fair.

My other question is regarding North America, it's been weak for a while, is there any risk this could create significant near-term headwinds for the HRH acquisition?

No.

As a matter of fact, one of the reasons -- I just want to remind everybody, I said this earlier, that one of the reasons we made the acquisition was not only the market share in a lot of cities where we were low, more locations, more product lines, greater capabilities.

But also with the enormity of the synergies that we're seeing we thought that it would help our margins a great deal.

And as it turns out I think it will help them in some cases more than I thought and that's what the synergy is about.

All right, thank you.

Thomas Mitchell, Miller Tabak.

I have two unrelated questions if possible.

The first is for the moment put yourselves in our place.

And it's almost impossible for someone on the outside to actually look at your results year after year, year over year, quarter to quarter and see visibly the cost savings that you refer to from one initiative or on another or from one activity or another.

You're not the only company that talks about this and makes it difficult for people, it happens in bank mergers and other things.

But I'm wondering, are we always permanently going to have to refer to your guidance as to what adjusted earnings are and will those adjustments always be such that the adjustments are higher than what's reported?

I think my answer to that would be we've tried to do a pretty good job as we've gone through each quarter talking about where we've invested and what we've invested in.

This year, as you remember, we said we would make a bunch of savings.

We talked about the 350 headcount and then also talk about trying to give some granularity about where we've invested so as to describe both elements of the savings from the charge and then where we've also reinvested.

The other thing we've tried to do is give some pretty specific guidance for future periods.

So you've got some pretty hard numbers, both in terms of cost saves and also earnings-per-share and margin targets for '09 and '10, which arguably we've given more specifically than other companies.

Absolutely, absolutely you've done that.

My problem is of course that now we're beginning to imagine that those targets are going to become moving targets.

But we'll wait and see; I'm willing to give you the benefit of the doubt on that.

You're the one that thinks they're moving, not me.

That's why we continue to suggest that we think we can hit those targets.

Let me go back a little bit in history.

When the Spitzer era hit and we got hit with the give up of contingents our margins went from the low 30s to 24%.

And in the course of trying to overcome the lack of contingents and in the course of trying to overcome the headwinds of the soft market we have kept our margins at 24% over a basic two to three year period of time, which I think is outstanding.

And we've done that by shaping our future initiatives, we've done that by growing our revenue.

Our revenue growth for the last -- gosh, I don't know how many quarters, 12, 13, 14 quarters against our competitors has been better than everyone else except for one quarter.

We've contained our costs.

We've created Shaping our Future initiatives.

I think we've done quite well.

We gave you those targets against a real documented set of plans that we still think are very achievable, as a matter of fact in a very granular way to be able to help you.

So we're telling you now that a lot of that is gaining traction.

The only thing that didn't exist then was HRH and we're telling you that that's going pretty well.

So we're very optimistic about the future; I just don't know about the uncertainty of the world.

But even despite that we feel very good.

Okay, that's fair.

The second question is sort of a follow-up on your comments about the logic of a possible cycle turn and that is it appears that the world financial system is moving to a much more deleveraged condition.

In theory that means that capacity from alternate kinds of markets, investment bank driven, new capacity and capacity from insurers who have -- let's say who have questions about how their ratings are going to hold up, shouldn't that also contribute to a diminishing of potential new capacity going forward for the whole industry?

Yes.

Again, the question I was asked earlier is my point of view with regard to whether markets would harden.

I gave my point of view with regard to the ingredients that would suggest that.

Capacity is lower for all sorts of reasons.

Ike seems to be a bigger damage than people thought.

Capacities have gone down to [high] income statements over the last couple years because there's been negative premium growth.

There was a time there when combined ratios were 85%, 90%.

They seem to be 100% or more now.

And then you've got the issue of investment income.

If you take all those things together and you take the absence of leverage and balance sheets of investment banks it would seem to suggest that the answer is, yes.

Thank you very much.

Meyer Shields, Stifel Nicolaus.

Good morning, everybody.

Let me start with a couple of quick numbers questions.

One, the $2.60 to $2.70 in this year's adjusted operating EPS, does that assume a $0.32 number for the third quarter?

That assumes, yes, the reported number for the third quarter, yes.

Okay, for the reported adjusted -- okay.

Also Pat, can you give us some sort of help or guidance in terms of the annual run rate for depreciation and amortization in 2009 and beyond?

Yes, are you referring really to the HRH acquisition?

Yes, I guess that would be the change year over year.

I think we're expecting something in the region of $70 million or so from amortization of intangibles.

Obviously we need to go through the whole purchase accounting exercise in the fourth quarter prior to the filing of the 10-K and staff and finalize our assessment of intangibles versus goodwill and all that kind of good stuff, but it's something in that kind of ballpark.

So $70 million change from previous annual run rate?

Correct, yes.

Okay, thanks.

And I guess the bigger picture, Joe, when we look at the Market Scout sort of monthly trend, I know that the numbers are probably given more credence than they should.

But they have shown a sort of steady deceleration in the decreases in the third quarter compared to the rate decreases they were reporting much earlier in 2008.

And I'm just trying to gel that with your commentary saying that the headwinds from rates and other market conditions are actually the worst that you've seen so far in this quarter?

I think there's a lag because I look at the Market Scout like you do and then you see the thing going down and then coming back up again to suggest that there's been a deceleration of rates going down.

There's got to be a lag.

I'm not going to suggest Market Scout is wrong, I'm just telling you that our headwind was 3%.

It's also, Meyer -- it's very US-based and our numbers are obviously on a global basis.

Okay.

All right, that's very helpful.

Thank you very much.

Dan Farrell, Fox-Pitt.

Good morning.

A few questions.

Just circling back to the guidance again for '08, it seems to me that you're saying most of the decrease in guidance is related to HRH being added in the fourth quarter.

So that will be roughly a $0.20 to $0.25 swing.

Now your full-year guidance change for 2009 had been in the range of about $0.15, on that range.

Is the difference in the fourth quarter -- I just want to try and understand a little better.

Is the difference because you can't repurchase any shares or has your viewpoint at all on the earnings power or integration or anything like that, whether it be economy or whatever factors, has that changed?

Or is it a large part due to the share repurchase not being able to take place right away?

It's a few things, Dan.

Let me kind of walk through some of those.

In terms of the (inaudible), so the change in our guidance for '08 is all due to our addition of HRH.

The reason it comes up to the impact it has is a few things.

One is you've still got a little bit of amortization of those underwriting facilities, the bridge facilities, which doesn't exist in 2009.

You've really got no synergies in '08 and, as we've talked about before, we expect a full run rate by 2010 of $120 million.

So a big chunk of that will be in 2009.

We've also talked about tax benefits we expect to achieve from the deal, none of which is in '08 which, again, we'll get in '09.

And we're not expecting to do any share buybacks in the fourth quarter, as you say.

So again, we haven't got any impact of that in the fourth quarter as well.

So it's a combination of all of those really and, as I say, all of those taxes really will be there as we go into 2009.

Okay, thanks.

And then just a couple other additional questions.

In terms of your view on pricing when you said flat to up is a possibility, which would certainly be an improvement from what we've seen thus far.

Does that kind of scenario offset the negative drag from the economy?

I'm just trying to think in terms of forces what will be stronger?

And then also if you could just talk a little bit about your discussions with lenders related to the bridge loan.

I wanted to try and understand if the slowing there is related to just a cost issue.

Is the cost on that too prohibitive right now or is the capacity just flat-out not out there at any cost right now?

I'll answer the first one.

The answer is, yes, it could offset.

I don't know what will happen to rates.

I mean, I was asked -- that's why I said you've got to ask an insurance carrier about that.

But my sense is from this perspective, it could get flat to up and, yes, it could offset less buying, if you will, because companies are doing so well.

That remains to be seen but that's possible, yes.

Then you had a question about the bridge loan.

The bridge loan, just your discussions right now with lenders in trying to refinance that.

I'm wondering if it's an issue of cost right now or just lack of availability right now regardless of the cost.

As you know, the debt markets are going to close at the moment, have been for a couple of weeks.

So there are some signs obviously with the LIBOR rate stirring up a little bit, coming down a little bit.

There are some signs that those markets are easing up.

And we remain hopeful that over the next period of weeks up until the end of the year that those markets will open up again for us.

So it's difficult to say that we've got absolute expectations of that, but we're hopeful that the [thawing] of the markets will carry on and we'll be able to access the markets over the next few weeks.

Okay, thank you very much, guys.

(Operator Instructions).

Steve (sic) Alexander.

Keith?

(technical difficulty) question.

I was wondering, where exactly did the FX impact flow through revenue and expenses and in which lines and how much was the impact?

It almost all flows through the other expenses line.

Okay.

So it's a bit north of $15 million in dollar terms.

All right, thank you for that.

My other question is kind of a follow-up on the guidance.

Are you guys more or less comfortable with your original guidance in terms of buybacks?

Or given the economy and capital market changes?

I think the first priority is to get the bridge financing squared away.

So hopefully when the markets get sorted out we'll do that, as we described earlier.

And then, as Joe said, we're a cash generative business.

We expect to generate good amounts of free cash flow as we go into 2009 that will allow us to do that.

The game plan back in June was to get financing done.

We had financing in place and with the bridge, get the bridge replaced with permanent financing, get the share buyback and we're off to the races.

Again, the world changed since then.

We still feel very confident about our ability to generate enough cash in the things that we talked about to get the bridge done and then after we do that we'll go from there.

And yes, the plan is the same, but the timing is a little bit off for the reasons we mentioned.

Okay, thanks a lot.

Thomas Mitchell, Miller Tabak.

I was wondering, with the various members of the energy complex from oil rig operators to pipeline operators, etc., undoubtedly are important customers in the insurance business and the insurance brokerage business.

I'm not sure how much business you have in that area, but I'm wondering if you're seeing any impact from the decline in the price of oil in how energy-related customers are looking to buy insurance?

Not yet.

Energy business still grew in the quarter.

And the coverage ratios, that is the value of the property -- no indications on that either?

No.

There are no indications.

But even though the price of oil has come down, I mean it's not come down without going up and then coming down.

So it's too early to tell.

It's a good business for us, but we haven't seen any affects of that yet, no.

Thank you.

Anybody else?

There are no further questions at this time.

Okay.

Thank you very much, everybody.

Have a great day.

Appreciate your questions.

Thank you.

Thanks a lot.