Willis Towers Watson PLC (WTW) 2008 Q4 法說會逐字稿

Welcome and thank you for standing by.

At this time all participants have been placed on a listen-only mode until the question and answer session.

(Operator Instructions).

Today's conference will be recorded.

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

I would now like to introduce Ms.

Kerry Calaiaro, who is the Director of Investor Relations.

Thank you, you may begin.

Thank you and welcome to our earnings conference call and webcast at Willis.com for the fourth quarter 2008.

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

This call will be available by replay starting at approximately 10:00 a.m.

Eastern Time through March 11, 2009, at 11:00 p.m.

Eastern Time, by calling 800-756-1819 or 1-203-369-3011 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 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.

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

Here with me today are Pat Regan, COO and CFO of our Company, Grahame Millwater, our President, and Don Bailey, our CEO for Willis HRH.

Our call today will cover three areas.

The results for the quarter and year by business, the significant progress on the resolution of our $1 billion bridge loan, and our progress on the HRH acquisition.

We're very excited obviously about our 6% organic growth in Commissions and fees in the fourth quarter with 9% coming from new business and a negative 3% from declining rates and other market factors.

Now I want to run through some headlines for the quarter with you and all the headlines we think are just terrific.

Our international operation continued to outperform and we saw resurgence of our reinsurance business with double digit growth, which was just outstanding.

For the year, we had strong organic growth of 4% with 6% net new business and a negative 2% from declining rates and other market factors, and under the circumstances of the economy and what was going on with the soft market, we are really pleased with that.

In light of the weak insurance environment and the global economic meltdown, we are really proud of how our associates were able to continue to drive the business forward with industry leading growth.

Excluding the effect of foreign exchange in the fourth quarter and including HRH, we had earnings per share for the full year of 2008 of $2.83 compared to guidance of $2.60 to $2.70.

Excluding foreign exchange and the first quarter of HRH, we would have had earnings per share of $2.90 with an adjusted operating margin of 24%, which was consistent with our plan of $2.85 to $2.95 and a 24% margin.

Therefore, we hit our targets, which we're really proud of.

The integration of HRH is really going well and ahead of plan.

We recognized $16 million of synergies in the quarter while we originally planned for no savings at all in the fourth quarter, so we were really proud of how hard we worked to get the synergies.

We now expect to realize $100 million of run rate synergies by the end of 2009.

Where we had previously estimated this would take two years to accomplish, we think we'll accomplish it in one year, and we expect to realize $140 million by 2010.

In other words, we're raising our expectation level of the synergies that we're able to get.

We've already succeeded in negotiating up front commissions, and I know this was a big issue when we announced the deal for a lot of you.

We've already succeeded in negotiating up front commissions for 60% of the original $50 million of HRH's contingents to standard commissions, which we had three years to complete.

So therefore, we would have completed 60% of it in four months since we did the deal.

So we feel more than confident, which we felt in June, that we would be able to cover the contingents and more.

And we've also secured, which we're very happy about, which kind of completes the scenario of the deal, that we've secured a $500 million new long term financing from Goldman Sachs.

We reduced the bridge loan to $750 million at year-end from the original $1 billion.

With the new loan, we will reduce the bridge to $250 million level and we expect to repay the balance of the bridge with free cash flow over the next quarter or so, so effectively we believe that the bridge loan by virtue of this is satisfied and we can move on.

Now let me share a few other highlights for the fourth quarter with you.

The highlight for the quarter was the excellent 6% organic growth that I mentioned before.

In this environment, it is absolutely outstanding.

We saw a significant resurgence in reinsurance and global specialties with 9% growth in the global segment.

International remains a very strong contributor with 11% growth this quarter.

I'm very, very proud of what they have accomplished, just outstanding.

North America declined 4% in light of the soft market conditions, the weak economy and some distractions from the HRH integration but we'll talk about that a little bit more later.

Traction from shaping our future initiatives and what we're really excited about is that a lot of the things that we started to do three years ago, two years ago, and even a year ago really manifesting itself in the quarter.

We got traction from shaping our future initiatives and strong client retention at 91% for the fourth quarter and we continue to contribute to good organic revenue growth.

Excluding foreign exchange and HRH dilution, the margin was 24.7% in the quarter compared to 23%, 23.3% last year.

That underlying margin expansion reflects good organic growth, ongoing expense management, which is a continuing thing at Willis.

We continually watch our expenses and haven't just done that because the world has gotten different over the last year, we've been doing that for a long time, and a $12 million reduction in investment and other income and the investments we've made in shaping our future and our new production talent.

Adjusted earnings per share were $0.37 in the quarter compared to $0.64 last year.

But, excluding foreign exchange and HRH, earnings per share was $0.66 or up $0.02 on a comparable basis.

Foreign exchange reduced earnings per share by $0.26 in the quarter.

Now for the year, organic growth in Commissions and fees was 4% with 6% net new business and a negative 2% from declining rates and other market factors.

Merit declined 1% for the year, global contributed 2% growth, and international growth was again outstanding at 9% for the year.

Adjusted earnings per share were $2.56 in the full year of 2008 compared to $2.77 last year, but excluding the effect of foreign exchange in the fourth-quarter earnings, the earnings would have been $2.83.

Now let me talk about the growth of North America, international and global and get into a little bit more detail about each one of them.

We closed the acquisition of HRH on October 1 so HRH's results for the full quarter are in our results.

We are very pleased with the progress of the integration.

I mentioned with the $16 million of synergies in the quarter and a new estimate of $140 million of synergies by 2010.

North America had a decline of 4% in organic commissions and fees while HRH's decline was 6% in North America retail, but this was in the face of a great headwind of 6%.

So actually, we grew our new business by 2% in North America, and I wanted to add a couple of comments about the revenues in North America.

In 2007, I want to remind everybody that our objective was to increase our margins, which we did from 14% to 19%, which means that we had to reduce our salary and benefit to revenue line a great deal, so effectively, we stopped recruiting in 2007.

In 2008, we bought HRH and again did not hire many producers, as we have been focused on integration, so 2007 and 2008, we did not recruit anybody.

We decided that we were going to concentrate on integration last year and most of the year was spent on integration and getting the results that you've just heard.

So the results of these efforts came through in the North American margin in the quarter.

And now 2009, we're going to talk about growth.

We're going to exclusively and aggressively go after the revenue line, after the growth line.

I'm very proud and Don Bailey is going to talk about this in a second, I'm very proud of not only the synergies, the integration and everything that's gone on.

Don will talk about the retention of people and the retention of accounts but also the way the cultures have fit very, very nicely together in terms of allowing the people in the field to be whatever they are from a cultural point of view but also blending in our zeal for earnings and compliance and working together.

So it's really terrific.

The adjusted operating margin in combined North America has declined 19% in the fourth quarter and to 15% for the year compared to the same periods in 2007.

But if you exclude the deal amortization and the integration costs, there was a solid margin expansion from a year ago, so there's a lot -- a little bit of noise in those numbers but if you look at everything on a net basis, there was expansion in the year.

Client retention levels have improved to 91% in the year, that's up 3 points from the full year 2007.

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

The integration is going very well and Don Bailey will comment more on what's going on with the integration process.

But again I couldn't be more pleased as to how this is going.

Don, you there?

Yes, I'm here, Joe.

Thank you, thank you.

I wanted to provide additional color on the HRH acquisition, as Joe said.

As you just heard, it has gone very well to date.

Our 2008 focus was very much on achieving and exceeding the synergy targets and keeping our associates.

We have worked hard to make this integration successful in three core areas: operational efficiency, client value creation, and cultural integration, and I can tell you that we're thrilled with our progress in each of these areas.

On operating efficiencies, as Joe said, we achieved $16 million in Q4.

These savings are mostly people-related, but there are other savings that are starting to contribute now to include lower insurance expense, professional fees, recruitment fees, advertising, T&E, temp costs, bad debts, all in all an outcome that far exceeded our original target and timing.

On client value creation, our specialty practices have been noticeably strengthened by virtue of this combination.

Great examples of this include employee benefits, healthcare, private client, complex property, and real estate, just to name a few.

The client feedback has been terrific thus far and the list of new business wins directly connected to the new combination is mounting every day.

Part of creating client value is keeping our producers here at Willis HRH.

If you look at historical attrition rates for producers, they tend to fall in the 10% range, meaning 10% each year would voluntarily leave.

At a time of acquisition, however, this rate often spikes to 20% or more.

In our case, since announcing this acquisition in early June, we have 2% voluntary producer attrition, 2%.

This data point, in combination with the very high client retention we've seen thus far, suggests that the combination has created a value proposition for both our clients and our producers.

On the cultural integration, I'm very proud of the new organization that we have created in North America.

Joe talked about this.

We have spent as much time on the cultural integration as we have on the operational integration.

Now let me make a few comments on the financial performance of Willis HRH in 2008.

Since the deal was announced in early June, the two companies have operated with a positive spread between revenue and expenses.

That is to say revenues have grown faster than expenses from announcement in early June through the end of the year.

The combined expenses of Willis HRH were down over $20 million in Q4 alone.

As you can see, the focus for the majority of 2008 has clearly been on lowering the expense base, navigating a very soft market, and achieving and exceeding all of the synergy targets.

Top-line revenue growth, as Joe talked about, was short of our targets in Q4.

We did, however, have a number of stand-out performances in North America to include 3% growth in our Midwest region and our South Central region.

With the integration now behind us in many ways, we're now able to recommit to our intense growth efforts in 2009 with things like just simple activity tracking, pipeline management, throughout each of the 200 offices in North America.

Finally, I'd like to offer an update on our contingent and supplemental conversion efforts.

Joe talked a little bit about this.

HRH collected roughly $50 million annually from these carrier arrangements.

As you know, our philosophy is not to accept compensation from carriers in that format.

Nothing has changed for us in that regard.

To date we have been successful in converting 60% of that revenue to up front commissions.

All of this has been done in four months.

We're very proud of that.

As you can see, we're very pleased with how the integration is going and as Joe stated, we are 100% recommitted to growth going forward in every one of the 200 offices we have in North America.

Thanks, Joe, and I'll turn it back to you.

Thank you, Don.

Let me talk a little bit about international now, which was the biggest contributor in 2008 to these very, very good results.

In our international unit, organic growth in commissions and fees was 11% for the fourth quarter as it continues its record of impressive growth across many regions.

There was double digit growth in Italy, Spain, Denmark, Australia, Latin America and China.

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

Client retention was steady at 91% for the year, with improvement in a number of key countries.

We have invested significantly also in international headcount with an increase of 300 in 2008, which has helped to drive the impressive growth.

Although we have been making targeted hires, we have continued to increase our margins.

Margin has expanded to 38%; I am going to say that again, 38% in the fourth quarter, and 28% for the entire year.

That's an outstanding performance with that kind of growth in margin by still making investments at the same time.

This margin expansion, despite increasing headcount, was driven by increased productivity and really tight cost control.

Productivity per FTE rose 6% since the end of 2007.

Now let me talk about our global business.

The global business segment comprised of global specialties and reinsurance, had 9% organic growth in commissions and fees in the quarter, with solid performance in global specialties and reinsurance.

Global specialties performed well with construction, FINEX and aerospace all showing good growth.

We continued to make investments in reinsurance to strengthen capital markets and analytics capabilities throughout the soft market and we're pleased to see the results of these efforts come through with a double-digit growth quarter for reinsurance.

You hear spun throughout my comments that even though we saved a lot of money, even though we were watching our expenses continuously on and on, we still found room to make investments, which is what it's all about.

The client retention levels in global improved to 90% for the year, up 1% from full year 2007.

Again, another theme throughout as we spend a lot of time on client retention.

Global operating margin increased significantly to 12% in the quarter and to 29% for the full year 2008, another outstanding margin performance.

We're very excited about the opportunities to expand Faber & Dumas, our third-party wholesaler, which we formed after the acquisition of HRH with Glencairn as its cornerstone.

Now let me talk about driving growth, which will be the priority for 2009.

Despite our industry-leading growth, we continue to believe there's great opportunity to drive top-line growth.

We want to do this through further development of our aggressive sales culture.

As good as we think it is, we think it could get better.

We think it needs to get better.

We need to open more new accounts.

The economy is uncertain.

We don't know what's going to happen in the world in the next year or so, so we need to continually do a better job at keeping and getting clients; keeping our retention rates going high and getting more clients as we go along the way.

We're going to do that by continuing to enhance our client advocacy program, which are advocates that are certified and trained to take care of our clients, to hold on to them and expand the business, and we continue to make strategic hires.

We hired 17 people from Carvals, which is a specialty reinsurance broker here in London, where we think we will have double-digit growth this year in reinsurance from the Carvel unit that we brought over.

We're going to make strategic hires in international, continuing to be able to feed that machine that has done so well.

The specialty lines, including energy, marine, aerospace, and Faber & Dumas, we will also make investments in.

And we'll get those investments from continually being able to watch our savings, spend money where it makes sense, and get rid of the things that don't make sense.

Continue to build on the improvement in client retention that we achieved in 2008, and we want to monitor specific growth metrics for all regions, countries and lines.

We have a very serious measurement of growth metrics that we look at to make sure that our vital signs are continuing to grow and we watch it on a constant basis.

We're going to redouble the effort in that regard and we're going to improve our tracking of the sales pipeline, which will be even more important in 2009 that it's been in the past.

Now let me talk a little bit about Shaping our Future.

We continue to have great traction from Shaping our Future program.

This was something that we began three years ago, that has really served us well.

We spent $40 million on the program in 2008 and this is paying off with gross benefits of $75 million in 2008.

Now let me remind you that we, in the fourth quarter, the benefits that we achieved from those initiatives were $28 million, driven by $11 million in the quarter from Shaping our Future Marketing, which is our ability to be able to take our marketing program and coordinate that program and be able to do that with our carriers to be able to get better commission uplift.

And secondly, our contribution from client profitability initiative, which is to take a look at unprofitable accounts and make sure they are more profitable.

So all of these things that we began a long time ago in terms of our vision for the future is now manifesting itself after these investments have been made.

The last thing I'm going to talk about is the right sizing of Willis.

This is something that we began a year ago when we started to see the economy take on a different shape.

And we wanted to make sure that Willis was right sized to the size of the economy and what was going on in the world.

Long before we knew the magnitude of the global recession, we instituted this culture of continuous rigorous expense management.

Last summer, we reinvigorated this process with further expense reviews as we prepared for an environment where we could see very modest growth.

Our current right sizing initiative continues to emphasize cost disciplines, including salary moratoria, talent management, location optimism and aggressive reduction of discretionary spending, so all of the things that we've done last year and the year before and the year before that, you can kind of see starting to click in now, which is one of the reasons why our year and our quarter, we thought turned out very, very well.

And with that, I'll turn the call over to Pat Regan, our COO and CFO, to review the financial results.

Pat?

Thank you, Joe and good morning, everyone.

Reported earnings for the fourth quarter 2008 were $62 million or $0.37 per share.

Adjusted earnings was $61 million or $0.37 per share as well.

This is after recording a $0.26 loss in the quarter from foreign exchange, which I'll come back to in a moment, and $0.03 dilution from the impact of HRH for the quarter.

Adjusting for these two items, the underlying earnings per share for the quarter was $0.66 per share, up $0.02 and $0.64 per share last year.

Reported earnings for the full year 2008 were $303 million or $2.05 per share.

Adjusted earnings were $379 million or $2.56 per share.

Again, the $2.56 earnings per share is after recording a $0.27 loss from foreign exchange for the year.

Excluding this foreign exchange impact, adjusted earnings per share for the year were $2.83.

The $2.83 is well in excess of our $2.60 to $2.70 guidance for the full year, which is driven by a combination of our 6% organic revenue growth, underlying margin expansion in the quarter and the overachievement of the HRH synergies.

Adding back the impact of HRH for the full year of $0.07, the underlying EPS for the year is $2.90 compared to $2.77 last year.

Turning to the operating margin.

As with earnings per share, the reported operating margin for the quarter was significantly impacted both by foreign exchange and the acquisition of HRH.

The adjusted operating margin for the quarter was 16.8%, compared to 23.3% a year ago.

But this is after the impact of a negative 490 basis points from foreign exchange movements, primarily our UK pension scheme, and again I'll come back to that in a moment, and 300 basis points dilution from the impact of the HRH acquisition, primarily deal amortization.

Adjusting for these two items totaling 790 basis points, the underlying margin for the quarter was 24.7%, an increase of 140 basis points from last year.

This 140 basis-point improvement was driven again by the very strong organic revenue growth of 6% for the quarter, organic cost growth of only 1% for the quarter, partially offset by approximately 200 basis points impact of lower investment income, and lower other income in the quarter.

Our adjusted operating margin for the year was 21.2%, compared to 24% in the same period last year.

Again, this was after the impact of our negative 190 basis points from the impact of foreign exchange for the full year and a negative 90 basis points from the initial dilution of HRH.

Excluding these items, the adjusted operating margin for the year was 24%, in line with our original target.

Again, it is important to remember that this margin was achieved after investing $40 million, as Joe mentioned, in Shaping our Future initiatives in 2008, and some approximately 400 new hires we made around the world, most of which were in our international business.

On operating expenses, adjusted carrier and benefit expenses for the quarter were $443 million, or 55.4% of revenues, down from 56.2% a year ago.

The 80 basis point improvement reflects the 400 new hires we made, offset by good cost control, realization of the savings identified last year, benefits from our initiatives, and lower pension costs in 2008.

Our adjusted other expenses for the quarter were $184 million or 23% of revenues, up from $119 million or 18.6% of revenues a year ago.

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

In fact excluding the impact of foreign exchange and HRH, the dollar value of the other expenses actually fell in the quarter, as we had successfully applied stringent expense management techniques to things such as travel costs, professional fee costs, debt collections and many, many other cost categories.

Turning then to foreign exchange.

As I mentioned earlier, foreign exchange translation had a $0.23 negative impact on earnings per share in the fourth quarter, and a 490 basis point negative impact on the operating margin for the quarter.

We had a UK pension scheme asset of approximately GBP110 million held on the books of our UK primary trading entity as a Sterling-denominated asset.

Just a reminder on this one, this Company is a dollar-denominated entity for accounting purposes because it earns most of its income in dollars.

Again, as the dollar strengthened almost to unprecedented levels during the quarter, the accounting revaluation of that pension plan asset gave rise to an $0.18 accounting loss in the income statement for the quarter and a $0.28 accounting loss for the full year.

As I mentioned, this is purely an accounting revaluation entry and not a cash item.

Given that that Sterling pension scheme surplus is very small now, we should not expect impacts of this size going forward in 2009.

Otherwise based on currency rates today we do not expect a material impact from foreign exchange in 2009.

A little bit more on our pension schemes.

Like all pension schemes, our UK and US pension scheme asset values were impacted by the fall in markets in 2008.

From a combined surplus of $360 million at the start of 2008, the schemes had a combined deficit of approximately $100 million at the end of 2008.

Due to this fall in asset values, there will be an increase in the income statement charge for our pensions in 2009 versus 2008.

Our pension scheme charge will increase to approximately something in the region of $50 million in 2009.

Again, this is primarily a result of lower active values and hence lower returns in the pension scheme.

We have made some changes to our pension plans to mitigate this increased expense and we continue to evaluate our options regarding the pension plan and continue to examine alternative options for managing the costs.

That said, from a cash perspective, we expect the cash contributions in 2009 to decline from 2008, and we do not expect in aggregate that the cash contributions to be in excess of the estimated income statement charge.

On tax, due to changes in the geographical mix of income with more income in international, the effective underlying tax rate in 2008 fell from 27% to 26% during the fourth quarter.

As usual, this excludes the tax effects, the disposal of the London headquarters, gains and losses on disposal and the benefit from release of tax provisions relating to the resolution of prior period tax positions.

On investment income, as expected we saw a decline in investment income in 2008 from $96 million for the full year to $81 million as interest rates fell across the globe.

However, we have a very active forward hedging program in place, which would generate significant savings in 2009 versus if we just had LIBOR-based rates.

In aggregate for 2009, we therefore only anticipate a decrease of something in the region of $20 million from the $81 million we achieved in 2008.

Turning then to capital management.

First, let me remind you the details of the bridge financing.

On October 1, 2008, we drew down $1 billion on the bridge financing.

The bridge financing facility expires and is due for repayment at the end of September 2009.

During the fourth quarter we reduced the outstanding amount of the bridge to $750 million using $175 million remaining on the term loan facility and $75 million from free cash flow.

With the new financing from Goldman Sachs, we aim to reduce the outstanding amount of the bridge by the further $500 million and use a further $250 million of cash flow over the next quarter or so.

As Joe mentioned earlier, we are pleased to announce today we entered an agreement to issue $500 million of senior unsecured notes to Goldman Sachs principal investment.

The notes have an eight-year term but are pre-payable after four and a half years subject to the payment of a redemption premium.

They carry 12.875% and have a fee of 3.5% of the amount borrowed due on completion.

The transaction is subject to the customary closing conditions and is expected to close during the first quarter of this year.

We intend to use all of the proceeds of the financing net of expenses of course to reduce the interim bridge financing.

As I mentioned before, once this transaction is completed, we believe that together with the cash flow we generate over the next quarter or so we will be able to pay off the bridge financing facility in its entirety.

Of course in addition, we still have the $300 million revolving line of credit facility, which was undrawn at the end of 2008.

There was also $176 million of cash and cash equivalents at December 31, 2008.

But also, included acquisitions for the year was 5% for Gras Savoye, which approximately was $41 million, total debt was $2.65 billion, and total stockholders' equity was also approximately $1.845 billion.

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

Thank you, Pat.

Let me just make some concluding comments if I may.

While we're very excited about our organic revenue growth in the fourth quarter in 2008, we appreciate the environment in 2009 and beyond could be very difficult.

We remain very vigilant about our priorities and let me again outline them for you.

Reinforce our sales and revenue culture aggressively and very focused throughout the year.

We've always done that.

We're going to step it up a couple of notches because we think it's really important because of the uncertainty of the future.

We're going to continue to execute Shaping our Future, which you understand and see by the numbers now are starting to bear fruit after three years in the making.

Integrate and continue to integrate HRH and achieve the $140 million run rate synergies by 2010 that I talked to you about earlier.

And the right sizing of Willis for the current environment will continue.

That is not a project, that is not a program, that is a continuous thing that we will do in terms of right sizing.

As long as the environment continues the way it is, we will continue to right size.

But we would also look at investment opportunities as we're right sizing at the same time.

Running a good business means you got to do all of those things at the same time.

With the mezzanine financing, we have strengthened our balance sheet with long-term capital and enhanced our financial flexibility with only $250 million remaining on the bridge facility, which we intend to pay down in the next quarter or so.

We effectively believe that the bridge loan is taken care of.

As you could see, we could do it through cash flow, we could take down the revolver, there's a lot of ways that we can do that.

We're very excited about having gotten that done.

At this point, I would not expect us, as you could appreciate, to be buying back any shares until the bridge is fully resolved, and let me just talk about guidance.

As you could appreciate also, we cannot predict the potential impact of the uncertainty of the global economy or current insurance pricing or on potential changes and the buying decisions of clients with any degree of certainty, none at all.

So therefore, we are suspending our practice of providing annual earnings guidance.

It's just too uncertain a world out there to be able to tell you otherwise.

But we have a great game plan.

2009 will probably be not only uncertain but probably be difficult but I like our plan.

Our aggressive sales growth, continued Shaping our Future, the integration of HRH and more synergies there, the right sizing of Willis, I like the way we're going into this year and I'm very, very pleased with the way we ended last year.

We will now take any questions that you have.

Wendy are you there?

Do you want to ask anybody for questions please?

(Operator Instructions).

Thomas Mitchell, you may ask your question and please state your company name.

It's Miller Tabak.

In light of the clear slowing economies around the world, I wonder if you could give us a little more detail on where the growth is likely to come from in 2009 with a particular emphasis on the international, where we've seen and heard that things are slowing down very rapidly outside the U.S.

as well as in the U.S.

Well let me just talk about the international situation.

I'll be glad to give you some specifics.

The international operation obviously as you heard grew at 11% but I will tell you that there's still a lot of momentum in international.

As a matter of fact I'm looking at the entire team as I'm talking to you, so I want them to nod their heads and agree with me when I say this.

The fact is that the momentum is outstanding.

We were able to, because we had a lot of air cover with the revenue increase, to recruit a lot of good people and we were constantly bringing in people as we were increasing our aggressive sales culture in international.

And I would say that almost across the board, that has continued.

Now it may not continue at 11%, I don't know.

It probably will moderate from there but those numbers I think will continue to grow.

They may not grow at 11%.

It's too uncertain to tell but I feel pretty comfortable we'll get good growth out of international.

Our EB operation internationally has been outstanding.

Most of our EB operation is pension-related, which means that we don't think it will be affected.

That was double digits growth in international and I mean double digits with a two in front of it, so it's really been a great contributor.

I think that will continue to be a great contributor so I feel pretty comfortable about that.

In our specialisms, I think -- and I know I'm sounding like a cheerleader but I think we got the best operation in London bar none.

Year after year, they deliver constantly.

You heard me talk about some of the divisions in London.

I can talk about almost all of them.

That might moderate a little bit but it's very good business and we're very good at what we do.

And with the addition of the third-party wholesale business in London through the new Faber & Dumas, I think that's going to be outstanding as well.

And then in the United States, we achieved that 4% growth for the year without the United States kicking in and without reinsurance kicking in until the last quarter.

We spent a lot of money in reinsurance over the last two or three years in our analytics capability, our people capability, our training, our research network.

And I think that's finally bearing fruit for us, and I think we'll have a very good year in reinsurance.

And then finally in the United States where if in the fourth quarter we had just been flat, that 6% would have been 8% or 9% because it's a big quarter for the U.S.

So with the emphasizing now, and I know it sounds like an excuse to people were distracted but they were.

Doing a deal that size and integrating them, both culturally and synergistically, it takes a long time and it takes a lot of effort.

But I really feel comfortable that even despite the economy that we're going to do better in the U.S.

as it relates to revenue growth, so it will probably moderate.

I can't tell you what it will be but I like our chances going into 2009.

Thank you.

Thank you.

Our next question is from Dan Farrell.

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

Good morning.

It's Fox-Pitt.

Hi, Dan, how you doing?

Hi, good.

A couple of questions.

Just firstly on the 60% of the HRH contingents that were renegotiated to up front commissions, did any of that have any kind of flow through into the fourth quarter on revenue?

And then secondly, with regard to the $500 million of new debt, are there any restrictions on any prepayment of that or cost on prepayment if you ultimately decide you want to do that?

I'll do this and then I'll let Pat do the bridge.

The answer is very little of that up-front fee that we negotiated to cover 60% of the contingents was very little, the full manifestation of that would take place obviously in 2009.

Pat, do you want to answer the --?

Yeah, in terms of the money, the $500 million with Goldman Sachs, it's eight year money.

It is non-core for four and a half years and after four and a half years, there's a pre-payment, a redemption fee to pay that reduces over time.

So within four and a half years, it's non-redeemable and after that it is redeemable based on a sliding scale.

Okay, great.

Thank you very much.

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, everyone.

Hi, Meyer, how are you?

Doing okay.

You?

Good, thanks.

Great.

You've talked I think pretty clearly about the shift of HRH contingent commissions to up-front commission levels.

Yes.

One of the [comments] on HRH's conference calls is that they weren't getting higher commissions from the carriers despite the fact that that's sort of normal practice during a soft market.

Can you give us any sense in terms of what the differential is between their average commission rate and legacy Willis commission rate and what the opportunity is there?

Well way back in June, Meyer, if you remember when we announced the deal, and I think you were on the call, I think the biggest issue from people was how are you going to replace $50 million in three years, and I went through a pretty intricate, detailed answer with regard to our system of placing business versus HRH's system of placing business.

Ours is much more coordinated.

It's much more unified.

We try to look at the commissions across the United States on a line by line basis, on a carrier by carrier basis, and expect minimum commissions for our efforts with regard to these carriers.

And as a result when we did the study, we saw that the Commission levels at Willis was higher than HRH.

So we thought by virtue of that comparison if we switched HRH to a more coordinated system with placement officers around the United States and we have a Chief Placement Officer in Leslie Nylund in the United States working with Don, that we could raise that level sufficiently enough to our level so that it would overcome the contingents and that's exactly what you've seen happen.

I understand that, but I would think that even setting aside the commission issue, there should have been some efforts for them to raise commissions just over the soft market from 2008.

Could you speak up a little bit?

I can't hear you.

Speak up louder please.

Sorry, let me try again.

Aside from the contingent commission issue, the sense we had was that their commission levels didn't reflect the fact that commission rates should go up in a soft market.

So I'm wondering if there's actually a delta there.

Well, no.

It had nothing to do with soft or hard markets.

It simply had to do with the method of placing business, and being able to track where the business went and what we got paid for the business.

It had nothing to do with soft or hard.

Okay.

And second question, if I can, is 27% a good tax run rate for 2009?

We haven't specifically given guidance but the rate we're running at now is probably a reasonable proxy for 2009, yes.

Okay.

Thanks so much.

When I saw when I talked to you about the difference in rates, when we were going through the deal and we had that June call, we had already done the analysis on what we were getting in rates for the same kind of commission and the same carrier and we saw what they were getting.

And that's what gave us the confidence to know that over a three-year period of time, that we felt comfortable with that.

And as you can see in four months we've got 60% of it covered and that was the basis of our feeling comfortable with that, Meyer.

I understand, thank you.

Okay?

Thank you.

Thank you.

Terry Shu, you may ask your question.

Pioneer.

Hi, Joe.

Hi, Terry how you doing?

Good.

I have a couple of questions, just clarifications.

I think you gave quite a bit, well you gave some guidance and let me just clarify some points.

On currency, I think you said that there will not be much of an impact, am I right, in '09?

Why wouldn't there be given that the dollar and pound in Euro exchange rate is quite a bit different now at the beginning of the year?

A couple of things.

In terms of the UK pension scheme asset, we'll talk about that one first and I'll come back to the basket of currency second.

In terms of the pension scheme asset first, effectively, the reason there was a translation was big FX movements and we talked about big assets, that's not gone away so that shouldn't reappear.

Right, that's a piece of it but going on an operational basis --

On an operational basis there are a lot of different moving parts within the operational FX.

You've got effectively foreign earnings, Euro earnings translating into dollars which will be at a lower amount, but then you've got things like in the London based businesses where you're earning money in dollars and paying expenses in Sterling will be a positive in 2009 so the net of those two of those means that based on where we are today we wouldn't expect a significant impact [from that].

So for the most part, it's a wash that your natural hedges will work well, reasonably well, maybe a slight impact but not much; is that right?

Correct.

That's correct.

Okay, the second point is again for modeling purposes if you can clarify, you gave a number of $50 million for pension.

Is that $50 million over '08?

How does that work?

What does that number mean?

The $50 million is an absolute number so that would be, sorry not the delta versus '08.

That's the approximate number for the income statement charge for '09.

And what was it in '08?

So what would be the delta?

The delta is closer to about 70.

70?

70, yes.

Okay, so that's quite a bit of headwind, right, for when we look out into '09?

Yes.

And then on the interest rate thing, I think you gave a number of $20 million; correct?

Correct.

That's correct.

And that's again an incremental number, so we're up to about $90 million in terms of headwinds, and then I think, Joe, you talked about cost savings and such.

The $100 million is really for the HRH integration that you--

Yes, the $100 million I referred to that we would get in 2009 had to do with HRH.

That does not have to do, that was synergies HRH that does not have to do with the total right sizing of the rest of our business if you will.

Right, and did you give a number for that in terms of savings?

I did not give a number for that but it's as you could see, it's helped in our margins and it's a constant effort here.

You know, you've been in the stock, Terry, a long time and we have been right sizing for eight years since I've been here.

Right, right, so do those offset the other stuff so that you can maintain margins or improve on margins?

I can't give you a specific number but knowing that, knowing these numbers and knowing the uncertainty you can obviously know that we have targets to offset these things.

And then finally I don't know whether you commented too much on the rate environment.

If you don't mind doing that, talk about North America as well as international, the rate, what you're seeing in terms of the competitive environment for primary property casualty insurance, reinsurance, and also the impact of the economy, exposure growth, where underwriters and brokers have talked about that a lot.

Well what I'll do is I think because the reinsurance rates come first usually, I'll let Grahame Millwater, our President and Peter Hearn, our COO of reinsurance, comment on that, and then I'll follow that up with the direct rates okay?

All right, great.

It's Grahame.

Actually Peter why don't you take that one because you're very much more involved.

Terry, with regard to the rates, what we've seen is that at 1/1, which is a fairly sizeable renewal season, we've seen a stabilization in the worldwide rates with increases in critical CAT areas whether that be U.S.

wind, whether that be Gulf of Mexico exposures on offshore energy risk, whether it be retrocessional pricing, whether it be Northern European wind, all of those have experienced increases anywhere from 5% to 20%.

But I think as a general comment we can say that there's been a cessation of the rate declines that we've seen on virtually every line of business and the reinsurance side and we are anticipating that there will be continuing price hardening throughout the year.

Grahame, why don't you talk about the rest of the rate?

Sure.

I mean as you all know there was a compelling logic as to why insurance rates over this year should harden.

At the moment, I think generally speaking, it is a very mixed bag in that we're seeing hardening in some specific areas.

We're seeing stabilization and more stabilization in others, and surprisingly, we continue to see rate decline in other specific areas.

I mean, areas like energy, financial, D&O, we are definitely seeing spiking in pricing.

Other areas, we're certainly seeing some element of stabilization in areas like aerospace, marine.

In some P&C areas, we continue to see a very competitive environment and actually seeing some reduction.

So it is very, very difficult to generalize, but it's obviously as you look at the general reinsurance environment out there and the insurance company results, there is a compelling logic as to why as we go through the year, we should see definitely a stabilization and in many areas, a hardening.

Thanks, Grahame.

Okay, Terry?

Yes.

Thank you very much.

Thank you.

Thank you.

Jay Cohen, you may ask your question.

Please state your company name.

Thanks.

Banc of America/Merrill Lynch.

Hi, Jay, how you doing?

I'm okay.

I'm still getting used to saying that.

I was just going to say, first time I've heard you say that.

You need to do it a little smoother next time.

Question on reinsurance, maybe for Peter.

Obviously, the fourth quarter seemed to be pretty good from a reinsurance standpoint.

It sounds like you picked up some additional business.

Can you talk about at least qualitatively how your renewal season went in January?

And then related to that I guess, are you seeing any fall out either from people or business from the Aon/Benfield merger?

Jay, with regard to the 1-1 renewals, it was pretty much as expected, similar to my comments to Terry.

We saw virtually every line of business stabilizing and where there was critical CAT exposure increases.

I would suspect that as the year goes on and demand goes up there will be a greater emphasis on pricing increases across more lines of business than just the critical CAT, but at the 1/1 renewal season, prices were in line with our expectations.

With regard to Aon and Benfield, we are starting to see the impact of that integration, less so with people.

Obviously they have let go a number of people to date but we have not hired any to date.

And with regard to business, we are starting to see the increase in RFPs and tenders as a result of the two companies merging.

On the renewals I wasn't so much focused on pricing but your business.

Have you been able to continue to pick up share as you did in the fourth quarter?

Because the fourth quarter, while that's nice, it's a pretty small quarter, January more important; has that trend of picking up market share continued?

Yes.

Great.

Thanks.

Thank you.

Our next question is from Keith Walsh.

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

Keith Walsh at Citi.

Good morning, everyone.

First question for Pat.

Just around I think you partially answered this already but just around the currency.

The currency exposure or movement I should say is dramatically different than your two largest competitors, who also have a lot of business overseas in the same areas that you guys do.

And I think you might have touched on this a little bit.

Can you flush out why it's so much more pronounced for you than it is for Aon and Marsh and then I've got a follow-up.

Thanks.

Sure.

The single reason is we have, in our London, here in London, we have a dollar-denominated entity because it earns most of our business in dollars so it's a London market trading kind of Company.

We have a lot more of that business than our competitors do proportionately.

In that dollar-denominated entity, we have a big Sterling asset, which was our UK pension surplus, and that asset translated through the P&L.

So that was -- and obviously, that's not been an issue for us in the past but we've had historic levels of foreign exchange movement, dollar, pound movement over the last couple of quarter.

So that's why we've had the issue and not others.

Obviously, the others have not got a pension surplus to the extent that we have in Sterling.

Again, that, for obvious other reasons, market reasons, that surplus in Sterling won't exist in 2009 so the issue doesn't carry over into 2009.

And then I guess just a follow-up for Joe.

A lot of talk about increased pricing out there or the recipe for a potential hard market coming.

But are you also seeing, partially offsetting that, maybe a higher risk retention at your clients?

Thanks.

We haven't seen it yet, but that's why I keep using the word uncertainty.

There's no question in my mind if conditions stay the same, as Grahame said, Keith, that you're going to get a hardening.

Hardening will happen as the year continues.

There's no question about that.

What we don't know is the condition of our clients, and the affordability of those rates when they are raised and that's uncertain.

But obviously, if there's some stability with our clients and we've seen a little bit of talk about this is what I can afford and my business is uncertain because of the recession and things of that nature, we haven't heard a lot of it; we certainly have started to hear it.

And obviously by just reading the newspapers and living life you can see that businesses are not in the same condition as they used to be, so there will be some offset of that.

The rates might go higher but the values might stay the same.

But we're in best position to take advantage of anything that goes on because as you know, Keith, 70% of our business on a worldwide basis approximately is commissions on brokerage and so that would be a good thing, and in the United States it's 80/20.

So a little bit of it.

It's still uncertain and that's the reason why we're cautious but the rates will definitely get harder in my opinion.

The question becomes how many companies will be able to pay for those rates, and that's yet to be seen.

But I think we're in a position to be able to handle whatever happens.

Okay, thanks a lot, Joe.

Thank you.

Thank you.

Thank you.

At this time I'd like to turn the call back over to our speakers for any closing remarks.

No more closing remarks.

If there are no other questions, thank you, have a great day and we'll talk to you next time.

Thank you.

Thank you.

This concludes today's conference.

Thank you for participating.

You may disconnect at this time.