Willis Towers Watson PLC (WTW) 2010 Q1 法說會逐字稿

Welcome and thank you for standing by.

All participants will be in a listen-only mode until the question and answer session of the conference.

(Operator Instructions) as a reminder, today's conference is being recorded.

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

I would now like to turn the call over to your host, Ms.

Kerry Calaiaro, Director of Investor Relations.

You may begin.

Thank you.

And welcome to our first quarter 2010 earnings conference call and webcast.

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

A replay will be available through May 30, 2010 at eleven fifty-nine PM Eastern Time by calling 877-387-6450 from within the US or 1-203-369-4751 from outside the US.

No pass code is needed.

Alternatively the webcast replay can be accessed at our new and improved investor relations section of the website at www.willis.com.

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 estimated or anticipated.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings including in our annual report on Form 10-K for the year ended December 31, 2009 as well as our earnings press release for a more detailed discussion of the risk factors that may affect our results.

Copies may also be obtained from the SEC or by visiting the investor relations section of our website.

Also please note that certain financial measures we use on the call are expressed on a non-GAAP basis.

Our GAAP results and non-GAAP to GAAP reconciliation can be find in our earnings press release.

I will now turn the call over to Joe.

Thank you, Kerry.

And welcome everybody, and good morning.

Thank you for joining us for the first quarter 2010 earnings call.

Here with me today are Stephen Wood, Group Controller and interim CFO, Grahame Millwater our President, Don Bailey, Chairman and CEO of North America and Peter Hearn who is responsible, as you all know, for our reinsurance business.

So we are all here to answer your questions and to chime in when you want us to.

Let me talk about the first quarter and the conditions surrounding the first quarter.

Obviously we are very pleased with the results we have delivered this quarter, especially given the environment.

The general economic conditions remain challenging in a number of countries in which we operate and then, on top of that, as you all know the rate environment is still very soft.

But against this background, we delivered and that is what we are excited about.

Adjusted earnings per diluted share from continuing operations was $1.27.

Adjusted operating margin of 32.2% was up 240 basis points over the year ago period.

3% organic growth in commissions and fees.

And this was driven by positive organic growth in each -- in each of our operating segments, which is really exciting to us.

Shaping Our Future, an ongoing program that has been going on for three years, continued to yield net benefits of $14 million that was raised -- that was realized in the first quarter of 2010.

Now, let me talk about our business segments.

First, North America.

Last year we continually talked about integration, updated you on how that was going.

We're not going to -- we are not going to do that any more.

That's done, dusted, over.

Let's talk about our business and really what is going on in North America.

We had 1% organic growth, where we delivered double digit new business generation supported by continuing high client and producer retention rates which is very, very important.

These are two things that we concentrated on, especially in North America, since the acquisition was made.

And that is due, I think, to intense personal engagement with producers by our local management, by our regional management, by Don Bailey and his staff and they have done a great job.

Combine this with the new producer package which we inaugurated on January 1 and I think it makes all of those statistics possible.

The rate headwind was a negative 3% for the quarter compared with the 6% negative in the fourth quarter.

So that remains soft.

The differentiation I think is in the mix of business.

It is not that the business has gotten any harder or more stable, I think it is the mix of business that makes up the differential between the two.

Driving our new business growth is commissions and fees in general are our specialist businesses.

We gained substantial client feedback from various sources including client advisory councils, client surveys, and interviews.

And we know from all of that, that the client demand from us that our product and segment expertise and our specialist expertise carried the day.

In the first quarter, high levels of growth were delivered in healthcare, financial institutions, personal lines and real estate hospitality.

Bottom line, where we specialize, as I said earlier, we perform better.

And the whole underpinnings of our growth that you will hear later with regard to our growth strategy going forward is our specialization, understanding our client needs, understanding their industry and where we specialize and let them understand and be comforted by the fact that we understand them, we win.

We continue to successfully convert or protect the legacy HRH contingents.

We noted that in the press release.

In the first quarter of 2010, we had $8 million compared with $20 million in the first quarter of 2009.

Let me just make a couple of points before I go off that subject with regard to contingent commissions.

They don't convert- That differential of $12 million, they don't convert automatically in the first quarter.

They convert over time, over a period of the course of the year because it is on a portfolio basis.

Secondly, they don't convert dollar for dollar.

A lot of times business is lost or there is other things that occur in that business and they have been converted in a declining rate environment.

So it is not $12 million in the quarter, there are a lot of things that have jurisdiction over that $12 million and I thought I would take a second to make sure that that is understood.

So at the end of the day, our organic revenue growth came from strong new business with high client retention and producer retention.

The US recession and high unemployment continued to weigh, especially on construction and our employee benefits businesses which I thought I would mention because it is a big part of our business.

The construction practice commissions and fees declined single digits in the first quarter, better than it was last year, and they are improving from now double digit decline in the full year 2009 versus 2008 but still in decline.

Now, it is a single digit decline but getting better.

Employee benefit practice represents about 20% of North American revenues.

Commissions and fees were flat in the first quarter of 2010 compared to 2009 which I think, in a declining headcount job rate environment, that was a very impressive result because a lot of this has to do with the amount of employees that are covered by our clients.

So I think very, very impressive considering the unemployment levels.

While I'm on the subject of employee benefits, I should give you a little bit of color and share a few thoughts on healthcare reform which is not an easy thing to do.

It is complicated, I'm not going to read all 2600-pages but I will give you our take on what healthcare reform is all about.

Many of the final details about the healthcare legislation have yet to be determined.

Any discussion of impact on the business is difficult and probably premature, but I will take a few shots at it.

The legislation will create more insureds, that is good for us.

It will create more regulatory complexity, and that is certainly good for us.

It will create incentives for cost management, that will place a premium on world class program design and placement and that is good for us.

And it will increase employer costs that will create the need to find high value broker pro-- provider broker that can give them really intelligent consultation and that is good for us.

While the practical implications of medical loss ratios and state-based exchanges are still to be determined, it is too early, Willis is -- I think we will well positioned to deliver what we believe clients will need.

Brokers with key structuring and transaction skills, which we have, along with broad consulting capabilities, I think we will do well in the future environment.

At Willis we have all under one roof.

We have all of those capabilities, all the resources and we are excited about the future as the economy recovers, as more people are put to work, as more questions are answered, as more help is needed by our clients, we think that is good.

And then lastly, I will tell you the operating margin in North America expanded to 21.5% in the first quarter of 2010, up 60 basis points from a year ago, reflecting organic commissions and fee growth combined with ongoing cost management.

Just a terrific job in North America.

Let me talk a little bit about international.

The organic growth in commissions and fees continues to be good.

It was 3% for the first quarter and continued its record of impressive growth across many regions in the face of some slowing economic conditions which you are familiar with, especially in some of the countries in Europe.

Outside the UK and Ireland, international grew 5%.

So if you take out Ireland and its economic woes and you take out the UK, international grew 5%.

We had strong growth in Latin America, led by Venezuela and Brazil, Asia, led by Indonesia and China, and Eastern Europe, led by Russia, while Continental Europe faces a more challenging economic environment as I said earlier, resulting in lower growth levels.

UK and Ireland retail are improving but still declined 3% as they continue to face the economic challenges.

We have seen some signs, though, of an improving economy in the UK with positive GDP growth.

While the Irish economy is showing signs it might have bottomed out so that is good.

Employee benefit practices, which represent about 10% of international commissions and fees, continues to perform well, growing in mid single digits.

New business generation remained double digit while absorbing a negative 1 point rate impact.

Finally, international operating margins remained seasonally high at 33.9%.

Now, let me turn to global.

Segment comprised of reinsurance just to remind you, reinsurance, global specialties, Faber and Dumas, Willis Capital Markets and Advisory had a 7% organic growth in commissions and fees in the quarter and in the face of a 2 point rate headwind.

Despite the continued softness in the market, each business delivered positive growth, primarily driven by our reinsurance operation which continues to deliver.

Reinsurance had a high single digit growth in the quarter.

Growth was driven by strong new business generation in North America and strong growth in Europe and Asia.

As a result of strong reinsurance underwriting profits in 2009, there is a general but disciplined softening of rates which continues to be a significant headwind.

Insured losses are not yet sufficient to change pricing, despite record loss activity in quarter one.

It was the largest first quarter cat loss in history in the first quarter.

Global specialties, our revenues were the drivers.

The financial and executive risk specialties and marine.

Strong new business in a difficult environment.

Headwinds continue to include industry consolidation, depressed world trade and soft rates.

Faber and Dumas, our London-based wholesale business, also recorded positive organic growth driven by new business generation.

Willis Capital Markets, all I can say is we are happy with the early successes of Willis Capital Markets.

It is a fledgling business, but we are very, very hopeful and optimistic of what is going to happen throughout the year.

And our global operating margin, after having said all that, was a seasonally high 45.5% in the first quarter.

So, with all of that as the backdrop let me turn it over to Grahame Millwater who is going to talk to you about growth, Shaping Our Future, and funding growth as we go forward.

Grahame?

Thank you, Joe.

We continue to drive our program of change and continual improvement across all the businesses, and see the benefits from these programs reflected in our quarterly results.

Just to remind you the program focuses on three key areas.

The organic growth program that is driving our revenue increase, Shaping Our Future which is driving our efficiency and profitability, and funding growth which is the program managing our underlying expense base on a day to day basis.

Let me give you a brief update and progress report on all of these.

Firstly, growth.

We are now entering our second year of the growth program.

We commenced at the beginning of 2009 and we initially focused on our international and global businesses and then our North American business in the second half of 2009 as we came out of the integration process.

The growth program has the following key elements to it -- firstly, driving the retention and new business metrics across every business unit with very defined targets and those targets linked to our global incentives.

Secondly, increasing the productivity and effectiveness of our revenue generating associates and a major drive to recruit the best talent in the industry.

Thirdly, continued development of our proposition in our key segments of global large accounts, middle market and small commercial.

And that is combined with a real focus, as Joe said earlier, on our specialty skills and our industry segments.

Also we are focusing on real breakout growth segments such as China, Brazil, employee benefits, facultative reinsurance, Willis Capital Markets, et cetera.

And in the first quarter of 2009 we had nine large meetings across the world where we really engaged with a thousand of our business leaders on the subjects of new business growth, retention, business planning and targeting.

I have to say the optimism and excitement was so obvious at these meetings and just confirms the opportunity that we have in front of us as a group.

The impact of all these initiatives is evident in our sector leading organic revenue growth and it is also very pleasing to see our efforts in North America graining traction.

Let me turn to Shaping Our Future.

One of the questions we often get is whether our margin and margin improvement is sustainable.

One of the drivers of this has not just been our day-to-day expense management, but our longer term program of change to our infrastructure program, processes and optimal use of locations, such as the offshore center in Mumbai.

The momentum in this program that we call Shaping Our Future continues, and we will continue to derive benefits from this program over the coming years.

We met the three year target we set ourselves at the beginning of 2008 within two years.

Just to remind you, this was to deliver a key additional net benefit to our bottom line of $100 million.

Despite having met this target early, we continue to drive the program and the associated benefits and in the first quarter of 2010 we delivered further additional gross benefits of $23 million with net margin benefits of $14 million.

The key drivers of these benefits in the past couple of years has been our focus on client profitability and enhanced commissions.

However, we are now entering the next interesting phase of Shaping Our Future where we start to drive increased benefit from the program of technology and process change.

Whilst we continue to manage our expenses on a day to day bases, our efficiency gains going forward were largely derived from the infrastructure programs within Shaping Our Future.

We have three major programs of technology and process change in London, UK retail and new the EPIC program in North America, and this will be extended into international retail in 2011.

We also continue to roll out the program of location optimizations, with work being moved out of the branch offices to our regional service centers, and then from the regional service centers to offshore in Mumbai.

And we are now also in the process of identifying low cost service center locations in Europe and Latin America for non-English language related servicing requirements.

It is this combination of technology platform enhancement, key process change and optimal use of our service and support centers that really allows us to continue to drive cost efficiencies and increase service performance even as our revenues increase in line with our growth plans.

And as I have already said, this plan allows us to believe that we can continue to improve our margins over time.

Now, let me turn to funding growth, the third of our major programs.

We are driving the funding growth program in 2010.

As you know, we achieved significant HRH synergies and Rightsizing Willis savings in 2009.

Generally speaking our major focus has shifted from integration to driving organic growth and building a platform to do it in the longer term efficiency gain.

However, in 2010 we have identified further internal expense savings that come from just our performance management program and identifying other corporate expense improvements and we are in the process of executing on these savings.

This program will help us fund the investment we are making in 2010, on the most productive recruits and further investment in our technology program.

That is a quick overview of where we are in these initiatives.

And, needless to say, the cumulative effect of these has allowed us to deliver yet another quarter of positive organic revenue growth and operating margin improvement.

With that I will turn the call over to Steven Wood, our Group Controller and interim CFO, to review the financial results.

Stephen?

Thank you, Grahame.

And good morning, or good afternoon, everybody.

Earnings -- reported earnings from continuing operations in the first quarter were $204 million, or $1.20 per share.

Reported earnings were impacted by a nontaxable one-time charge of $12 million or $0.07 per share.

This relates to the Venezuelan currency devaluation.

Adjusted earnings from continuing operations in the first quarter of 2010, excluding the Venezuelan revaluation, were $216 million or $1.27 per share.

Other foreign currency movements positively impacted earnings per share by $0.06 in the first quarter of 2010.

Let me now turn over to operating margin.

Reported operating margin was 31%.

This was negatively impacted by the one-time charge related to the Venezuelan devaluation.

Excluding the impacts of the devaluation, adjusted operating margin for the quarter was 32.2%, up 240 basis points from 29.8% in the year-ago quarter.

The first quarter 2010 adjusted operating margin was impacted by solid growth in commissions and fees, lower investment income as global interest rates remain low, lower pension, severance and amortization costs, and favorable operational FX.

Let me give you more details now on the expense.

Reported salaries and benefits were $486 million in the first quarter of 2010, compared with $480 million in the first quarter of 2009.

Salaries and benefits were 50% of total revenue in the first quarter of 2010 compared with 51.6% in the year-ago period.

As reported in the press release, we have had -- we have a cash retention program in place.

We started awarding retentions in 2005 for a small number of people.

With the success of the retention program we expanded it over time to include more staff, and our employee turnover has declined.

Given the increased prominence of the program, we believe it is appropriate to give additional color.

In the first quarter 2010, cash retention awards of $169 million were paid with amortization currently over three years starting from the beginning of the quarter in which the payment is paid.

Salary and benefits includes $28 million of expenses relating to the amortization of cash retention awards compared to $18 million of expenses in 2009.

Salaries and benefits do not reflect the unamortized portion of annual cash retention awards.

At the end of the first quarter 2010, the balance sheet held $233 million of unamortized retention awards in other assets, $98 million as of December 31, 2009, and $127 million as of March 31, 2009.

Reported other operating expenses were $149 million in the first quarter of 2010 compared to $138 million in the first quarter of 2009.

We will continue to maintain the strict expense control protocols we had in place throughout 2009.

Operational foreign exchange.

Operational foreign exchange had a positive impact on the Q1 2010 adjusted earnings per share and adjusted operating margin compared to the quarter a year ago, Q1, 2009.

The Euro appreciated, positively impacting results due to overweight of Euro revenues and the pound appreciated against the dollar, negatively impacting expenses due to overweight of sterling expenses.

However, the impact of this was broadly offset by our hedging program.

Let me move to tax items.

Reported income taxes, income tax expense for the quarter was $67 million compared to $62 million in expense for the comparable period a year ago.

The effective tax rate for the quarter ended March 31, 2010 was 26%, after adjusting for the net effect of certain items.

The underlying effective tax rate for the quarter ending March 31, 2010 remains at 26%, the same underlying effective tax rate for the full year 2009.

Associates -- Income from associates was $20 million in the first quarter of 2010 compared to $26 million in the year-ago quarter.

This line is reported net of interest from seller financing in the Gras Savoye transaction we completed last year.

We currently estimate that the reduction of the ownership of Gras Savoye will reduce the associate line by approximately $10 million in 2010 compared with 2009.

Pensions -- Like others, our defined pension plans continue to impact our income statement, balance sheet and cash flow.

Our main plans are in the UK, US with several smaller plans in international.

The scheme had a combined deficit of around $120 million at the end of 2009.

That deficit was approximately $80 million at the end of the first quarter 2010.

We expect to make total contributions to the fund of approximately $125 million in 2010.

We currently estimate pension expense in 2010 to be approximately $40 million.

Debt and capital management -- Total debt at the end of the first quarter is now $2.4 billion compared with $2.37 billion as of December 31, 2009.

As we typically do at this type of year, the revolver was drawn for normal seasonal usage to the tune of about $65 million.

As you know, we pay bonus and cash retention awards in the first quarter, and the revolver is paid back over the subsequent quarters.

We also had a mandatory term loan repayment in the first quarter of $27 million.

Debt reduction remains our priority.

Looking at the rest of the year we have mandatory term loan repayments of $27 million per quarter and a final bond maturity payment of $83 million in July.

Cash and cash equivalents was $196 million as of March 31, 2010.

With that I will now turn the call back to Joe.

Thank you very much, Steven.

Before I give you some concluding comment, I want to give you an update on our CFO search.

The process is moving along very, very well.

It is a very, very important position so we are not rushing it.

Short list of very strong candidates across the board and we hope we will make a decision soon so you will be hearing about that I think very soon.

Let me just summarize what I think of our achievements.

Adjusted earnings per diluted share from continuing operations was $1.27.

Adjusted operating margin of 32.2% and 3% organic growth and commissions, with positive organic growth in each segment, which as I said before, is outstanding.

Let me reiterate the priorities, many of which you have heard over the course of this presentation.

Reinforce our sales and revenue culture to drive growth.

High growth in new business and high retention rates.

Further execute Shaping Our Future, that is going to go on for a long, long, long time.

It is part of the culture of this company.

Maintain, continue to maintain as we have for years, disciplined expense management to fund that growth and also to be able to fund the difficult environment we are in, and to continue to strengthen our balance sheet and continue to get to the point where we get the debt to EBITDA down to the levels that we mentioned earlier.

I think all of these efforts have and will continue to position us very, very well for success.

Now, I will turn this over to the moderator who will ask you if you have got any questions.

Thank you.

(Operator Instructions).

Keith Walsh from Citi, you may ask your question.

Good morning, everybody.

Hi, Keith, how are you doing?

Good, Joe.

Good to see you the other night.

Same here.

I guess the first question, the same one I have been asking I guess for the last four quarters in a row.

The contingent, you tell us, it goes from 20 to 8.

I'm assuming the other 12, you alluded to this a little bit, maybe less than 12 was converted to regular commissions.

Is this number is, that $12 million or $10 million or whatever it is included in the organic growth rate of 1% in North America?

No.

It is not.

I mean it is something you and I have been talking about for a while and it is just -- the suggestion is that the 12 is converted in one quarter.

It is not.

It is converted over a period of time and it is not converted on a dollar for dollar basis.

There is lost accounts in there, there is different kinds of treatment as it relates to the way that pledged stuff flows through so that when you take all of that stuff into account plus declining rates the $12 million is almost de minimis, there is almost nothing there.

Just to be clear here you had $20 million in contingents and now it is only $8 million.

There is the gap in between there and you are telling me that gap is nothing.

The gap of $12 million which appears to be in your particular case, and I can appreciate that, that suggests that you take that away from our growth number that we are not really growing 1%, is simply a difference of miscalculation in the way you look at it.

The $12 million is not converted in one quarter, Keith.

The $12 million is not -- it is spread out throughout the year so that gives you a very small percentage in the quarter.

Secondly, it is not done on a quarter -- on a dollar for dollar basis.

There are declining rates that are also included in there and there is also included in that calculation lost accounts that we will never see again.

And as a result of that, when you include all of those factors, it is de minimis.

Okay so basically you are saying that $12 million is an immaterial number and that 1% organic is more representative of your true organic growth even if I stripped out both --

Yes, and another thing I say on top of that.

Whatever the number is, that is converted into the upfront commissions which we have done over the last year and a half, are work that we have to do to convert them from contingents to upfront commissions.

So if you do all of that whatever is left and I think it is small, it is not a great percentage of the converted contingents, is still up front commissions which we had to work to generate.

When you put all those things together, I don't see that that had a grave effect on our organic growth.

Okay.

And then just moving on to Peter, you know, looking at the strength in global, I'm assuming a lot of that is coming from reinsurance.

Maybe if you could just talk a little bit about, you know, the strength there between, maybe buckets of price, carrier retention and maybe share gains from some of your larger competitors?

Yes, I think it as combination of all three, Keith.

We have had in place in reinsurance a very strong sales discipline for a number of years and it is starting to manifest itself in all of our businesses.

We still benefit from the purchase of RK Carvill last year on top of the strong North American growth we had, but it is a function of high client retention, which has always been a hallmark of Willis Re, strong sales discipline, and, yes, some fallout from some of our competitors.

And just if I can sneak one last one, Stephen just on the pension expense -- I think you said the GAAP expense of $40 million in 2010.

If you could just remind us what it was in 2009.

In 2009, it was $43 million.

Great.

Thanks a lot.

Thanks, Keith.

Our next question comes from Jack Sherck with SunTrust.

Hi, you all.

Thank you very much.

A question about the rate headwind in the US.

You mentioned it was down 3% versus down 6% in 4Q, and it was due to a change in the mix of business revenue than a change in the market.

I just want to interpret that correctly.

Was more strength you saw in healthcare financial, personal lines and real estate?

Is that what that was?

I will let Don answer that question.

And the answer would be generally yes.

The point that Joe is trying to make is that we are not suggesting that there is some demonstrable trend in the marketplace where rates are getting better, that is not the case at all.

What you are seeing is more different products that represent our mix of business in the first quarter versus the fourth quarter.

That's all.

It is a question of sector strengthening, some lines getting better than other lines but so when you look at it, gee, rates seem to be getting better, that is not the case.

That is why I mentioned it is more of a mix of the type of business and the lines of business rather than it is a broad book that is going from 6 to 3.

Right.

And then you mentioned that in North America employee benefits is about 20%.

What is construction now?

How much percentage of our business is construction?

Exactly.

In North America, it is 10%.

10%.

And then just my final question is on the 2% rate headwind that you mentioned in global, what was that last quarter, do you remember?

What was it last quarter?

It was about 2%.

Okay.

Great, thank you very much.

Thank you.

Our next question comes from Keith Alexander with JPMC.

Hi, good morning.

Hi, good morning.

Hi, I was wondering do you expect growth to persist in global and international for the rest of 2010?

And if not, what kind of macro environment is needed to keep it positive?

Well, we certainly hope so.

I can't make any predictions.

The economy there as you know is very inconsistent especially in the so called PIIG countries but I will tell you that the PIIG countries just represent 15% of our revenue in the international but they are good countries.

You know, Spain and Italy especially are very big countries for us, but the total is only 15%.

So there is a lot of inconsistency.

You know, you have Ireland still not getting to positive GDP but getting better.

The UK is positive GDP, that is getting better.

We don't know what is going to happen in Europe.

We could get more strength in obviously Germany and France but then you have got the Spain and Italy thing.

I think when everything is said and done, of course our Asian operations and South America and Latin America have done very, very well.

When you put all that together you have got 3% strength if you include UK and Ireland and you have got 5% strength if you don't include it.

We are very hopeful with everything that we have got in place and the consistent results that international has shown, that -- we are hopeful that that is going to continue.

Okay, great, that was helpful.

And then I was wondering if you could talk about why Willis has been able to grow North America while some peers particularly in the middle market have had more difficulty?

I'm looking at Don Bailey and I think our management is outstanding.

We really spend a lot of time with our producers.

I said that and then I will let Don answer this, but we spend a lot of time with our producers.

We are very intense about the relationship we have with our producers.

We have lots of growth-oriented training that talks to growing our new business and retaining our clients.

Our client retention is 92% and growing but if you take loss for cause - of that 8% differential, it is about 3% or 4% that is actually lost.

So that is a great number.

I think that the way we run our practices and our specialisms which means that our practices help our producers feel specialized in the areas that our clients are interested in.

And if you take all of those things together that is the reason why, you know, we grow as well as we do.

There is simply a different model that we execute in North America.

Lots of the time in our branches around the country are spent in servicing our clients' needs, in talking about what they need to have done rather than a lot of administration and more of that is going to continue as we continue to do more administration outside of branches and less in branches.

So I would say those are all the reasons but Don is here.

Nothing to add to that, Joe.

Did I miss anything?

No, you did not.

I wanted to answer that because I wanted to say that I think he is doing a great job and he wouldn't say that.

Well, maybe he would have, I don't know.

Yes, I would.

Thanks for that answer.

Has there been any change to how you define the middle market in terms of client size?

Not really.

We just have a lot more of that business I have virtue of the HRH combination than we ever had before.

We have some great critical mass in our core business which allows us to deploy a lot of the strategies that Joe was just talking about.

It makes the recruiting game a lot more wide open than it was before.

We can recruit from everybody because we have got a space, a critical mass in that space and we have got it in cities all across the country.

We now have 130 plus offices all over North America, so our business in the middle market is not one that is just focused around major cities.

It is a secondary and tertiary city presence as well.

Okay and then one last question regarding the UK pension plan.

Was there any impact from foreign exchange mark to market on the plan in the quarter?

No, there wasn't that much impact actually.

Assets increased and the dollar weakened so it had a basic netting itself off.

All right, great.

Thank you, guys.

Thank you.

Our next question comes from Brian Meredith with UBS.

Good morning, everybody.

Hi, Brian, how are you doing?

Good.

Question, just looking at some of the numbers here.

The corporate expenses looked like they were down substantially.

Is that due to FX or is that really where a lot of the expense saves have been coming out of?

For the corporate expenses we put the hedging through and the amount of hedging that went through there was lower this year than it was last year so the loss on hedging was lower.

So that is the principal reason why there is a big decline.

Yes.

Got you.

Next question.

Are you seeing any increase or any change in kind of the competitive pricing among the insurance brokers out there?

Or is it everybody kind of being disciplined with kind of fees right now?

No, I don't think everybody is the same.

I think that, you know, you -- you hear a lot of stories about the competitiveness of people dropping their fees to keep accounts.

You hear that all the time.

I'm not going to suggest that it comes from any one place but you do hear stories about that all the time.

We are competing for accounts and somebody will call me and say we won or we lost because somebody dropped their fee enormously.

It is still out there.

Is it prevalent rather than once in awhile?

I think it is more prevalent than it is once in awhile.

But, you know, in our particular case, you know, we do most of our business in commissions and when we do do business on a fee basis, I do hear stories that people are dropping, you know, their fees a lot in order to hold on to accounts and come back and fight another day.

I think that is accurate.

Don, do you want to --

The other dynamic is just that clients in this environment are looking for more for less.

So we have that dynamic that plays out on top of what Joe just described which is brokers looking for that elusive core organic growth who are increasingly more competitive on their fees.

Thank you very much.

Thank you.

Our next question from Meyer Shields with Stifel Nicolaus.

Thanks.

Hi, Meyer.

If I could take one more whack at the contingent commission issue or the conversion -- I understand that only a small portion of the $12 million gap is going to show up as commission revenue this quarter.

But I would think that this quarter would also include the converted contingents from previous quarters.

Is there any way of sort of ballparking that total figure?

No, it is what it is.

There is nothing else there.

I don't know, I tried to bear down on this issue for what it is.

The $12 million gets converted up front.

It doesn't happen at one time.

Contingents by their nature don't happen all at once.

It is a book of business that is calculated over a course of the year, not in one quarter.

And it is not done on a dollar for dollar basis.

And is certainly doesn't include because it is legacy HRH contingents that they are necessarily going to be everything in there that is going to be converted.

So when you put all of that together it is not what it appears, you know to be.

It is not part of organic revenue.

The organic revenue growth is there.

I have tried to explain it as easily and as thoughtfully as I possibly can for you.

Okay.

Let me move to a different subject then.

On the reinsurance side, can you give us a breakdown of how much reinsurance brokerage revenue is fees versus commission?

30% fees.

Not too different from the primary side?

No.

Actually mirrors across the board.

Okay.

Is your expectation that there is more growth opportunity in terms of market share gains from larger competitors or smaller?

And this is again on the reinsurance side?

I think it is both, Meyer.

I think we feel comfortable we can compete against anybody, anyplace, any time.

Depends on the situation.

So either large or small.

Great.

That covers me.

Thanks so much.

Our next question comes from David West, Davenport & Company.

Good morning.

Hi, Dave.

First question on the benefits side you mentioned the obvious that many employers have lower head counts.

Could you talk about the pricing trends overall on benefits?

You are going to see in that business inflation factors that play out in the rates.

So, those have certainly moderated from what we have seen in the past.

You will see a lower impact on that in our business than you might have seen historically.

Very good.

And then lastly, Stephen nicely outlined the debt maturities and so forth this year.

Could you maybe update us on your thoughts in 2010 as to where you may get on the EBITDA to debt targets and what implication that might have on share repurchase activity?

Stephen and then I will put a period at the end of the sentence.

Debt to EBITDA at the moment is in the region of about 2.5 debt to EBITDA, and we expect to continue to bring that down as the year goes on during this year and to get below 2.5 towards middle, towards the end of this year.

And when that happens as I said on a couple of previous calls, we will take a serious look at buybacks.

Very good.

Thank you so much.

Thank you.

Have a nice day.

Our final question from Keith Alexander of JPMC.

Thanks for the follow-up.

I just had a question.

Have you guys observed any impact from the recent large losses in Chile and elsewhere on terms and conditions in those lines and geographies?

We were talking about that earlier on the call and the expert is Peter Hearn so I am going to let him answer the question.

Keith, not yet.

It takes awhile for these to percolate through the system.

As you may have read in the first Q report, over $16 billion of loss in the first quarter of 2010 and it really hasn't moved the dial on rates at all.

Obviously the rig loss in the Gulf is a very large and potentially could be the largest maritime loss ever and it takes time for these things to percolate through the system.

Usually at a minimum, three to six months and more likely nine months.

Okay.

And then -- thanks, that was helpful.

I was also wondering if there is any update or if you could provide an update on the progression of the Stanford financial lawsuit?

Stanford financial lawsuit - I will let Adam Ciongoli give you an update on that, our general counsel.

We filed a motion to dismiss and there are four cases overall, three in federal Court.

One was originally filed in state court and has now been removed to federal court, all before the same federal district judge.

We filed a motion to dismiss in two of the federal claims and are expecting an answer from the plaintiffs any day now.

The third federal case there has been no movement.

We are waiting for a scheduling order.

And the state case as I said has been transferred to federal court and we are waiting to see whether the judge decides to move it back to state court.

Great.

Thank you, guys.

Okay, Keith, any other questions?

There are no further questions at this time.

I will turn it back over to Joe Plumeri.

Okay.

That's me.

Have a nice day, everybody, and thank you very much.