Willis Towers Watson PLC (WTW) 2010 Q2 法說會逐字稿

Welcome, and thank you for standing by.

At this time all participants will be in a listen only mode until the question and answer session of the call.

(Operator Instructions) Today's conference is being recorded.

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

I would now like to introduce your host to today's call, Kerry Calaiaro, who is the Director of Investor Relations you may begin.

Thank you.

Welcome to our second quarter 2010 earnings conference call and web cast.

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

A replay of the call will be available through August 29, 2010, at 11:59 PM Eastern Time, by calling 888-568-0518 from within the US, or 1-203-369-3480 from outside the US.

No pass code is needed.

Alternatively the web cast replay can be accessed through the investor rations section of our web site at www.willis.com.

If you have 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 that term is defined by the Private Securities Litigation Reform Act of 1995.

Such statements are subject to 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 revision to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings including our annual report on Form 10-K for 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 maybe also obtained from the SEC or visiting the investor relations section of our web site.

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

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

I will now turn the call over to Joe.

Thanks Kerry, and good morning everybody.

Welcome, and thank you for joining us today on our call.

On the call with me today are Grahame Millwater, the group President.

Stephen Wood, the group Controller.

Mike Neborak as you know who we announced, who will be our CFO, has been with us a couple of weeks.

He had a long planned family vacation this week and since this is a family operation, we said go ahead and take care of your family.

So he is on vacation with his family.

As usual, the rest of the senior management team of Willis Group is here and we will be glad to answer any questions that you might have.

I'm very happy with the results that we have delivered today.

Especially, the outstanding growth that we continue to generate as a result of our strategy of investment, while still watching our expenses, and getting out of those investments the growth that you saw in the quarter.

The environment though remains pretty tough.

In the US, we have not seen evidence of sustained recovery yet.

Economies in a number of other countries where we do business, also remain under considerable pressure.

And the rate environment is still as you all know, very soft and unlikely to change significantly through the remainder of 2010, in the absence of a major loss activity.

With these headwinds we delivered though, which is I'm really proud about.

Adjusted earnings per share from continuing operations was up 4%, to $0.54, including $0.03 of favorable FX.

4% organic growth in commissions and fees in this environment is an outstanding, outstanding achievement.

Driven by international and global segments, companies well with 1% -- compares well with the 1% a year ago and 3% in the first quarter.

So dramatic again results by growing organically internally.

We continue to generate strong growth through new business across all our segments, 16% for the quarter.

Which is one of our better quarters in terms of growth through new business, which again is an indication that our investment and our internal growth strategies pipelines are working plus very, very solid client retention.

Shaping our future net benefits of $13 million in the quarter, Grahame is going to talk about that -- that's become a way of life in this Company and we are going to continue to do that.

Adjusted operating margin of 21.4%, which is an increase of 20 basis points.

For the past several years, we have right-sized, we have integrated and taken quite a bit of expense out of our cost base.

And still delivered solid margins.

As we continue to watch expenses, we still need to make investments to fund growth, which is what we have been doing, which is what this quarter, I think is a manifestation of.

And you see that coming through organic growth.

As an example, we started Willis Capital Markets.

That was an example of the investment we made.

We made that investment about a year ago.

We hired 25 people, to begin that investment bank and as a result, inside of one year it's already paid for itself and contributed 1% in -- of the 4% organic growth to this quarter.

So, that's a great example of investment and getting the organic growth we took the shot and made the investment.

It was the right one to make, we are very proud of what that group has done and has many opportunities in the pipeline as this market stays soft and the opportunity for consolidation and doing a lot of work could afford us a lot of possibilities.

When you look at this for the first half of the year, adjusted earnings per share from continuing operations were up 7% to a $1.80 including $0.09 of favorable FX.

4% total organic growth in commissions and fees so the half in the quarter were the same.

Shaping our future the net benefit was $26 million, a gift that keeps giving something that we began, three or four years ago, started it from scratch.

Again, an initiative that we created internally and continues to do well for us.

Adjusted operating margin of 27.3%, an increase of 150 basis points, from a year ago.

Now, let me talk about some the segments, first of all North America.

North America is operating in a tough economy.

With lower exposures, it's interesting I've been doing this for 10 years at Willis and for the first time I hear everybody talking about exposures.

Nobody ever talked about exposures before.

I guess the reason is because they are lower.

People are buying less insurance.

If you take the two headwinds we should probably make up an index, the headwind of the lower rate, and the headwind of less exposures it comes out to be a high number.

It's probably close to 10%, by the way that's -- the exposure number is unscientific.

But, I have asked insurers and they told me that exposure units are down in the 9% to 10% range, you add the soft market to that, which in the quarter was 4%.

So, you are getting up there pretty good.

So, anybody that's coming in -- around one like we did, in the first quarter, flat or little better than that is driving it's growth through a lot of new business and a lot of retention, which is, I think the story of North America and a comparison over a year-to-year basis.

Our organic commissions and fees were down 1% in the second quarter, with 3% net-new business, and a 4 point rate headwind as I said earlier ,That's a pretty big headwind.

There are good numbers behind this headline.

Our producers are generating new business growth in the teens, and client retention remains solid.

So, you are growing in the teens, your retention is solid, you've still got these headwinds and you're still coming in around where we are -- is pretty good result -- more than pretty good results, an outstanding result, I think, given the environment especially coming off of integration and all the things we had to do that others did not.

The organic decline is a significant improvement on top of that from negative 8% that we reported in the second quarter a year ago.

While we were very focused on the HRH integration.

So, you go from minus 8% to minus 1%, again, we look at that as terrific, terrific improvement.

And when I look at the -- now the concentration on the pipelines as I have meeting in North America with [Don] and with the national partners, we are feeling good about the future.

Our employee benefit business, which is our largest practice area, was up 2% in the quarter, which is again a good result considering unemployment remains close to 10% in North America.

Construction, which is our second largest practice was still down single digits, again, reflecting the on-going challenges in that area from the slow economy.

So, as we said last quarter, where we specialize, we do better and we have seen positive results from some of our specialty practice areas this quarter including technology and telecom, mining and utilities.

In addition, for year to date, both health care and mining were up double digits.

So, when you look at all of these things on a large basis, and you step back from what is going on today with regard to the economy and the rates, the progress in North America, I think has been stunning.

We noted by the way in the press release, a $2.9 million favorable impact from a one time accounting adjustment related to the HRH acquisition within the specialty businesses.

This was a revenue item and impacted organic growth.

North American operating margin was 20.5%.

If you exclude the pension curtailment gain in the year ago quarter, we would have had around a 90 basis point margin expansion in North America, which, as I said, given all the circumstances, just an outstanding job and we are very happy with the direction of North America.

International, organic growth and commissions and fees was 8% for the quarter and 6% year to date.

That's another gift that keeps giving.

Our international division has just been stunning.

They keep doing a fantastic job, quarter after quarter, the new business generation remains double digits and the significant -- the segment afforded about a 3% rate headwind.

Again, you've got some countries in international, especially in the euro zone that aren't doing well, a 3% rate headwind but still growing at 8% organic growth has got to be the best in the business and we are very proud of that as well.

This is a great result, shows the strength of this operation as the number of the economies are still challenged as I said before.

We recorded double digit growth in Asia, Latin America and Eastern Europe with contributions from China and Indonesia and Asia; Brazil, Chili and Latin America and Russia, Eastern Europe.

Given the weakness of UK and continental Europe economies, we were very pleased -- and I want to underscore this -- very pleased that our UK division returned to positive growth.

So, our retail offices in the UK were positive for the first time in a long time, which probably shows a lot of things -- a lot of growth, growth through new business, retention of accounts, we are very proud of that.

Growth in Europe was a positive as well, led by Switzerland, Spain and Italy.

And, you notice I said Spain and Italy, both economies especially Spain not doing well, which really shows the underlying strength of those businesses in those countries.

The international margin expanded modestly to 23.5%.

But again, we are in the mode of making investments, we've got good operations internationally.

I think the best around, and we are going to feed it.

The worst thing we can do is to kill the golden goose, we are not going to do that.

We've restrained our expenditures very, very well.

We've watched what we spent over the last couple of years but when it's time to invest we are going to invest.

That's what we are doing and that's why you see growth like 8% and then say to yourself "why isn't this margin expanding?".

That's the reason.

Because this is not just for today this is for tomorrow and the next day, and the next day after that.

Our global businesses segment comprised of Global Specialties, Faber & Dumas, Willis Capital Markets & Advisory Reinsurance had another excellent quarter with 7% organic growth and a relatively flat rate impact.

Which means that all of our businesses outside the US and we talked about why the US was the way it is, was up 7% or more.

Which, I think is again an outstanding achievement.

Global was up 7% on year to date business.

Each of the business lines in global generated double digit new business growth.

Global Specialties reported strong growth in the quarter.

Led by financial and executive risks and energy.

Strong growth resulted from new business generation and the investments we've made.

Wins were distributed across the businesses and the geographies.

Willis Capital Markets was the largest contributor.

I talked about that -- to the segments growth this quarter -- in part due to their role in leading the Harbor Point transaction.

So we are really happy with the progress by this relatively new business unit -- not relatively, it is new.

It is a transaction oriented business.

So the results are going to be variable and lumpy on a quarter to quarter basis.

We really have real excitement over the future.

Reinsurance continued to post modest growth with strong new business levels overcoming the headwinds of clients retaining more risk and rates being down.

So, they continue to show positive growth -- again another piece of business -- business area that we are particularly proud of.

Strong growth in the London market specialty areas, especially marine and aviation and despite the high loss levels earlier this year, rates remain soft as I said, except for marine and energy.

The global margin declined -- it's almost funny to say declined -- but declined to 31.8%.

Primarily due to foreign currency, translation impact on our London market business, excluding FX, global margin expanded about 1 point.

So all of our businesses across the board continue to do well.

We are a global broker, we are investing in the expansion of our business.

I will talk a little bit more about that in the end but that expansion is coming from internal growth organically.

Now I would like to turn things over to Grahame Millwater to update you on priorities for 2010.

Grahame?

Thank you Joe.

The [corserick] is again a reflection of our continual focus on delivering organic revenue growth.

The 4% organic revenue growth in an ongoing difficult economic and insurance rate environment is a testament to our continued progress of new business development, retention and investments.

Let me firstly touch on growth.

Rather than repeat the overview of our growth programs I outlined on the last quarter's call, let me just focus on a few specifics.

In the middle market we're developing a unique industry focus sales process with supporting analytics and technology, which we are calling [Sales 2.0].

We believe this will improve the ability of our sales and client relation associates to deliver value and differentiate themselves at the point of sale.

We will endeavor to pilot and fully develop this by the end of 2010 with rapid roll out globally in 2011.

We are rolling out commercial network franchise model, that has been such a success for us in the UK retail small commercial sector to several countries in Europe and the emerging markets.

This provides product and effective access to markets for small select retail brokers and is a profitable line for Willis.

We have also built new facultative reinsurance platforms including teams in Latin America, North America, Europe and globally.

Playing to our unique integrated culture, this has delivered double digit revenue growth in the core facultative unit in the second quarter and could be a significant driver of revenue going forward.

Joe has already mentioned Willis Capital Markets & Advisory.

This has been a great addition to our business.

It has a good pipeline of potential transactions and in this environment we certainly see no sign of merger and acquisition activity slowing.

So, these are just some examples of how we have and are investing for current and future growth.

Let me briefly turn to shaping our future.

The key drivers in shaping our future benefits in the past two years have been our focus on client profitability and enhanced original commissions.

These initiatives have become a way of life now with those activities largely embedded in the individual businesses.

The next phase shaping our future is where we start to drive increased benefit from our long-term program of technology.

In the first half of 2010, we delivered gross benefit from the shaping our future program of $46 million and net benefits of $26 million.

Lastly, let me turn briefly to funding growth.

We continue to manage the expense base to fund our growth efforts.

If you exclude the pension curtailment adjustment in 2009, our underlying growth in operating expenses was approximately 1%.

This includes about 250 client facing new hires and continued investment in our growth platform and new technology.

This exercise is a reflection of our continual process of addressing non-value adding cost and transferring those dollars to investing in revenue generating assets and/or processes and technologies to generate further efficiencies going forward.

I would lake to turn it over to Stephen to review the financials.

Thank you, Grahame.

Good afternoon or good morning everybody.

Turning to earnings, reported earning from continuing operations in the second quarter were $89 million, or $0.52 per share.

On adjusted basis, reported earnings were $0.54.

Excluding the favorable impact of foreign currency, adjusted earnings-per share were $0.51 compared with $0.48 in the second quarter of 2009, if you exclude the US pension curtailment gain.

Turning to the operating margin, reported operating margin was 21.2% in the second quarter of 2010.

With adjusted operating margin of 21.4%.

The adjusted operating margin expanded 20 basis points, through strong growth in commissions and fees, continued focus on expense management, while funding growth and making investments - as Joe and Grahame mentioned -- favorable operating FX of about 140 basis points.

Lower corporate segment expenses were primarily due to the lower year on year hedging losses.

Expenses, salary benefits were $456 million or 57.1% of total revenue in the current quarter.

That compares to $443 million, or 56.5% in the year ago period.

Salary and benefits in the year ago quarter included the $12 million curtailment gain.

As we said last quarter, we have a cash retention program in place.

The cash payments are made in the first quarter and then amortized over a period -- currently three years.

In the second quarter of 2010, salary and benefits included $32 million, of expenses related to the amortization of cash retention awards compared to $26 million in the year ago quarter.

Reported other expenses were $135 million in the second quarter of 2010, compared to $139 million in the year ago quarter, reflecting our ongoing strict controls of costs.

Foreign exchange -- operational FX had a positive $0.03 per share impact on EPS and a positive 140 basis points on adjusted operating margin compared to the second quarter of 2009.

The weakening of the euro against the dollar negatively impacted revenue due to the overweight of euro revenues.

The weakening of the sterling against the dollar positively impacted margin and earnings per share due to the overweight of sterling expenses.

Tax items -- reported income tax expense for second quarter 2010 was $35 million, compared to $31 million in the year ago quarter.

Effective tax rate for the quarter was 27.3% and for the six months was 26.4%.

The underlying tax rate for both the quarter and the first six months was 26%.

The same as 2009 full year rates.

Turning to pensions, our UK, US and international pension plans had a combined deficit of around $120 million at the end of 2009.

And around $50 million at the end of second quarter 2010.

We expect to make $124 million total pension contribution payments in 2010.

Currenty estimate 2010 pension expense at around $40 million.

Finally, looking at debt and capital management -- total debt at the end of the second quarter was $2.3 billion.

Down from the $2.4 billion at the end of the first quarter and down slightly from December 31, 2009.

In line with typical seasonality during the second quarter, we paid down part of the revolver that we had drawn in the first quarter and have a mandatory term loan payment of $27 million.

Looking at cash usage for the remainder of 2010, debt repayment remains our priority.

We have mandatory term loan repayments of $27 million per quarter.

And have just made final bond maturity payment of $83 million in July.

Cash and cash equivalents were $139 million at the end of the second quarter.

With that I will now turn you back to Joe Plumeri.

Thank you very much, Stephen.

So we have continued to invest in and grow our business and this quarter shows that we are delivering.

Our strategy is not a strategic acquisition strategy.

We are not in the acquisition business at this time.

We are in the business of reducing our debt making investments internally and growing our top line and building a great business over time.

That's what we are doing.

That is our strategy.

And we think it's working quite well.

Organic growth and commissions and fees are up 4%, up from 3% in the first quarter and 1% a year ago.

We think that's pretty good.

North America significantly improved organic revenue growth from a negative 8%, as I said before -- a year ago -- to now a negative 1%.

Internal segment continues to grow, national segment continues to grow -- a testament to geographic diversity and presence in emerging markets where again, we have invested a great deal.

A lot of investment internationally and that's paying off.

Global has expanded.

With our young capital markets and advisory business it's developing nicely and each while we invested in the business, we have continued to improve our margin.

So we will continue to invest in the areas that we believe will drive future growth and margin expansion.

We will stay the course and we think it's working well.

Now I will be glad to take any questions that you may have.

Now I will be glad to take any questions that you may have.

Thank you.

(Operator instructions) One moment please.

Our first question comes from Keith Walsh from Citi.

Hi, how are you?

First question would be around the $2.9 million accounting benefit related to HRH, could you give us a little more detail around that?

And I guess in relation to that, did that flow through the commission and fee line, and did that impact your North America organic growth?

It's basically, what it is, it represents I guess a percent, it is organic and it represents a percent, Keith, and a penny.

Okay.

Then the second question would be around the $3 million after-tax loss on disposal.

Could you give us a little bit more color around that?

Was that just one operation or several?

That was several operations and disposals.

Is that an unusually high number relative to what you usually see in a quarter?

I'm trying to get a sense for it -- that you highlighted it in the press release.

It depends on disposals.

But, no, it's not unusual for the disposals that we did.

Thanks, Keith.

Our next question comes from Jay Gelb with Barclays Capital.

Hi.

My first question has to do with the investments going forward.

I believe the adjusted margin benefited pretty meaningfully from foreign exchange, so I want to get to that in a sec.

But on a normalized basis, should we anticipate further margin expansion as Willis continues to make investments in the business.

Yes, we are always looking to expand margin.

The question is, how much is the margin going to expand?

This is not a suggestion that because we are investing in the business that it's a excuse for the margin to go backwards.

That's not what we're saying.

We are simply saying that when you get which today is enormous revenue growth like 4%, that's enormous, and you see modest margin expansion, you ask the question, what happened to all the margin?

And I'm telling you what happened to it is we invested in the business because that's what we do.

We are trying to grow the business.

We are not making big acquisitions.

We are staying the course.

We are growing organically, we are growing pipelines.

We have sales programs like Sales 2.0 which is a big initiative across the world in the middle market.

We made investments in the capital markets.

We are recruiting people.

We're making investments in International.

And so on, and on, and on.

So instead of just growing the margin and bringing all that to the bottom line and not making investments for next month and tomorrow and next year, we feel very good about what we are doing.

But at no time do we suggest because we are making those investments, that our margins should be reduced.

They're just not just to expand in a dramatic fashion like that kind of spread suggests.

You got to remember that the retention award is another investment, it's an investment in our people.

That's why we did that, to retain them, in a world where everybody's coming after your people, in a time when business has not been good and we've been through a tough time.

We felt that the best thing to do was to invest in our people rather than go out and buy other people.

And that's what we did.

That's all a part of this thing we call an organic growth strategy ,and that is what we are going to do.

(Operator instructions) Our next question comes from Thomas Mitchell with Miller Tabak.

Last quarter, you discussed your balance sheet and the potential for resuming share repurchases sometime in the second half of this year.

On this call, I'm hearing a lot of emphasis on making new investments, so I'm wondering if you still think that there may be room for reinitiating share repurchases later this year or if that's more of a 2011 or 2012 prospect.

We said later this year, or early next year, I even made the comment, "Don't hold me to December 31 or January 1." So let's call it around that time framework.

Yes, it's still the same.

I said that earlier.

We still want to pay down debt and then we want to buy back stock, and we are taking operating expenses and we are using that to invest in the business.

That's exactly what we are doing.

That strategy has not changed.

Okay.

And a totally unrelated question that confuses me.

In having so much new business growth, are you seeing a higher sort of general customer churn taking place in the marketplace?

That is, as everybody's new business going up, you happen to be keeping more of it than the other insurance brokers, but there's more customers shopping for different brokers?

I -- that's tough to be scientific about.

I can't tell you that.

All I know is that when you have 16% new business growth in North America, it's well in to the teens, and your retentions are pretty good, that usually means that you are going to get good growth.

I can't -- I like to think that it's less shopping in a soft market, although that's -- that happens to better value proposition, our pipelines are something that we look at diligently, day in and day out.

And the pipelines are pretty robust.

And that robustness gives us a pretty good sense of predictability in the future.

I can't -- it's tough to say, because we don't question clients about is this new account because you were shopping a better price or something.

I do know that a lot of the growth that I mentioned in the areas that I mentioned have come from very good pipeline management and very good value propositions around the world.

And I think that's going get better, the Sales 2.0, that I mentioned earlier, is a initiative on our part to rollout a great value proposition across the middle market around the world.

It's something we are very, very excited about because nobody's ever really tried to do that before.

That's the best answer I can give you.

Thank you.

You're welcome.

Our next question is from Mark Hughes from SunTrust.

Good morning.

Two questions.

One, could you give us comparable new business generation number for the first quarter?

And then secondly, kind of your early view even just directionally on the ForEx impact in the 3Q, foreign exchange impact both to top and bottom line.

The new business number in the first quarter was I think -- I'm trying to figure out what it was.

It was low, it was lower than the 16%, it was in the low teens, maybe 12% or 13%.

Okay.

And what was your second question again?

I'm sorry.

Any early read on where the foreign exchange impact is going to be in the third quarter top and bottom line?

In the 9% to 10%, assuming all things stay equal and the rates stay relatively calm.

It's hard one to forecast because of all the variables that go in to it.

We anticipate that will probably have slight uplift in foreign exchange for Q3.

We expect it to go slightly negative in Q4.

And then for the full year, we expect a overall upside from foreign exchange.

Thank you.

Our next question come from Keith Alexander, JPMorgan.

I was wondering if you could talk about your comfort with the Company's ability to sustain current growth rates given the benign to cautious economic outlook in a developed world.

And then more specifically, in the Global segment, what did growth look like, excluding the Harbor Point transaction?

Give me your first question first, I'm sorry I didn't quite get it.

Sure, I was just saying, given the benign economic outlook for the developed world, how comfortable are you with being able to sustain current growth rates?

Pretty comfortable.

We are -- because of diversity in the areas that I mentioned, Asia, it's been very, very strong, South America, has been very, very strong, and we have had amazing resiliency, Keith, in Spain and Italy, even though those economies are not good.

So I feel pretty comfortable about that.

I know Sarah Turvill is probably behind me saying that she has got to raise the bar, she is the one responsible for International.

But I feel pretty good about it.

I just looked at her and she shook her head.

The second part of your question was Harbor Point.

Of the 7%, it was 5%.

Okay.

Touching back on growth in Europe, I mean, has the debt crisis impacted business that you've seen at all, or should we expect it to in future quarters?

It hasn't yet.

I don't think the debt crisis is necessarily related to our business in Europe as much as just the economic conditions, if you will.

Spain had positive growth, but not as positive as it would have been a year ago.

Italy had positive growth, very positive growth.

Almost double digits.

But not as positive as it would have been a year ago.

Which means that's really resilient.

You know, you take a place like Spain, and we're very proud of our operations in Spain and Portugal, Liberia in general.

You got 20%, I think, unemployment and they are growing at a strong mid single digits.

It's terrific stuff.

No.

I don't think that the credit crisis in Greece is necessarily been the most impactful, I just think it's the economies in general.

Then, finally a numbers question.

Can you break down the amortization of cash retention payments by segment?

We don't provide that data, I'm sorry.

Thank you.

Thank you.

Our next question comes from Meyer Shields with Stifel Nicolaus.

Good morning everyone.

Hi, Mark.

Can I get -- I guess, you mentioned earlier that the Global segment margin was negatively impacted by foreign exchange.

And I would have thought because of the prevalence of pound denominated expenses it would go to other way.

Can you go sort of through the mechanics of that?

The Global segment was negatively impacted by its business in the London market, which is partially Euros and Sterling.

And obviously the dollar strengthened against the Euro.

And therefore, that's why you got some of the negativity coming through.

Wouldn't the stronger dollar -- if the expenses are disproportionately pounds, wouldn't that expand margins?

Yes, but he expenses aren't all specific to just Global.

The expense go across other parts of the business as well.

Okay.

That's fair enough.

You talked about investments this time.

If we look back to 2005, 2006, there was a lot of investment in pounds then, and it doesn't seem like that was complete success.

Can you talk about how things are different this time?

It was not a success, thanks for reminding me of the failure.

We recruited a lot of people back then.

This is a different kind of investment.

It's -- I name some of the investment, and I put under the category the retention award is an investment in our own people.

That's certainly different than going out and recruiting a lot of people.

I admitted in 2005 that we recruited a lot of people and that wasn't successful.

This is a different kind of investment.

The Capital Markets is a different kind of investment.

You are actually seeing accretion in those investments.

You retain your people, it's accretive.

The Capital Markets was a big investment, that was accretive.

We made a great investment in Reinsurance in the [Carvil's] Group, that was accretive right off the bat.

It's those kinds of targeted investments I'm making reference to, teams of people internationally that continue to do well.

We've made investments in Brazil, for example, like that, and South America, that have been accretive.

So when I say investment, I do not mean go recruit a lot of people.

I don't think hiring a whole bunch of people and getting one or two good ones out of a bunch is what we are doing.

These are targeted sane, sober investments, and the reason I brought it up so much, you mentioned that early in your question, is because I know if I were you I would say, "Geez that's wonderful organic growth, and with expenses -- the way Willis manages expenses, you should have had really great margin expansion." And I'm trying to explain to you, that's what I would have said.

And I'm trying to explain why that is not the case.

It's not because I'm emphasizing the investment more than I usually do, I'm simply emphasizing it because, when you have that kind of spread, you should have gotten better margin expansion, and I think we are doing the right thing.

Appreciate it.

Thank you.

You're welcome.

Your next question is Adam -- (technical difficulties) Your line is now open.

Thank you, good morning.

Can you talk about the Capital Markets business, what other potential transactions could that unit do, and how did the pipeline look right now?

We could do almost anything as long as we are not using our own money.

We are not an investment bank, so we don't have an investment committee.

But anything that we can do on advisory basis, anything we can do to help like we did with Stone Point and Max Re, arrange, revise the transaction, which was significant.

You got to remember, Tony Ursano, who runs that group, and his people are seasoned insurance bankers.

They know the space very well.

We didn't hire a bunch of people who have never done this before.

I think it's augments our reinsurance business really well.

So when you sit back and say, "Joe what do you do for insurance companies?" -- we have a great reinsurance operation with great analytics, with great tools, including the Willis Research Network.

And then on top of that, you have an in-house investment bank that advises insurance companies.

So when you look at that across the board, you say that's pretty good arsenal of activity where we help our insurance clients and they work together nicely.

If you think that the soft market is going to stay soft and consolidations and are going to continue, then we are at a great position to continue doing these kinds of things.

And I can tell you, the pipeline is big.

A lot of people are on the acquisition trail, you know this.

And there are a lot of people that, at one point in time market continues to be soft, they throw up their hands and I give.

I like the position we are in.

I love what we do for insurance companies from Reinsurance all the way to Capital Markets, and now we got a great capability in the cap bond area, with people who find lots of cap-ons in the past.

So that's the way we look at it.

We look at it as capital and what kind of capital requirements do insurance companies need.

And with Tony Ursano and Peter Hearn and the whole team, it's fun to watch these guys.

Thanks.

Question on the deferred comp, can you give us an idea for annual basis, what the deferred comp should run and what the amortization should be?

The amortization on the retention is about $32 million at quarter.

Okay.

Thank you.

Okay.

Thank you.

Our next question comes from the Brian Meredith with UBS.

Good morning, Joe.

Hi, Brian, how are you doing?

Good.

Couple quick ones.

I'm wondering, is it possible to get the North American organic growth ex the employees benefit business?

No.

Not -- Not off the top.

We don't calculate that way.

I'm look at Don Bailey, I don't think he does either, no.

I guess on the employee benefits --

The reason for that is not a dodge, it's that the business is so intertwined in the branches, that it's tough to separate it.

Right.

What do you think is driving the growth in that employee benefits business, obviously with unemployment still high here?

I think they really got a great business proposition, but I'm going let Don answer that question.

The people are really good.

I'm proud of them.

There's great value proposition.

Don, you want to get into that please.

Sure.

I think, it's certainly, Brian, some of which I was talking about, a unique proposition in positioning in the marketplace.

We sit very affectively in that space.

We are smaller than some of the very large consultants that do a lot of fee-for-service type of work and we are much larger than all of the smaller agencies that are out there that are mostly purely transactional.

So we occupy a space that tends to be more middle-market client-driven and downstream from there, where we make most of our money on commissions and provide a lot of value-added services, HR communication, wellness programs that come along with the commission.

So, it's a unique positioning we have in the marketplace.

I would also give a lot of credit to the leadership of our employee benefits business in North America for transforming that value proposition and bringing a lot of the sales management that Joe talked about earlier, pipelines, forecasting, in a much bigger magnitude to that business than we ever had before.

Great, thanks.

One other quick one, wondered if you'd, Don and Joe, talk a little bit about the pricing environment in the quarter.

Did you see it get was incrementally worse, incrementally less worse, what was happening with rates this quarter?

The insurance companies are kind of giving us two different views.

I will go first and then Don can pile on or add to it, whatever he wants.

I said the rate environment was down 4% in the second quarter.

That's worse than the first quarter, which was 3%.

We see it getting worse, we don't see it getting better.

There's no stabilization that we see in sight.

And as I said, that the exposure units, if you will, and this is insurance companies telling me this, are up in the 9%, 10% range.

I don't know what they are telling you, but that's what we see.

Don, you got --

The only thing I would add to that, Joe, it's that more specific in some areas, Brian, to Joe's point of this double dip.

You have, even some FI, DNO, ENO areas, where we started to see firming not so long ago as those rates started to run up a little bit, you saw a lot of capacity start to chase that down and that's become much more competitive than it was even a few months ago.

So to chime in with everything that Joe said, it's becoming even more intensely competitive than a few months ago.

Thank you.

Our next question is from Jay Gelb with Barclays Capital.

Wanted to follow up on a separate issue, Joe, with regard to producer compensation.

Can you talk about the extent that you are having success in increasing upfront commissions and fees?

And broaden that out to anything else you want to talk about in terms of producer compensation.

Sure, I will.

You know how we feel about on contingents.

I only lead with that so that everybody understands again that we've taken that position, we believe in it.

And I think it's -- just for inside, in case you're interested, I think it's put us in good stead with clients and prospects.

I hear more and more from clients and prospects that they're proud of our position and as you can see by our numbers in North America, excuse me, especially, versus our competitors who have reported before us who take them, that our number are better.

So we haven't given an inch.

We still expect to get paid.

We've told the underwriters carriers that we expect to get paid.

Don't misunderstand the nonacceptance of contingence for not wanting to get paid.

That gets back to what Grahame was talking about shaping our future.

One of the components of shaping our future is making sure that commission uprights -- upgrades upfront for the business that we do, based upon nothing more than an negotiated upfront commission between ourselves and the insurance carrier.

And we are very happy with the progress there.

And I said to the carriers, I don't expect to get paid any less just because we don't accept contingence.

And I think that's going along well.

You can see part of the component of shaping our future and that's going very, very well.

Don, you got anything else you want to add?

What I would add, Joe, specifically on producer recruiting is a key metric for us in terms of running our business obviously is keeping producers and bringing on new producers.

Two key parts to that.

One is having a value proposition for them to sell.

And the other part is a viable producer compensation plan.

We have a plan in place that we think is best in class on our market that emphasizes retention, but also emphasizes growth.

But specific to the issue of contingence, when you don't take contingence and you take all your comp in upfront commission, producers get paid on all of that revenue.

And that for us in the recruiting game is a differentiator, that we don't have the organization taking centrally contingence out of the comp pool, we are leaving that all in and producers get paid on it, and that becomes a competitive advantage for us from a recruiting perspective.

Next question comes from the Meyer Shields with Stifel Nicolaus.

I wanted to ask a broad question.

When you see the underwriting results that the industry is reporting in the aggregate and you contrast that with the rate declines we've seen for the past five or six years, did the numbers seem appropriate?

No.

No.

It doesn't.

When you got insurance stocks -- this is my own personal opinion, when you have insurance stocks selling at discounts to book, plus you got investment income down, and you got rates as low as they are, it seems to be incongruous.

But I don't run an insurance company, but it would seem to be incongruous.

A lot of cash, a lot of them are buying stock back obviously.

A couple, in particular.

So there is a lot of cash out there and a lot of capacity, so you would think that because of that capacity that's the reason the rates are low.

And it's going to take quite an event to change all that.

Okay, thanks.

Our next question comes from Clifford Gallant with KBW.

This is a naive question because if rates are falling, I assume low price is still winning out there.

But are you seeing any change in terms of preference by buyers of insurance, is there concern over the credit quality of their insurers?

It's not apparent.

It's not apparent, no.

I'm looking around the room to my colleagues, and they're all shaking their head, no, it is not apparent at all, Cliff.

That's a simple answer.

Thank you.

The next question comes from Mark Hughes from SunTrust.

Thank you.

The sharp turnaround in the UK, how much of that was a ramp up in the new business, and then is that pace sustainable?

The ramp up in the new business in the UK was very good.

As a matter of fact, this morning, David Margrett and I and Grahame had a review at the UK and, yes, I think it's sustainable.

And I think they are doing a great job with their pipelines.

We've examined -- we examine pipelines in place like it's a second breath.

UK, as you know, is UK and Ireland, UK was positive for the first time in a long time.

And Ireland still negative, but not as negative as it used to be.

That country, as you know, was staggered with the economic crisis over the last couple of years and is really getting down now to where it's negative growth is close to breakeven, so -- or zero.

So we are very happy about that.

We think that's going in a positive direction.

David, do you want to say anything?

No, I agree.

Across every segment we carry on seeing strong new business growth and we expect that to continue with the work we've put into our pipelines.

(Operator instructions) Our next question comes from Keith Walsh with Citi.

Just a follow up on the amortization of cash retention payments.

If you had $32 million this quarter and you write in the press release $26 million in Q2 09, so that the $6 million dollar variance, is that a good run rate thinking about the second half of the year, that it would be a $6 million pressure on your margin for next couple of quarters as well?

Yes, that's pretty accurate, Keith.

Thanks a lot.

Okay.

At this time, there are no further questions.

Okay.

Thank you everybody.

Have a nice day.

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