Willis Towers Watson PLC (WTW) 2010 Q4 法說會逐字稿

Welcome and thank you for standing by.

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

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

Today's conference is being recorded.

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

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

Kerry Colaiaro and Joe Plumeri.

You may begin.

Thank you and welcome to our fourth 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 of the call will be available through March 10, 2011 at 11.59 PM Eastern time by calling 888-568-0648 from within the US or 1-402-998-1531 from outside the US.

No pass code is needed.

Alternatively, the webcast replay can be accessed through the Investor Relations section of our 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 update the results of any update to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings, including our annual reports on Form 10K for the year ended December 31, 2009 and for the year ended December 31, 2010, which we expect to file by the end of February, as well as our earnings press release, for a more detailed discussion of the risk factors that may affect our results.

Copies maybe 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 GAAP to non-GAAP reconciliation can be found in our earnings press release.

I will now turn the call over to Joe.

Thank you Kelly Calaiaro.

I appreciate it.

Welcome and thank you for joining our call today.

On the call with me today are Grahame Millwater, our Group President, Vic Krauze, our new North American CEO and Mike Neborak, our CFO.

As usual, other members of the management team are also here and will be happy to answer any of your questions.

2010 was a great year for Willis and we finished strong.

In the fourth quarter, we continued to report exceptional 4% organic growth, even as the external environment, as you all know, remains largely the same as the last time we spoke.

We continue to win new business with each segment reporting double digit new business growth which we concentrate on very much here.

We continued to invest in our business, to drive this growth and we've delivered significant bottom-line expansion with adjusted earnings per share up 21% to $0.57.

In fact, the story of the fourth quarter was really the story of the year.

We also reported 4% organic growth for the full year.

With our entrenched sales culture, each segment reported double digit new business growth.

Our associates have done a great job of winning new business in an economic and rate environment that has remained tough in many countries where we do business.

Total productivity for FTE grew in each segment and rose 3% from last year to $193,000 for the whole Company.

We invested in the business and will continue to invest to ensure that we build for future growth, delivering adjusted operating margin of 23%.

You'll see that the rest of the story today is how we grow on that 23%.

We remain focused on actions that will allow us to return capital to shareholders.

2010 was a great year and we know, though, we know that we can do better.

We have plans to further build business for our 2011 and beyond and I will talk about that shortly.

But first, I want to run through some of the achievements in our segments.

First, North America.

Not much has changed in terms of the external environment.

The economic outlook remains uncertain with the recovery slow and unemployment stubbornly high.

The rate environment remains soft and there's little evidence of a turn.

In fact, we delivered flat organic growth in the fourth quarter with 3% net new business growth and a negative 3% rate headwind that was a bit worse than the 2% that we saw in the third quarter.

In this environment, flat organic growth for the quarter and for the year was a good result but again, we think we can do better.

And our producers are doing great, they continue to generate double digit new business growth and client retention was up, both of which you know, we concentrate on a great deal.

In terms of geographies, we saw particularly positive results from Canada and the Atlantic regions.

Employee benefits, our largest practice, was up 4%.

The third consecutive quarter of growth in an environment where unemployment is obviously a problem and a great result in a labor market that remained soft.

Construction was down mid-single digits in an area of the economy that is still not seeing much improvement.

We also continue to see good results in a number of specialty practice areas including Healthcare and Facultative, Reinsurance, among others.

North America's operating margin was down slightly to 25.1%, as the benefit from new business generation was offset by higher incentive compensation which is what we will talk about.

In both fourth quarter and throughout 2010, our North America segment has delivered better client retention and strong producer retention.

This is a great reflection of the success of our integration efforts and teamwork across our enhanced network.

Productivity for FTE was up 5% to $238,000 for 2010.

Up 5% in this environment we think is outstanding.

Let me turn to International now.

International continues to deliver excellent growth with organic growth in commissions and fees of 8% in the quarter and 6% for the full year.

New business generation remained in the double digits against a rate headwind of even worse than the US, up 4% in the quarter.

The strength and diversity of our International network is reflected in these results, even as some of the economies in which we operate remain pressured.

Latin America and Asia again delivered double digit growth with strong contributions from Brazil, Argentina and Chile in Latin America and China and Asia.

Continental Europe grew high single digits even as some of the economies in the region remain pressured.

We were very proud of that because, as you know, the Eurozone has been under great economic pressure.

Growth in the region was led by Denmark, Spain and Germany.

UK and Ireland business delivered positive organic growth in the mid-single digits, despite continuing to face challenging economic conditions, GDP growth in the UK turning negative in the fourth quarter.

Key revenue drivers this quarter were major accounts, Employee Benefits and Personal Risks and again, very proud of the UK and Ireland given the pressures of the economy.

International operating margin was 32.8%, up from 31.3% in the year ago quarter.

Just outstanding.

We had strong organic revenue growth which is partly offset by investments to support growth in unfavorable foreign currency movements.

The productivity for FTE was up 3% to $160,000 for 2010.

Let me now turn to Global.

We continue to see good growth in what is a seasonally light quarter for Global business segment and I want to reinforce that.

It's the lightest quarter for our Global business segment.

Global delivered 6% organic growth in both the quarter and the year against 1% rate headwind in the quarter.

Reinsurance had flat organic growth, continued strong new business generation, high double-digit growth even as clients continued to retain more risk.

Continued generally soft rate environment, January 1 renewal rates were down 5% to 10%.

In our Global specialties, we had mid-single digit organic growth led by energy, aerospace and marine.

Growth through strong new business and improved retention with continued rate softness.

In Faber & Dumas, we had a very good quarter driven by new business generation and cross selling success.

However, this unit is still impacted by a soft wholesale market.

As you know, that's our London-based wholesale market operation with continued pressure in the most economically sensitive lines like bloodstock, jewelry and fine arts.

Willis Capital Markets & Advisory had a good quarter from recurring business and transactions and we continue to build that pipeline and continue to be very excited about Willis Capital Markets.

Global operating margin of 10.7% was down from 12.2% in the prior year period.

Good organic growth was offset by unfavorable foreign currency movements, and lower investment income.

And the productivity for FTE was up again 2% to $365,000 for 2010.

So, that's the highlight of the quarter, it's the highlight of our businesses.

Now let me turn to 2011.

We are always looking ahead and I'm excited about the future we are building.

You are going to hear about a plan, you are going to hear about us aggressively going after significantly growing our margins, and our earnings per share and that's what this is all about.

Willis in the 21st-century has been defined by three specific chapters.

In a large part, these prior chapters have been internally focused.

In 2010, we developed the Willis Cause which is our value proposition to our clients and rolled out internally.

In 2011, we begin chapter four by evolving to deliver the Willis Cause which is why we are doing the things that we are doing so that our value proposition, which is the Willis Cause, differentiates us and allows us to grow our business in an outsized way.

I am pleased with what we have done in the past.

We know we can do better.

2011 presents us with some unique challenges that we are addressing head-on and they involve costs and they involve the evolution of our business model.

So there are two challenges that we face in 2011.

Our costs, which are unique to 2011, and the evolution of our business model.

Now, let me talk about the first challenge, which is our cost.

Salary and benefits expense will include an increase of approximately $100 million in 2011 compared with 2010 as a result of three things.

All of these things premeditated, all of the things that we know we are doing, because we need to grow our business, retain our people, do the right thing.

One, is a higher amortization of cash retention payments.

It's the way we pay our people, we amortize it going forward, there's a big payment in 2011 and that is the reason that we have this unique experience that we have to deal with in 2011.

The reinstatement of salary reviews for all employees after two years of no salary reviews is the right thing to do.

We want to face that challenge head-on and the reinstatement of 401(k) match for our North American employees, again, is the right thing to do.

All of these three things are unique to a converging in 2011.

About $20 million to $25 million will continue through 2012 as an incremental expense.

In addition, obviously to the normal course growth but most of that goes away in 2012.

In addition, to support our growth strategy and continued execution of the Willis Cause through 2011 and beyond, we have to continue investing in technology, advanced analytics, product innovation and industry talent and expertise.

So, that's the cost challenge of 2011 that we address head-on by virtue of our plan.

Now, the second piece, is to evolve our business model, the Willis Cause, our value proposition, so that we can continue to grow our revenue at the pace that we do, continue to evolve that model and invest in that business.

The evolution of Willis brings a realignment of our business model, to future grow the Company and deliver the value proposition to clients.

It's the realignment of our resources against that model.

We are instituting target operating models in our business units and corporate center.

We are segmenting our business and focusing resources on client delivery.

We are connecting the dots through our business to deliver the Cause to our clients and we are redefining our culture of externally around the Cause and internally around new core values.

We will take better advantage of our service centers in Ipswich, Nashville and Mumbai by relocating a number of roles where they can be performed more efficiently.

We have also identified a number of revenue additions, all linked to delivering the Cause.

We are doing very well but there is still great untapped potential in each of our businesses and importantly, even more when we connect the dots and link our businesses together to better serve our clients.

These investments are important for our future but must be supported.

As a result, in order to fund the investments and the increase in salaries and benefits expense, we are undertaking a full operational review to be completed in the first quarter of 2011, and all the businesses to better realign our resources with our growth strategies which should generate meaningful savings.

In 2011, for example, we expect to deliver modest adjusted margin expansion and adjusted EPS growth, including estimated cost savings of between $65 million to $80 million.

In 2012, and beyond, that should accelerate to significant adjusted margin expansion and adjusted EPS growth, including estimated cost savings of $90 million to $100 million.

What is this all about?

This is all about not growing moderately or modestly year-over-year.

We have high margins, it's 23%, I'm constantly asked, "when are your margins going to catch up with your revenues?" You can't do that unless you take aggressive actions to do that in the years to come.

Because, we don't want to be moderate, we don't want to be modest, we want to grow significantly in all areas.

This is in the Company that likes modest.

And, we are serious about accelerating our margin and our earnings growth and everything Grahame and I are outlining today will put us in better position to deliver this year and into future especially.

Grahame?

Thank you, Joe.

Good morning everyone.

Over the last five years Willis has successfully executed a number of initiatives that have enabled us to navigate a very difficult environment.

Just to remind you, that some of those initiatives.

We initiated a program in 2005 to replace lost contingent commission by increasing our original commissions.

We achieved our goals.

We outlined a program of change in 2007, called Shaping Our Future.

This was a series of initiatives involving technology, process change, placement and client profitability.

We set a target of $100 million in net benefits to be achieved by the end of 2010, which we outlined to you.

We delivered this, a year ahead of plan, and cumulative net benefits at the end of 2010, from this program were over $150 million.

With the acquisition of HRH in the fourth quarter of 2008, we identified initial integration synergies of $100 million.

In 2009, against the backdrop of economic and financial turmoil, we also implemented a Right Sizing program.

The combination of HRH integration synergies and Right Sizing Willis generate cost savings of well over $200 million.

With the HRH integration completed, we refocused on revenue growth.

Our organic growth in commissions and fees doubled from 2% in 2009, to 4% in 2010.

And in 2010, as Joe outlined, each business segment grew new business by double digits.

As you can see, we have a successful track record of planning, execution and delivery.

As Joe outlined, we are now embarking on a fundamental restructuring of the Company.

To further drive our growth ambitions and deliver our future margin expansion aspirations.

We have planned, we are executing and we will deliver.

Most of the gross initiatives we have outlined to you on previous calls, for example, creating global solutions under Martin Sullivan to drive growth in our accounts segment, launching last year, our industry focused middle market sales initiative, rolling out our unique small commercial network franchise model that we developed in the UK internationally and globally.

The appointment of sales professionals in all of our major businesses to drive new business, growth and retention through a relentless focus on metrics and process.

Creating a global placement organization that is driving aggregation by our facilities, optimization of our commission levels, technology development and process to manage the $45 billion of premium we placed into the global markets.

As you know, this is all work in progress, and we are very satisfied with that progress.

However, we now believe we are at a stage where we are confident enough and we have done enough foundation work to look more radically at our business model.

This business model is driven by how we deliver our value proposition to all our client segments in a differentiated, but also more consistent and more efficient manner.

Now, there are four core strands to this work.

Firstly, the creation of Willis Global to bring both cost synergies that much more importantly, enormous skill and knowledge synergies for a more formal integration of our global businesses.

And, you will have seen a series of announcements we made this week regarding the next stage of this program.

Secondly, a much closer alignment of our global retail network.

Frankly, 80% of what we do in each retail branch is virtually identical and we can derive great synergies from a more consistent application of our business practices and our processes.

Thirdly, and much more aggressive application of our target operating model, to both our businesses and our corporate infrastructure.

And, a key element of that as Joe mentioned, is the optimum use of locations, including our regional service centers and our unique offshore locations such as Mumbai.

We are also embarking on a program of associate engagement.

We intend to retain and attract the top talent in the industry.

This takes investment, as Joe outlined earlier.

However, in order to nurture our top talent, this also requires us to continue to [performance] manage those who are not performing so well and also ensure those roles will [toss], no longer delivering the value we require are addressed.

This more radical approach to our business is entitled, [Delivering the Cores] and our leadership team globally is completely as one in their determination to execute on this program.

The restructuring charge Joe has referred to enables us to aggressively initiate this program in 2011, right across the organization.

And we also believe this program will continue to enable us to deliver both industry-leading, organic revenue growth and yet still allow us to grow our margins over time.

And with that, I will turn the call over to Michael Neborak, our CFO, to review financial results.

Michael?

Thank you Grahame.

We reported earnings in the fourth quarter 2010 of $98 million, or $0.57 per share compared to $79 million or $0.47 per share in the same period a year ago.

That's up 21%.

Adjusted earnings for the quarter ended December 31, 2010 was $98 million or $0.50 per share compared to $80 million or $0.40 per share in the same period a year ago.

Fourth quarter 2010 earnings per share were up positively impacted by $0.04 from non-recurring tax credits and negatively impacted by $0.07 from foreign exchange.

The negative $0.07 per share impact from foreign exchange reduced the fourth quarter operating margin by 150 basis points year over year.

The principal drivers of the negative impacts were, one, dollar strength against the Euro where we are overweight on the revenue side in hedging losses and reevaluation of non-dollar denominated positions in our primary UK trading Company, Willis Limited.

For the full-year 2010, FX had a positive impact of $0.04 per share in adjusted EPS and a positive 40 basis point impact on operating margin.

On the revenue side, our revenues increased 1% to $835 million in the fourth quarter of 2010, compared with a year ago period, and increased 2% for the full year to $3.3 billion.

Reported commissions and fees grew 2% in the fourth quarter to $825 million and were up 3% for the year to $3.3 billion.

It is important to note that the reported commissions and fee growth of 2% in the fourth quarter was negatively impacted by 200 basis points from foreign exchange movements.

Again, organic growth was 4%.

As we noted in our earnings release, a change in accounting treatment and an acquired specialty business in North America resulted in a $5 million favorable impact to commissions and fees in the fourth quarter with a corresponding 1% favorable impact to North America's organic commissions and fees growth and a 1% favorable impact to consolidated organic commissions and fees growth.

Total investment income declined $6 million or 40% to $9 million versus the fourth quarter of 2009, with lower interest rates the principal driver.

Full-year 2010 investment income was $38 million.

We currently estimate that investment income in 2011 will be closer to $30 million for the full year.

On the expense side, total operating expenses were up 1% to $658 million compared to the fourth-quarter 2009.

Salaries and benefits were $469 million or 56.2% of total revenues in the current quarter, compared to $455 million or 55.2% in the fourth quarter 2009.

The 3% increase in salaries and benefits was primarily due to higher incentive compensation, moderated by favorable foreign exchange currency movements on the expense side of our income statement.

In fourth-quarter 2010, salaries and benefits included $31 million of expense related to the amortization of cash retention awards compared to $22 million in the year ago quarter.

Amortization of cash retention awards for full-year 2010 was $119 million compared to $88 million in 2009, a $31 million increase.

Assuming a similar level of cash retention awards are paid in 2011, amortization will be approximately $184 million in 2011 or $65 million higher than in 2010.

Other operating expenses were down 8.4% to $153 million in the fourth quarter, compared to $167 million in the year ago quarter, reflecting disciplined cost management and the absence of approximately $13 million of integration and redomicile expenses that we recorded in the fourth quarter of 2009.

Depreciation and amortization of intangibles were each $18 million in the fourth quarter 2010.

We expect full-year 2011 depreciation expense and intangibles for amortization to be approximately $75 million and $65 million, respectively.

Our operating margin-- reported and adjusted operating margin for the fourth quarter was 21.2%, an increase of 20 basis points and 10 basis points, respectively over reported and adjusted operating margin in the year ago quarter.

Adjusted operating margin was positively impacted by continued organic growth in commissions and fees and rigorous expense management.

These positives were partially offset by higher incentive producer compensation, unfavorable foreign currency movements and lower investment income.

On the tax side, our income tax expense for the year was $140 million compared to $96 million in the prior year.

The effective tax rate was 20.7% for the quarter and 23.9% for the full-year 2010, favorably impacted by non-recurring tax credits.

The underlying effective tax rate for both the quarter and the year was approximately 26%, the same as the full year 2009 rate.

Our earnings from associates was a loss of $4 million in the fourth quarter compared with a loss of $9 million in the year ago quarter, primarily due to our reduced ownership of Gras Savoye.

Please note that historically we've recorded losses in the fourth quarter from our investment in associates.

On the pension side, our UK, US and international defined benefit pension plans had a combined surplus of approximately $15 million at the end of 2010 on a US GAAP basis, up from a deficit of approximately $120 million at year-end 2009, principally due to cash contributions that we made to the plan during 2010, and strong investment returns.

[Cash] contributions to the pension plan were $42 million in the fourth quarter, and $130 million for all of 2010.

Pension expense was $8 million in the quarter and $35 million for all of 2010.

Looking forward we currently expect to make cash contributions to the pension plan of approximately $125 million during 2011.

In terms of our debt and capital management, total debt including the revolver was at $2.3 billion at the end of the fourth order in line with where we are at the end of the third quarter.

The leverage ratio at year-end was 2.4 times as calculated under the term loan covenants, cash and cash equivalents were $316 million, and we generated approximately $230 million in cash from operating activities during the fourth quarter and approximately $510 million for the full year 2010.

On the balance sheet, in terms of some of the disclosures that we made we've enhanced those disclosures and in particular, I point you to our balance sheet which is now classified where we have separated fiduciary assets and liabilities from the Willis-owned accounts receivables and payables.

This will help facilitate the calculation of working capital changes in terms of the cash flows that the Company generates.

Also I'll point out that included in fiduciary assets is fiduciary cash of approximately $1.7 billion.

Let me now turn to 2011.

As we indicated in our press release, salaries and benefit expenses are expected to include an increase over and above normal cost growth of around $100 million in 2011 compared to 2010 as a result of higher amortization of cash retention payments, reinstatement of annual salary reviews of all employees, and reinstatement of the 401(k) match for North American employees.

It is important to note that these items are expected to increase 2012 expenses by only $20 million to $25 million.

But the $100 million in 2011 and the $20 million to $25 million in 2012 are over and above normal growth in salaries and benefits.

As Joe and Grahame mentioned earlier, we are undertaking an operational review to be completed during the first quarter of 2011, of all our businesses to better align resources with our growth strategies.

We estimate that this review will result in a pre-tax charge of approximately $100 million to $130 million, largely recorded in the first quarter of 2011.

Furthermore, these actions are expected to generate cost savings of $65 million to $80 million during 2011, reaching annualized savings of approximately $90 million to $100 million in 2012.

Finally, I will talk a little bit about our capital management strategy, as we've stated previously, we are committed to debt reduction and returning capital to shareholders.

Consistent with the strategy, we are reviewing our current debt profile and subject to market conditions, we may take advantage of attractive financing rates to reduce the cost and extend the maturity profile of our debt.

Among the actions we are considering, is the payment of a make-whole premium to redeem the $500 million in aggregate principal amount of 12.875% senior notes that are due in 2016.

If those notes due in 2016 had been redeemed at the end of December 2010, a one-time pre-tax charge of approximately $80 million would have been incurred.

Relating to the make-whole and calculated under the terms that govern the indenture for those notes.

With that, I will turn it back to Joe.

Thank you Mike.

So let me conclude.

We had a great 2010, strong organic growth of 4%, with an adjusted operating margin of 23%.

Those are not easy accomplishments.

It's not easy in this environment to grow significantly your margins from 23%.

If it were easy, everybody would do it.

What we have been talking about today is an ability to be able to significantly grow them higher than the 23%.

We are not satisfied with that.

We are not satisfied with moderately growing our earnings per share, we want to do better than that.

To do better than that, you have to attack the problem aggressively as we have outlined today.

So, there's two issues.

2011 costs and the ability to be able to grow our operating model so that it creates more revenue and it creates more efficiency.

And, we are doing both of those things in tandem to aggressively grow our business and grow our business model.

We feel very good about our ability to be able to do that, and to be able to grow our business this year on a moderate basis and then significantly be able to break out next year and the entire Company is excited about doing that.

We will be glad to answer any questions that you have.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions) Keith Walsh of Citi.

First question around the Goldman debt.

I just want to clarify something I think Mike had said that it was a potential $80 million charge and the release says $180 million so I just want to make sure --

He meant $180 million.

He didn't have enough coffee today.

Around the Goldman debt, I guess the question would be -- I understand optically how it would be beneficial to remove that from your income statement and balance sheet, but it seems like that would be a non-economic move, right, versus, say, share repurchase.

So I just wanted to see your philosophy behind that and why that is good for shareholders?

Sure.

It's a good question.

You know the rate environment today is pretty good.

I don't know what the rate environment is going to be in 2013.

We looked at it -- we looked at the Delta in terms of doing it today versus doing in 2013, and when you look at the debt environment and you look at the deals that been done, they've been done pretty favorably.

We think that, that arbitrage between what we can maybe borrow at today or what we can maybe borrow in 2013 it makes a lot of sense if you believe rates are pretty low.

So, that's the thinking behind it.

It's not a question of just the OpEx and it's not just a question of getting rid of the expense associated with it.

It's a question of the timing seeming to be right now for the arbitrage to work.

Yes, Keith, as Joe mentioned we looked at this quite a bit and we're still looking at it so what we've outlined here is just some of our thoughts.

But our view right now in the fall of 2013 when we can call these notes at a 6% premium is that rates are going to be materially higher than where they are today and based on that, is really what drives the economics.

And then just regarding cash, I know -- I understand you're going to be incurring some charges to get expense saves and we've seen that from all of your competitors as well.But just thinking about how does that impact the buyback, I would assume that gets pushed back as a result of incurring cash charges on lowering costs.

We have not, as part of this entire plan, we have not said, let's just put buybacks in a box and it will come out another day.

It's still part of the mix.

We will wait for the timing to be right.

It has to do with the sequencing of events that take care of all these issues.

But that's still on our mind, Keith.

And if I could just sneak one, quick one, one last one for Mike.

Just the margin, I heard you talk about it moved.

What was the underlying movement excluding FX in the fourth quarter?

It was plus 150 basis points from what we reported so we reported 21.2 so add a 150 basis points to that.

Okay, so FX helped your margin in the quarter?

No, it hurt our margin.

It hurt your margin.

I just wanted to understand that.

Thanks a lot.

Thomas Mitchell from Miller Tabak & Co.

Just thinking about this a little bit in perspective, the last time your stock price was this high, or even maybe a little bit higher, if we go back to the spring of 2007.

My notes, which I admit are a little bit scribbled, say that as I recall your plans at that point were, by about this time, to get your operating margins to close to 30%, and the math that went with the operating margins and what you expected to accomplish got us actually close to $3.50 to $4.00 a share of earnings by now.

As I look at the 76% increase in the incentive compensation that is the cash, rather than the amortization portion, I am beginning to wonder how you expect to get the margins and the earnings up going forward in a way that becomes credible given the record since 2007?

Let me take you back to 2007, Thomas, and a little bit of a history lesson.

Since 2007, when we reported we were going to grow our margins and I will tell you specifically what we said, 24%, 26% and 28% in those three years when we had an Investor day.

Since that time, a couple things that happened that changed the world a little bit.

Number one, you've had an exceedingly and not necessarily in this order -- an exceedingly softer market than everybody expected, number one, and we still outperformed everybody in that environment.

Number two, you had an economic breakdown that most people compared to a Great Depression.

That changed matters significantly and, three, we did a major acquisition of Hilb Rogal & Hobbs in June that we announced in the June of 2008 and between June of 2008 and October of 2008, the credit markets fell apart and the world fell apart and companies went out of business.

So, I think, it doesn't make for a good comparison to talk about what we are doing today versus what happened in 2007 and all the events that transpired since then so it's a little bit different.

If we're talking about apples to apples, then your point could be well made but we are talking about apples to pears, grapes and everything else.

So, what we are trying to do here is take a very good performance, our margins at 23% are high relatively speaking to other people especially in the global environment.

Were not satisfied with that.

People ask me continuously and appropriately on this call, when are your margins going to grow at the same rate that your revenue grows?

That's an appropriate question.

And, they haven't grown because of the two issues that I'm making reference to, especially 2011 and growing the operating model and we're trying to attack that rather than continually say on these calls that we are satisfied with margin improvement that is moderate.

So the actions that we are taking are actions that are required for 2011 and beyond to be able to grow this business, grow the margins and make our shareholder returns even better than they have been in the past.

So the comparison between the two is simply doesn't hold water.

So what about the difference between the growth in shareholder earnings and the growth in incentive compensation which is light-years above what your organic growth is?

The incentive compensation has to do with the methodology with which we pay our people and because we amortized the retention payments going forward, we find that the amortization in 2011 finds its zenith, its greatest level in 2011.

And we are trying to attack that.

That $65 million I referred to is the $65 million that Mike referred to.

In '12 and beyond, it abates.

It starts to level out and that's what I say by going away, it just simply goes down drastically from there.

It's the way we've kept our people, it's the way our margins have stayed up there, it's the way our revenues grow at 4%, it's the reason why the business operates the way it does.

Okay.

Thanks.

Jay Gelb, Barclays Capital.

Thank you.

On the guidance, I wanted to confirm that the baseline we should be using for earnings growth in 2011 is $2.75, is that right?

Yes that's right.

Okay and then so, what should we -- I think you make mention in the release, talking about accelerating operating margin and earnings growth in 2012.

What is the driver there and what's the goal?

The driver there is obviously by the efficiencies that we get from the charge, not necessarily in this order, that drives it.

You heard about the savings this year and next year.

Additionally, the three things that drive the cost this year, the biggest of which is the amortization of retention, which is the $65 million as Mike mentioned.

That $65 million grows at a less pace, if you will, in 2012, so that piece doesn't go away but it grows drastically less in 2012 which also helps to significantly grow the margins and the earnings per share.

So, that the convergence of those factors, plus what we think will be more efficiencies that we add to that business because of the operational restructuring of the model in the Willis Cause, plus I think, continuing to grow our revenue which allows us to segment our business and be able to grow.

If you look at all of that, as they converge together, we are looking very, very good as we continue to grow this business in '11 and '12 especially.

And the margins or earnings growth goal there, Joe?

Yes, that's why said in 2011, you can expect moderate margin increase over 23%, and as I said, that's not easy.

23% is high in a terrible environment, but we are still doing well and as I said, if it was easy, everybody would do it.

But we are not happy with that.

We're not happy with saying that the environment is bad and the market is soft, et cetera, and we're going to grow by basis points.

That's not what we do here.

So, we are going to be moderate in '11 in earnings per share growth and margin growth, but significantly grow our margins in '12 and significantly grow earnings per share in '12 as well.

That's what this is all about, it's to make the next step forward irrespective of the market environment.

If the market environment turns, God bless us all.

If it doesn't, it doesn't matter, we are going to significantly grow this business.

And then more broadly, for the restructuring, is this an issue where there is increased competition for talent?

Is that what's driving this or is it something else?

No, it's not -- that's not at all.

It's always increased competition for talent.

It's the things that I outlined, Jay, it's the cost of challenge in 2011 and the amortization of the retention awards and it's again, taking our business and saying, how can we deliver a better model locally so that we offer our clients the best possible advice and consultation while we are doing the operational parts and the processing parts someplace else which makes it more efficient.

To do that, we've got relocation issues; to do that, we have people issues; to do that, we have technology issues; to do that, we need to be able to attack the problem all at once; that's the reason for the charge, and that's the reason for when all of this is done, we believe significantly you will have margin improvement and earnings improvement.

Matthew Heimermann, JPMorgan.

A couple questions, I guess first, with respect to the restructuring plan, could you just give us a sense of how much of that is going to benefit [SME]versus the G&A, just percentage terms at completion?

It's too -- I'll let Mike answer that before I do, but it's too early because what we said was in our comments is that at the first quarter we are going to look at all of the issues having to do with SME, with people issues and all that stuff.

We think we have an idea, obviously because we've heard from our operating divisions as to what that might be.

But we won't know fully until the end of first quarter, that's what the first quarter is about.

Okay.

That's right, Matt, we are hard at work at that and during the first quarter, we'll obviously have the answers to all of that when we report our earnings.

All right.

That's fair.

I'll follow-up next quarter on that then.

Healthcare reform both obviously both pluses and minuses have been in the news.

I would just be curious, could you remind us how much of your business is related to the placing of traditional and employee benefits healthcare plans and just what the split is, large case versus small case and fee versus commission?

It's a total, in terms of percentage, it's 15% on a worldwide basis and it's a little bit more than that in the US.

And, basically, the business is almost totally middle market versus large accounts.

Okay, so --

By the way that growth of 4% in the US, given the economy, which I said in my comments, we're very excited about.

We have less jobs and our business is the placement of healthcare for companies against the backdrop of less employment, we think is very, very good and we're excited about that as the economy improves, that's even going to get better.

Yes.

And is that predominantly then commission business?

It's predominantly commission business, almost exclusively.

Okay.

Thank you.

That's helpful.

And I guess the last question I had is just specific to global.

I know that this is usually a weak quarter for global, but the margin was a little bit softer than I thought and I just may have mis-estimated but is there any -- sorry, does the amortization of the retention award disproportionately impact global versus some of the other segments?

Or is there -- could you give us a sense of how to think about that expense pressure in the quarter?

No, not at all.

It's evenly dispersed across the Company.

Okay.

All right.

Much appreciated, thanks.

Mark Hughes, SunTrust.

Just to follow-up on that, with healthcare reform, what's your assessment of what that will do to commission rates?

Are you seeing any movement or any rumblings yet?

No, not at all.

We haven't -- nothing has really happened yet as it relates to healthcare.

There's just been a lot of discussion.

We know what the law said, we don't know what the amendments may or may not be, but all I can say is that I am really heartened by the infrastructure that we have in the US which is where primarily we place healthcare benefits.

Our employee benefits in the US is defined, Mike, as healthcare.

And you can grow 4%, 5% in an environment where you've got less employees.

We have a great value proposition, because what's happening now is that employers are looking for advice and consultation in terms of what to tell their employees and using us to help them consult with their employees and advise them and give them the right direction as it relates to healthcare.

So, what we found is, is that the healthcare reform has gotten more complicated, they've had to turn more to people that understand how to help them do that with their employees.

So, the business has been good, we think it will get better as the economy gets better, as there's more employees, you're giving benefits on a per employee basis which should get better.

So if you think the economy will get better there will be more jobs, and you think that healthcare continues to have to be uncomplicated by somebody, and to be advised and consulted by somebody, then we think we are in a great spot, especially in North America.

In the rest of the world, our business is mixed from healthcare to pensions and a lot more pension mix as you go further east.

Right.

The global business, I think you suggested there was a down one rate headwind.

How did that breakout generally between Reinsurance and the Specialties business?

It's Grahame here.

Generally speaking across all segments, we've seen the rate pressure as we mentioned in the script.

In Reinsurance, we saw just in general renewals at 5% to 10% down and that's what we saw towards the end of last year.

But, in all reality it's virtually every single segment.

We are seeing pressures still continued, downward pressure.

So it's across the board.

Okay.

Thank you.

Dan Farrell from Stern Agee.

I was wondering if you could talk a little bit more about the expense restructure?I realize you are still in the midst of it but when we think about what you've done so far you've had great success in the track record obviously an expense savings that you took out in HRH, but you've also had really an ongoing effort, I think, on overall operational efficiencies which is Shaping the Future.

So it seems like some of these things that you might be looking at you've already had an ongoing [profits] in looking at them and so it seems like a tough task to take out even more expenses, so I was wondering if you could just comment a little bit about that?

Yes, what's allowed us, Dan, to grow to 23% are all the things that we talked about in the past, the Shaping Our Future, the integration of HRH, the successful programs and projects that we've had.

Okay.

So, that has given us the ability in a very tough environment, in a soft market environment, to grow the revenues better than everybody else, it appears.

I don't say that arrogantly but it appears against everybody else is reporting, and 23% is high.

That's what got us there.

Now, what do you do?

Because I am constantly asked by everybody again, appropriately, what do you do now that you've done that?

I am going to expect that the environment is going to stay the same for quite some time.

I don't know when it's going to change.

You can't play casino with the economy or the market.

What do you do about that?

So, we've outlined today is an aggressive approach to do something about that.

So, what we've done in the past got us to where we are, and then the question about what do you do next, we are trying to answer for you in an aggressive way.

I also think one of the key points to that we've done in Shaping the Future, is understand that all part of the benefits that we've derived from Shaping the Future has surpassed our expectation in that period.

But an awful lot of that work has been foundation work and proof of concepts which will enable us to go to the next stage.

So if you look at what we did, we changed the platform in London, in terms of the process and technology and we then went on to the UK retail.

We haven't actually really begun that in earnest in either the US or the international businesses.

But the experience of what we've done has given us great confidence that we can do that.

If you look at what we've done on placement, we've launched some technology that we are going to roll out across the world, we piloted it in Italy at the tail end of last year.

It was very successful, that's given us confidence to drive that forward.

So what Shaping the Future has done, we've actually delivered the benefits, surpassed the benefits we said, which is giving us great experience and foundation work to know that we have the confidence and the proof of concepts to take that on a more aggressive basis.

Shaping Our Future, Dan, is basically a prelude to the Cause so we've done this in some places.

Now we are just expanding it in huge parts of geography and very big parts of our business that we haven't done that with plus other initiatives that we've outlined.

That's why we feel so confident that we can do that.

And the result of all of that is going to be significantly higher margins in the face of a continuing environment that we suspect will stay the same for a long time.

So, that's what's exciting about this.

This is nothing new.

Okay.

Thank you very much.

Cliff Gallant from KBW.

I just want to ask about the Reinsurance segment and the growth you're seeing in there.

Is it just a small number of large accounts, is it across the board, are there certain geographies or lines of business that you are having particular success in?

It's Peter Hearn.We've seen growth in our emerging markets, and in the United States.

It's a function of our entire portfolio -- specialty, small, regional and large accounts.

And it's really just share gain then, is that a fair comment?

Yes.

Thank you.

Jay Cohen from Merrill Lynch.

The first question is these added expenses, in 2011.

They feel a bit like a catch up, almost as if that money probably should have been spent over the past several years and now you've got to step up and do things like match the 401(k).

Is it fair to look and say the margins over the past several years may have been a little inflated because those expenses weren't spent?

No, I don't think the word is inflated.

I mean a lot of people froze their 401(k) match, a lot of people froze salaries.

Not at all.

We chose to pay a retention award to our people so we can continue to reward them and pay them.

As a result, our productivity count, if you will, and the number of people who produce business has stayed the same if not grown.

So, no, I wouldn't call it that all.

This is simply, it's time to reward our people, it's time to reinstate the 401(k), it's time to give salary reviews, they've worked hard, so I don't think it's a catch up at all.

If that were the case, everybody -- most people in last couple years did those things and I don't think that they inflated anything.

That's fair.

Next question.

Pension expense, can you talk about what it was, the actual expense in 2010 and what the expectation is for 2011?

So, for all of 2010, pension expense was $35 million and the estimate for 2011 is somewhere around $15 million.

Okay.

That's a bit of an offset then to some of these added expenses.

Yes, that would be.

Great.

Thank you.

Brian Meredith from UBS.

Good morning.

Most questions have been answered here.

You guys did great job walking through everything.

Just quickly, capital markets business.

Could you give us a sense of what the year-over-year growth in that business was?

How much did that contribute to the Global Specialties growth rate in the quarter?

Well, as you know, that first of all, I will tell you we're ecstatic about our Capital Markets business.

Last year was the first year out of the box and it was accretive, first year out of the box.

We hired a lot of people, began that business from scratch, Tony Ursano leads it.

He's well-known in the insurance industry and all I can tell you is that we expect, given the pipeline and given our success in the first year, that, A, it was accretive in the first year, B, the pipeline is big.

If you think there is going to be consolidations, people need advice, capital management, et cetera, in the insurance sector, we are poised to do that.

We have done -- we've been very successful in getting our cap bond operation off the ground.

We've been on the cover of a couple of offerings, so I couldn't be more pleased at what we've done.

Great.

Thank you.

Vincent DeAugustino with Stifel Nicolaus.

Just curious what's the normal expense growth that Mike had talked about earlier in the prepared comments?

I'm sorry.

Say that again please, Vince?

I couldn't hear.

Sure, earlier Mike had responded to -- just mentioned that there is a normal cost growth component.

I'm just curious what that normal growth in expenses would normally be?

Yes, what we meant was that $25 million will continue -- will be incremental in 2012.

I told you that the $65 million will basically fall away, because the rate of that growth will not continue like that because it's the height of amortization retention cycle.

And then you're looking at normal growth and normal growth in this place is usually what we've been experiencing over the last couple of years.

Okay.

Great.

And then just getting back on the employee benefits side.

So one of the things that we've heard from a number of different competitors is they're seeing a shift with some carriers from a commission-based fee structure to that of a straight up fee.

I'm just curious if you're seeing any shifts towards that.

I know you mentioned earlier that you're mostly commission, but what I'm most curious about is if we go to a fee-based compensation structure, do we lose the revenue ratcheting component of a commission off of an increasing insurance premium rate environment?

We have no, we have had Vince -- it's a good question.

There's been a lot of talk about shifting to fees from commissions.

We have but nothing been done, it's just been a lot of talk just like there was talk when I got in this business about whether or not people could go direct and not have a broker.

I mean, it's that kind of thing.

We've had no discussions with any carriers or clients about the way we get paid.

Most of our business, 70% of our business worldwide, is commission-based.

It's done with middle market for the most part, clients and SME-based kinds of clients and it would be very difficult to come up with a fee structure that would change the world dramatically with that kind of a base.

So, we've had no discussions at any point other than maybe people mentioning it at a conference or something, but we have had no substantive conversations in that regard.

I imagine if you were to have a case where that would happen, on year one, I'd imagine you guys would be pretty successful in negotiating a level fee if you did have to go from commission to a fee.

So, in year one if it's flat, does -- come year two, three and four, is it harder to go back if you had to go to a fee to ask for more compensation, just in those future years off of the first one?

First of all, we don't even have it in a model, because it's such a remote possibility that we haven't even thought about it, and I mean that sincerely.

If your hypothetical question is could you go back and get in fee, would you get it out of commission which I guess is what you're asking me is -- we don't know.

What we can tell you is that part of Shaping Our Future which Grahame mention that we've done successfully had to do with client profitability which gave us the ability to go back to our clients that we thought were not profitable, that we didn't charge enough and drastically increase our ability to get paid for the services that we provided which was very successful when we did it.

So if hypothetically you're asking me, we could go back and get paid in fee what we got paid in commission, we have got a good track record of doing that so, I think if that happened it would not be a problem.

But I don't think that, that's anywhere near in the cards.

Great.

Thanks so much.

(Operator Instructions) Keith Walsh from Citi.

I just had one follow-up.

When you're thinking about and please correct me if I'm wrong, I think you said some modest growth off the $2.75 adjusted EPS for 2011, are you including any gains from the potential retirement of the Goldman debt in the number?

Or is this a pure EBIT number?

Did you get that Keith?

I didn't hear you.

I'm sorry.

He said yes.

So you're including the retirement of the Goldman debt potentially in growth over $2.75?

$2.75.

Okay.

Thanks a lot.

At this time, I have no further questions.

Okay, thanks everybody.

Have a great day.