Willis Towers Watson PLC (WTW) 2011 Q2 法說會逐字稿

Thank you for standing by and welcome to today's conference.

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

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

(Operator Instructions)

Today's conference call is being recorded.

If you have any objections you may disconnect.

I will now introduce your conference host, Mr.

Mark Jones.

Thank you and welcome to our second quarter 2011 earnings conference call and webcast.

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

A replay of the call will be available through September 4 by calling 866-458-4762 from within the US or, internationally, country code 1 then to 203-369-1319.

No passcode is needed.

The webcast replay can be accessed through the Investor Relations section of our website www.willis.com.

If you have any questions after the call, my direct line is 212-915-8796.

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 report on form 10-K for the year ended December 31, 2010 and subsequent filings as well as our earnings press release for a more detailed discussion of the risk factors that may affect our results.

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

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

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

With that, I will now turn the call over to Joe.

Thank you very much, and welcome and thank you for joining our call today.

On the call with me are Grahame Millwater our Group President; Vic Krauze, CEO of North America; Michael Neborak, CFO of our Company; and Peter Hearn who is the Chairman of Willis Re.

As usual there are other members of the Management team who are also here with me today and they will be happy to answer any questions that you have.

Let me review the second quarter for you.

We set out clear targets for what we wanted to achieve this year and let me just remind you what that was so I can put this in context.

We said that we would undertake an operational review to better align our resources with our growth strategies and generate meaningful savings.

We said we would take a charge to implement these changes and we would roll out our growth initiatives and review our balance sheet.

That is what we set out back in February when we told you what our goals and objectives for the year was.

We also said that we expected these actions would help us deliver modest growth in both adjusted operating margin and adjusted earnings per share.

Even as we knew costs would increase, we knew this at the beginning of the year and we said this back in February, we said that we were going to have higher retention award amortizations.

We knew that the amortization of our retention award, which is the way that we pay our people in this Company, would be much higher.

We told you what that would be.

The reinstatement of salary reviews and the reinstatement of 401(k), which as you have seen, is the reason why the S&B has gone up.

We knew that at the beginning of the year and that is the reason, one of the reasons, for the operational review.

I'm proud to say that we have delivered again on all of these targets in the second quarter, achieving solid financial results.

3% organic growth in organic commissions and fees in a quarter that on a comparative basis was difficult because there were some things that hit last year on a credit basis that did not hit this year, so that 3%, is better than it appears to be.

Modest adjusted operating margin expansion and 13% adjusted earnings per share growth.

We continue to focus on implementing the revenue and cost initiatives associated with our 2011 operational review.

Grahame is going to talk about that a little bit later.

The team is doing a great job of implementing these initiatives and the results are as we expected them to be.

For the first half of 2011, we have recorded $115 million of the extra expected total $130 million charge and realized around $23 million of the $65 million to $75 million in cost savings expected this year.

We wrapped up the redemption on the last piece of the Goldman debt and reduced the total debt and further strengthened the balance sheet, all which was a part of this grand plan this year to review our operations.

That was a major part of it.

Turning now to the growth in the quarter.

Organic growth in commissions and fees was up 3% over the prior year quarter, led by our international and global segments.

North America was flat compared to prior year, but I'm going to talk about that in a second.

Our net new business was up 4% driven by double-digit new business generation and retention of existing clients increased about 1.3% to 92%.

This was partly offset by 1% headwind from rate and other market factors.

When I say 1%, I mean that in the world.

In some places it was 1% to 2%; it varies depending upon where you are.

The external environment has not changed much the -- for the last time we spoke; you already know that.

We continue to face familiar issues in the quarter, with economic weakness and soft insurance rates in many countries and lines of business; that has not changed.

We've seeing economic conditions getting tougher in some of the European countries, including the UK, while the US economic recovery remains uneven at best.

In terms of the pricing, while we have seen some improvement in catastrophe-exposed property and some other specific lines, depending upon where you are geographically, there was still substantial capacity in the market and we don't expect the environment to change significantly any time soon.

And I might also add that exposures are basically unchanged.

That is to say, the amount of insurance that people are buying is basically the same.

That has not gone up.

Now let me talk about the various segments.

North America, the operating environment in North America has not changed a lot.

The economy continues to show signs of recovery, but it is uneven and it's not clear that the recovery will be sustained, if in fact there is a recovery at all.

I will leave that up to you.

Job growth is fast, but not fast enough, so unemployment is still high and that affects a couple of our main businesses -- Construction and Employee Benefits, which together combine about 34% of our business in North America.

The overall insurance rate environment is still soft, although somewhat less of a headwind than it has been, and I talked about exposures not changing much.

Organic growth was flat in the second quarter, with the rate headwind here about 1%.

While growth was better than the first quarter, operating conditions for our middle market clients are still difficult.

Against this, we still delivered new business generation and low double-digits while client retention calculated on a dollar basis, not a client basis, remained a solid 91%.

Even though I say solid, I think we can do better.

In terms of geographies, we saw good growth from the Atlantic region and also Canada.

Our Employee Benefits business, which is our largest practice, which is about 23%, 24%, grew low single-digits, which I think in this environment, when you are basically charging on a per-employee basis, when unemployment is high, is outstanding and shows the virtue of our value proposition in North America with regard to employee benefits.

We are also continuing to help clients work through the changes that are occurring in this area as a result of healthcare reform.

Construction, our next largest practice, remains down due to the economy and the lack of one-off stimulus-related business.

That business is a 10% or 11% kind of business in terms of percentage of the revenue, so 2 of our bigger practices affected by the economy, but we are still flat in North America, which is an outstanding result given the conditions.

I will talk more about that on a comparative basis to give you a little bit more cover.

Construction, remains down due to the economy and the lack of one-off stimulus-related business.

Both of these practices should benefit when the economy improves and further jobs are added.

Looking at our specialty business, we've [pocketed] specialty businesses before.

The healthcare practice did particularly well.

As we called out and mentioned in the release, one of our specialty businesses was down in large part to a tough comparison with the second quarter of 2010, when it benefited from a $2.9 million one-time accounting adjustment.

I'm making reference to our Loan Protector business, which does fourth place insurance, which we acquired as part of the HRH transaction in '08.

While we really like this business, it was also negatively impacted in the quarter by lower foreclosure levels and some changes in compensation agreements, which will also impact this business over the rest of the year.

If you exclude this impact of the one-time accounting adjustment, North America would have reported positive organic growth.

With flat organic growth in commissions and fees, North America's operating margin declined by 108 basis points to 18.6%.

But I am pleased at the fact that with the bad comparison with Loan Protector in the second quarter of last year with the account charge and lower commissions and the slowing down of foreclosures, not because of the economy, but the banks have given it a little bit of a reprieve on that.

That and the fact that EB and Construction still are struggling because of the economy, and we were still flat on a comparative basis quarter-by-quarter, I think our colleagues in North America are doing a great job and I just wanted to make you aware of the color and what that flat means.

Without the comparisons, it would've been very positive.

International had another good quarter of growth, reflecting the strength and diversity of our extensive network.

Organic growth in commissions and fees was 6%.

New business generation remained in the double digits against a rate headwind of 2% while retention grew to 94%.

Now you are seeing greater headwinds in the rest of the world than you are in the US, which is now catching up.

I wanted to make sure you understood that distinction.

We are really proud of the 94% retention.

Latin America, Eastern Europe delivered double-digit growth with strong contributions from Brazil, Colombia, and Venezuela in Latin America, and Russia in Eastern Europe.

Asia grew nicely, with strong double-digit growth from China.

Very proud of our Chinese operation and the way that is growing.

Continental Europe grew low single digits; a good result given the economic pressures that you are aware of and the number of countries in the region and what they face.

Growth in the region was led by, believe it or not, Spain and Denmark, which is just outstanding because the economy in Spain is well-known for its problems, and Denmark as well.

So we are very proud of the results there.

UK and Ireland business grew low single-digits with client retention higher.

We had good results even though there's pressure from weak economic growth in both countries.

The UK GDP growth was just 0.2% in second quarter after weakness in the 2 prior quarters and Ireland is still under a lot of economic pressure.

International operating margin was 21.5%, up 240 basis points from 19.1% in the year-ago quarter.

Margin growth was supported by strong growth in organic commissions and fees, together with favorable foreign currency movements, although this was partially offset by higher incentive compensation as we continue to invest in future growth.

Internationally, all goes well and continues to be a great contributor to this Company.

Our Global business segment, comprising Reinsurance, Global Specialties, London Market Wholesale, and Willis Capital Markets, performed exceedingly well, delivering 3% organic growth but a couple of those business really paved the way for great growth.

High single-digit growth, double-digit new business growth in North America, with continued strong growth in our International and Specialty businesses has been a lot of focus on the pricing environment for mid-year reinsurance renewals, given the cumulative impact from global catastrophes.

Insured losses over the past 16 months have cost reinsurers approximately $48 billion and insurers $86 billion.

And the RMS v11 model changes, the reinsurance market as a whole has reacted reasonably logically with a differentiator approach driven on case-by-case basis.

Catastrophe renewal rates in Japan in the quarter saw significant rate increases, obviously.

And US property catastrophe pricing has improved, although client differentiation is key.

Reinsurers' renewal pricing was a function of individual insurance company exposure change, geographical spread, and program restructure.

Still very limited evidence of price stabilization or increases in classes outside of natural catastrophe.

Our Global Specialties and so our Reinsurance business, having said all of that, is doing very, very well and growing very, very nicely in the high single digits.

Global Specialties, mid-single-digit growth driven by Aerospace, FINEX Global, Marine and Energy, and growth from strong new business and improved client retention with continued overall rate softness.

Willis Capital Markets & Advisory has been a terrific business for us.

A good quarter on the back of M&A advisory activity, including advising Chaucer on its sale to Hanover Insurance.

However, as you know, it is a choppy business in terms of revenue and Capital Markets had a tough comparison with the prior year as second quarter '10 included a significant benefit from the Harbor Point transaction, which is a very large transaction which we booked in the second quarter last year.

Another comparison that even though Capital Markets did well in the quarter, it does not compare favorably to the quarter of a year ago, so another unfavorable comparison.

That's why I said that 3% is better than it appears and we are very happy with the way our businesses are going.

Our London Market Wholesale, good growth in our Global Markets International business, offset by weakness in Faber & Dumas, which reflects continued softness in the wholesale market.

The operating margin was 32.5%, that is down 220 basis points from last year.

But the biggest driver was unfavorable foreign currently movements.

Wasn't the operation of the business particularly, the strengthening of the pound against the dollar.

This was partly offset by organic commissions and fee growth and lower pension expense.

The operational review that I made mention of at the beginning of this call is something we are very excited about, because it is the thing that will differentiate us and position ourselves for significant growth in the future.

That's what this year has been all about.

I'm excited with what we are doing to deliver our value proposition, The Willis Cause, to our client segments in a differentiated and more efficient and consistent way is what I think will propel us into the future.

Delivering The Cause to our clients, together with the efficiencies we are achieving from the operational review, and the charge was to align our resources and delivery mechanisms so we can deliver The Cause, has moving well as the year progresses and will position us to drive accelerated operating margin and earnings per share growth in 2012.

Remember what we said, that this year we would expect modest growth in margin and earnings per share and next year, we would expect significant growth in earnings per share and margin.

With all of that as a backdrop, I will turn it over to Grahame Millwater to update you on the initiatives and The Willis Cause.

Thanks, Joe, and good morning, everybody.

On the last call, I outlined The Willis Cause and how that has become the framework around which we are building our differentiation and driving at our organic growth engine.

I want to highlight today some of the detailed progress we've made with a number of important initiatives that underpin The Cause.

So let me start firstly with Global Solutions.

And to remind you, this is the unit that is spear heading our attack on the largest global companies in the world.

Here we are targeting the world's largest 1,000 public companies and we've chosen another 220 private and/or complex companies that we think also fit into this category.

To give you an indication of the opportunity, currently we're the lead broker on less than but approaching 10% of these companies.

We have a second reposition on approximately another 20%, leaving around 70% where we have very little or no involvement at all.

It is also clear that there is a real appetite amongst this target market for a new offering and a new player in a segment that is dominated by our 2 larger competitors.

Initially we are focusing on 450 of these potential 1,220 companies, and we have targeted them either because of the expertise we have in their particular industries or because we feel we have a distinct offering that will be attractive to them.

We are developing detailed account plans for those 450 with clear accountabilities and we are engaging the totality of the Willis organization in that approach.

And it is an obviously a very integrated organization.

I want to emphasize that on these companies we're taking a truly global group approach, not a divisional approach.

Much of this will be led by our significant risk analysis skills.

We believe that Willis is the only broker who can make serious in-roads in this segment, outside the other 2 major global players.

Frankly, the smaller brokers just do not have the geographic presence and/or breadth of capability to make any significant headway here.

The success of this approach is already reflected in some very significant recent notable wins.

And winning, as you know, breeds confidence and more winning.

We are very excited about the pipeline of opportunity we have in this particular segment.

Secondly, let me turn to our sales push in the mid-market, which represents about two thirds of the Group's business.

And this sales push we are calling Sales 2.0.

Sales 2.0 will provide a consistent approach to sales and growth through industry-driven specialization encompassing a much more consultative sales process and local delivery of our global expertise.

After a detailed gearing-up phase, we started rolling this out in May in the US, which is our pilot geography, and are now extending into our UK and European retail businesses.

To give you some detail about that rollout, in North America, we've initially focused on 6 industries and identified nearly 5,000 prospects.

And we have already turned over 650 of our associates.

We plan to roll out a further 2 industries in the US in September as momentum builds.

In the UK and Ireland, we have initially focused on 4 industries and commenced training our associates.

We have plans for further associate training in 2 additional industries in September.

We have targeted over 700 prospects within the initial implementation, and are focused on 2 further industries for the fourth quarter.

In Europe we are targeting the initial rollout on 9 territories and 5 industries.

We started this rollout in May and have trained approximately 50% of the target associates.

We aim to complete this training in October and the first wave of associates already started to use the approach.

So whilst it is still very, very early days of Sales 2.0, again we're very excited by this initiative in this segment.

Thirdly, we continue to rollout our franchise model for independent retail brokers in the small commercial market.

We call this the Commercial Network, after the model that has been so successful for us in the UK, where we have 120 Network members.

Let me list the numbers of Network members we have signed up in the other countries where we have only just started rolling this out in 2011, as I think it is a reflection of the attractiveness of this model.

We've signed up 32 members in Italy, 22 in Spain, 10 in Germany, 13 in Brazil, 8 in Colombia, 12 in Austria, and 23 in China.

This is a great start.

This is our first year of rollout and the momentum will really build as we add more member network, members into the network and they selling our products through the access that we give them to global markets.

Fourthly, I wanted to outline how well we're positioned on the risk analysis front, a key part of our Cause.

This is key in particular to our offering in the Global Solutions segment large account and mid-market.

And we built a very sophisticated risk analytical capability in Willis Re over the past decade.

2 years ago, we started building a similar capability to this in the Large Retail segment under the heading of Structured Risk Solutions.

This capability has been key in many of our largest wins in the past 12 months.

But alongside that, we have also built over the past 3 years a unique entity called the Willis Research Network.

This is a unique collaboration with 50 universities and public science institutions globally to understand and research risk issues from earthquakes to tsunamis, windstorms and also areas like supply chain risk and cyber.

We believe the Willis Research Network will be a key enabler in positioning ourselves as the broker who has the deepest insight into risk issues around the world.

And this new work is now really coming on stream.

Finally, I just wanted to outline how successful Willis Capital Markets & Advisory business has been.

Joe touched on this earlier, but from a unit we started 2 years ago and from our core teams now based in London and New York, we are really at the center of many deals in the insurance segment.

Obviously some of these deals are already public, Joe mentioned Harbor Point, we've got CVC Brit, Chaucer, to name just a few.

But many remain private and/or in development as we engage in a rich pipeline of potential deals.

The unique knowledge and access to insurance entities that comes from being aligned with broker like ours, combined with extremely talented insurance Capital Market experts that we brought in has been a great combination.

So excuse some of the detail in this update, but it does give a flavor of the systematic activity underway to underpin The Cause and drive the organic growth of the Company going forward.

I will now turn over to Michael Neborak, CFO to review the financial results.

Thank you, Grahame.

Good morning, everyone.

As Joe mentioned, our second quarter results were strong.

Let me begin by updating a few important components to those results.

All comparisons are to Q2 2010, unless otherwise noted.

The first area is the operational review.

As described in our press release, we recorded a charge of $18 million in the quarter related to the operational review, bringing total recorded charges in the first half to $115 million.

The $18 million charge was recorded $10 million to our S&B line, $7 million to other expenses, and $1 million was recorded to depreciation.

We still expect the total charge in 2011 to be approximately $130 million.

The remaining $15 million or so will be recorded in Q3 and Q4.

Expected cost savings realized in 2011 are estimated at approximately $65 million to $75 million.

We have made substantial progress against that.

In the second quarter, we achieved savings of approximately $20 million, of which $11 million was recorded against the S&B line and $9 million in terms of the other expense categories, bringing total savings for the year to approximately $23 million.

Full-year cost savings in 2012 are estimated at $95 million to $105 million.

Early in the second quarter, we redeemed $35 million of our remaining 12.875% notes that were outstanding at March 31.

The costs associated with this redemption were accrued last quarter, so there is no cost associated with that in second quarter here.

And following all the changes that we have made to our capital structure, interest expense going forward for the next few quarters in 2011 should be approximately $34 million per quarter.

With more in the money stock options, average diluted shares outstanding increased to $176 million during the quarter versus $171 million in the year-ago period.

If our stock price remains in the low $40s, average diluted shares outstanding will be approximately $176 million for the full year 2011.

Turning now to second quarter 2011 results.

Reported earnings were $85 million or $0.48 per diluted share.

These numbers were negatively impacted by $18 million in costs from the operation review and the $11 million FSA regulatory settlement costs.

After adjusting for these items, net income was $108 million or $0.61 per diluted share, up 13% from the second quarter of 2010.

Adjusted EPS benefited by $0.01 from FX movements.

Foreign exchange impacted our results compared to the second quarter of 2010 by increasing revenues by approximately 5%, largely due to the US dollar weakness against the euro and the Australian dollar, and increased our operating expenses by approximately 7%, largely due to US dollar weakness against the pound sterling.

These movements resulted in a 100-basis point decrease in adjusted operating margin.

Total reported revenues increased 8% to $863 million.

Reported commissions and fees grew 8% to $854 million while organic growth was 3%.

Total investment income of $8 million was down slightly from year-ago period.

We continue to estimate that full-year 2011 investment income will be approximately $30 million.

Included in fiduciary assets on the balance sheet was fiduciary cash of $2 billion, up from $1.8 billion at the end of the first quarter.

And just a point of note, fiduciary cash balances typically are the highest at the end of the second quarter.

Now let me talk about expense management, which is an ongoing focus here at Willis and one that receives significant attention in every business unit.

Simply put, our goal is to keep expense growth below revenue growth and expand the operating margin.

In that regard, I want to go into some detail this quarter in explaining our expense growth.

Total reported expenses were up $76 million or 12% to $706 million.

This increase included $18 million of costs associated with the operational review and $11 million related to the FSA regulatory settlement.

When you exclude those 2 items, adjusted operating expenses increased $49 million or 8%.

Of that 8% percent increase, 7% or .875 was related to foreign exchange movements.

And when you exclude the benefit of the $9 million legal reserve release, underlying expense growth was 2.6% so that's the big picture.

Let me spend some time on each major expense component.

Salaries and benefits were $50 million to $506 million and represented 58.6% of total revenues in the current quarter.

That 11% increase in S&B includes $10 million of costs associated with the operational review, severance.

When you exclude those costs, S&B growth was approximately 9% and the ratio of S&B to revenue was 57.5% compared to 57.1% a year ago.

Of that 9% growth in S&B, 5% or more than half came from foreign exchange.

The remaining 4% underlying S&B growth came from reinstatement of salary reviews which were effective April 1, the 401(k) match, new hires, higher amortization expense related to cash retention awards in the second quarter of 2011 -- $44 million compared to $32 million in the second quarter of 2010.

And those items were offset by lower pension expense.

Pension expense was $8 million lower in the current quarter versus the year-ago quarter.

Realized expenses expense reductions from our operational review which were $11 million here in the second quarter.

The second component, other operating expenses, were up $29 million or 21% to $164 million.

Those expenses included $11 million related to the FSA regulatory settlement and $7 million of operational review costs.

Excluding these costs, other operating expenses increased 8%.

After you eliminate the impact of FX and exclude the benefit of the $9 million legal reserve release, operating expense growth was 1%.

Depreciation was approximately $19 million in the quarter, representing a $3 million increase from the comparable period in 2010.

$1 million of that increase related to systems rationalization costs associated with the operational review.

For modeling purposes, depreciation should run approximately $17 million per quarter throughout the remainder of 2011.

Underlying expense growth was 2.6%, comprised of a 4% increase in S&B, and a 1% increase in other operating expenses.

Turning to operating margin, adjusted operating margin was 21.6%, up 20 basis points.

FX hurt the operating margin by 100 basis points in the quarter.

Our book tax rate for the quarter was 25%.

After adjusting for the net effect of nonrecurring items, the underlying tax rate for the quarter was also 25%.

For all of 2011, we estimate that our effective tax rate will be approximately 25% versus the 26% that we have been running over at least the past 6 quarters.

Income from associates was a loss of $3 million compared to a loss of $2 million in the year ago quarter and currently we expect associates' income in the second half of 2011 to be similar to the second half of 2010.

On the pension side, our US, UK and International defined benefit plans had a combined surplus of approximately $82 million at the end of June, up from approximately $15 million at the end of the year.

Pension contribution payments during the quarter were $30 million, and for the full year 2011 we expect that figure to be just shy of $130 million.

On the balance sheet, our total debt was $2.4 billion at the end of the second quarter, down from $2.6 billion at the end of the first quarter.

This reflects a reduction of $100 million usage on our revolver, the redemption of the remaining $35 million on our 12.875% notes and a $27 million repayment of our term loan.

The leverage ratio as calculated under our bank term loan agreement was approximately 2.5 times at the end of the quarter versus 2.7 times at the end of March.

Cash and cash equivalents were $317 million, compared to $432 million at March 31.

During the second quarter, we generated approximately $119 million in cash from operations, bringing the total cash recorded from operations in the first half to $126 million.

And with that I will turn it back to Joe.

I just want to wrap up by saying that we are very disciplined and continuing to do what we said we would do this year.

Our objectives are clear in terms of what we want to achieve through this year.

Through the first half we have completed the operational review.

We're implementing the associated cost and revenue initiatives.

We have improved our debt profile, we've delivered modest adjusted operating margin earnings per share, exactly what we said we would do.

Everything we're doing is aimed at differentiating Willis in the eyes of our clients, retaining those clients, and growing the business.

We believe that this, along with the actions we have taken, will allow us to achieve accelerated growth in adjusted operating margin and adjusted earnings per share in 2012.

At the beginning of the year, I said we are doing all of this because we don't want modest growth; we want significant growth and that's what we are aligning ourselves up this year to do for the future.

Be glad to answer any questions that you have.

We will now begin our formal question-and-answer session.

(Operator Instructions)

Adam Klauber, William Blair.

Thanks, good morning.

Hello, Adam.

Couple questions on the restructuring program.

I think you said you are up to $20 million in cost savings from the second quarter.

Your target is $65 million for the end of the year.

Will those ramp up evenly over the next 2 quarters?

More or less evenly over the next 2 quarters.

Yes.

Okay, okay.

And then I think you mentioned there have been a reduction of 600 positions.

Is that the total amount or are there potentially more positions that will be reduced?

There are a few more positions that will be reduced.

Most of the remaining work that we are doing is moving positions from a high-cost location to a low-cost location.

So, the headcount won't necessarily go down but the cost will.

Okay, okay.

That's a part of the alignment in the operational review of aligning the resources with where the efficiencies in the services deliver.

And then, finally, the Harbor Point transaction, did that take like 2 or 3 points off the global growth?

It took at least a point.

Okay.

Thank you very much.

Thank you.

Keith Walsh, Citibank.

Hello, good morning, everybody.

Keith.

The first question for Joe and/or Mike, just around the cash retention program.

I'm looking at this program, it's basically tripled since 2008.

And I appreciate, this year, the amortization is higher; but, it should be even higher than the $44 million a quarter if the program was expensed like normal comp and not amortized over 3 years.

So, the question really is, why not expense this program through the P&L in the year that it's earned, like Marsh and Aon do?

Because the program -- it simply makes your margins look better than there are.

Well, I disagree with that.

First of all, it's not a bonus.

It's a retention award.

We talked about this and full disclosed it well over year ago.

We pay retention awards so that when the years when things were tough -- so we didn't pay people over a 3-year period of time, like most people did, in terms of deferred comp or paying in stock or paying in options, and all the things people did to reward their people.

We came up with retention awards.

And retention awards are just that.

We wanted to retain our people while finding a way to pay them.

And the amortization for that goes forward.

When we pay retention awards, they sign a document that says that they will stay with us over a 3-year period of time or give up the retention award, so that's why we book it on an amortized basis going forward.

So, when you increase it over time, the amortization schedule shows a big increase.

We suggested, Keith, at the beginning of the year, that increase would be significant this year, because it has caught up in the third year so it is much higher.

So, we don't pay bonuses, we pay retention awards and, therefore, we don't accrue them, we pay them on a go-forward basis.

The effect on the P&L at one point in time is the same.

It goes through the expenses when it's amortized in the future.

So, we thought we came up with a program that has been very effective, that has retained our people.

Our retention is much higher than it has ever been.

We found a way to pay our people in difficult times, and so we pay retention awards, we don't pay bonuses, we amortize going forward, and therefore we don't accrue it.

But, the expense, going through the P&L, is effectively the same.

We said, at the beginning of the year, that it would increase significantly this year because the amortization schedule would be higher.

I even said it was $65 million higher than it would be the year before, which is why you see the S&B line going up.

So, its effect on margins becomes basically the same, when it's amortized forward in any given year, and when it's accrued.

I understand that.

If we keep the award at a steady state it'll waterfall in and it won't be an issue going forward.

But, you continue to increase the award.

So, in the first half of this year, you paid out $206 million and last year was $185 million.

So, when do we get to a steady state so this doesn't become an issue as far as the amortization?

Well, I think we're talking about $20 million differential.

I don't know, when you're having good years and you're growing your revenue and your people are doing a good job -- and our revenue grew 4% last year, and our margins did very well, and everything was going well -- you reward your people.

And we figured out a way to reward our people for the good job that they do.

I will let you know at the end of the year how well we do, and whether that is a steady state are not.

But I would assume that the number would be around the same.

And, therefore, the amortization schedule will be fairly around the same amount of money.

But, again, we are very happy with the program.

We're very happy with the way we do it.

It has retained our people.

We figured out a way to pay our people.

We amortize it going forward.

We've talked about this ad infinitum with the beginning of the year.

We went into this in great detail, which is why the S&B line has gone up.

Because of the combination of very higher, much higher amortization.

A 401(k) that we are starting to match again.

And because we're paying salaries again, that is why the S&B is up and it's gone quite well.

Okay.

And then, just for Grahame, and I apologize if I did not hear his comments correctly.

I thought, Willis 2.0, he talked about pushing to win business in the large case market from Aon and Marsh, if I heard that correctly, and I apologize if it didn't.

I guess the question then is, I saw in '05 and '06, you guys, when Marsh was struggling, took the comp ratio up to 60%, recruited people to take business from them.

And that really didn't appear to work well.

And, so, why is now different?

Sales 2.0, Keith, is not reflected in -- it's not a recruitment strategy, it's taking our existing resources and actually arming them in a way that differentiates them at point-of-sale.

So, that's not a major recruitment program.

As I explained, I mean, we trained in North America 650 associates, they're our existing associates.

It's a program to make their productivity and their effectiveness that much better.

So, it's a completely different angle.

Okay thanks.

It has nothing, Keith, to do with recruiting.

It has to do with making the people we have more productive.

Mr.

Jay Gelb, Barclays Capital.

Thanks, and good morning.

Hello, Jay.

I want to switch gears a bit to the forward-looking aspect.

You've talked about significant -- the expectation for significant growth in earnings and margin from in 2012 and given all the noise that is in the year-to-date results especially from foreign exchange, even on an adjusted basis, I think it would be helpful to get a base line of what level of improvement you are anticipating?

Well, I'm not going to get into the definition of significant.

Obviously, when you grow modestly, 20 basis points in margin is modest.

5 % to 10% in earnings per share is modest.

And we think that anything -- we want to grow significantly.

I'm not going to define significant, but I have said that the whole idea of the operational review and everything we are doing is to grow significant.

I said, at the beginning of the year, that when you have 23% margins, it's not easy to grow those margins at significant levels -- 100, 200 basis points a year.

If it was easy, everybody would be at 23%.

So, to look back at that conversation, we then had to then look at our business and kind of reorganize the way we looked at things so that, in the future, we could begin to take the 23% and make it much higher than that rather than 23.2%, 23.4%, 23.5%, we wanted to significantly grow that.

To do that, we said to step back, take the charge, do the operational review, align our resources with our services, do all the things that Grahame was talking about.

And so that we can significantly grow in 2012 or beyond, assuming that the world is going to stay the same.

And we feel like we are on course to do that.

And this presentation is giving you some insight into that.

Understood.

And then, on the next issue, or -- overall organic revenue growth, there are some tough comparisons in the second quarter versus a year ago.

You mentioned things like Harbor point.

Right.

Going forward, if reinsurance rates are higher, if the economy does recover to some extent, do you think you could get back to that 4% organic revenue growth level in pretty short order and take it higher from there?

I think higher to be honest with you.

I mean, that's not -- that's not a prediction.

I mean, I told you that, in North America, I was proud of North America, and I'll give you the color.

You know, you are flat, and you got your 2 best businesses that are affected highly by the economy, and you are still flat.

We took Loan Protector, which was a big contributor to our business a year ago, because of foreclosures, and because of [titient] and commission structures and agreements we had and the accounting adjustment that was made.

That was $2.9 million, not considering the commissions that have been adjusted down in that business.

And the fact that there are less foreclosures and there's more, basically escrowing of those monies.

That was a big contributor in 2010, and not as big this year.

And, still, we were flat in North America.

Then you add to that, Harbor Point a year ago versus what is still a good quarter for Capital Markets, and you put all those things together, you are well beyond 4% on a relative and a comparative basis.

So, I guess, the answer to the question is, yes.

And you throw a good economy in there and you throw firming of rates, especially given a Company where 70% of our revenue comes from commissions, I think it's a pretty good answer to say that, yes, greater than 4%.

All right, thank you, Joe.

You're welcome.

Thomas Mitchell, Miller Tabak.

I have 2 questions, one is kind of trivial, but I just wanted to follow-up.

It was very clear that the release of the legal reserve was laid out very clearly.

I am sort of wondering, is that something that is a continuing thing, or should we have considered that a one-off item similar to the FSA and other factors that were there, like the cause expense?

Well, the FSA was obviously a one-off.

We expect it to be a one-off, we hope it's a one-off.

That's over and done.

As it relates to putting reserves up and taking reserves down, that's an ongoing thing that we do.

We have reserve committees that we have, we look at our reserves, we put reserves up, which is an expense.

And, obviously, when we put them up, they affect margins and they affect earnings per share.

When we take them down, it's because the reserve committees, with our legal department, suggest that the settlements have taken place, that as the review, we review these cases that we find that there are less onerous than the reserve that we put up, and we release those reserves.

So, that is an ongoing part of doing business.

In this particular case, we released these reserves because we felt that they were no longer necessary to keep up as an ongoing way of running a business.

And we do that as part of the due diligence of the process that we go through with all the cases that we have.

So, when put them up, they hurt margins and they hurt earnings.

When we take them down, it's a good thing, but they obviously negate each other and it all comes out in the wash.

So, I think it's just as good that we should be punished for putting them up, because something bad happened.

And we should be given credit for taking them down, because we found out that they weren't as bad as we thought and that's good governance.

Okay.

And then, secondly, totally different, is the issue of whether or not, in competing for the large account business against Marsh-Mac and Aon, which sounds like a very exciting initiative -- does that business offer the same profit margin opportunities as your existing base of business, or would it be likely that you would have an impact from competition that would drive margins lower than what your existing base would have?

I'll answer that because it is a profit question.

There has always been this conception, or misconception, that large accounts obviously take more servicing, therefore they cost more, and as a result the profits are less.

We felt, from a strategic point of view, that because most of our business came from the middle market -- it's 70% is commissions worldwide and 30% is fees -- that we had all the elements in this Company to be able to compete in the large account sector.

We already have the expense of analytics.

It's housed in Reinsurance.

We also -- we all have the expense of specializations in London and the United States.

These expenses are already embedded inside the Company.

We already have people who look after a large accounts anyway.

And we thought that we had a great opportunity to gain market share since, as Grahame said very well, we have such a low base with regard to large accounts, and we have all of these resources sitting here as good as our competitors do, why not take advantage of it and why not give it some leadership?

Martin Sullivan came in to give it that leadership, and I think we are making great progress.

So, we look at it as an augmentation to our business by using the services that are already there that we pay for.

Okay, thank you.

You're welcome.

Mr.

Mark Hughes, SunTrust.

Thank you very much.

The Employee Benefits, sounds like you are getting at least a little bit of a boost from the healthcare reform.

How long do think that lift should continue?

Well, if you say a lift from healthcare reform, Mark, meaning people are in a quandary as to what to do, I don't know that's a lift.

I would rather them not be in a quandary, and the economy be better, and we grow at better than low single-digits.

So, I think that as the economy gets better, our sweet spot are companies where there is more than 50 employees and less than 1000.

That is where the sweet spot is for us in the middle market.

And, the economy at one point, we all hope and pray that improves and as that happens, there is more employment and as there higher employment, there is, obviously, a greater ability for us to do what we do very well and get paid more for it.

I would also tell you that, irrespective of healthcare reform, employers are going to have to find different and better ways to take care of their people.

It usually -- the trend is to be on a voluntary basis, the trend has to be towards wellness and putting programs into place.

And, we are very good at telling people how to do that.

So, I think it can only get better, actually, from here, where we specialize.

Vic, you want to add anything to that?

Yes, thank you, Joe.

Vic Krauze, head of North America.

I think our value proposition certainly gives us an opportunity to take advantage of the volatility that healthcare reform has brought on.

We are seeing some pressure from medical insurance companies, in terms of how they pay brokers as they look to conform to the regulations that have been imposed upon them.

So, there is a mixed bag in this area.

We just think that our value proposition will give us an opportunity to take advantage of those people who don't have a platform.

Thanks, Vic.

And then the -- any quick thoughts on the pipeline in the Willis Capital Markets business?

Yes, as Grahame said earlier, and said very well, it is robust.

But, the problem, Mark, is you don't know with these deals, it's not ongoing business that happens every day.

It's choppy.

But, I have to tell you that the pipeline is robust, we are involved in lots of conversations, we are involved in representing one side, another side, advisory business, it's just across the board.

Tony Ursano and our Capital Markets group are just outstanding.

They have been doing this a long time, they did this well before they joined us from Bank of America, and we couldn't be more proud of what they do.

But, it's a choppy business.

It just doesn't happen every day.

But very -- very, very confident that things will occur and when they will occur, obviously, you'll see it.

Thank you.

Thank you.

Ms.

Donna Halverstadt, Goldman Sachs.

Good morning.

Thanks for taking my questions.

You talked a lot about income statement objectives, the gross, the margins, et cetera, which is all very helpful.

And I was hoping we could complement that with a balance sheet objective.

And, for purposes of this question, if we completely set aside the credit agreement and the financial covenants they're in, what do you personally think the optimal leverage ratio is in terms of debt to EBITDA where you would like to run this business?

Well, our immediate objective is to get our leverage ratio down to about 2 times, and then, at that point, kind of based on the current environment, take a look at it.

I think, longer-term, we would like to get it down lower.

Getting it down lower gives us more flexibility in terms of our future.

So, the immediate objective is get it down to around 2, and then, longer-term, probably about 1.5; but, obviously, that depends on kind of the current environment and other opportunities that exist at that point in time.

Okay.

And then, the other question I wanted to ask brings the credit agreement back into it.

With the recent changes to the restricted payments covenant, presumably that was done to facilitate share repurchase.

Can you give us some color on how you are thinking about that topic?

Sure.

So, what you are referring to is we changed the restricted payments covenant, which limited share repurchases if our leverage ratio was at above 2.5.

We increased that to 2.75 times, so as we sit right now, we have some room, but it's not a lot of room.

So, we did that to give us flexibility, but I don't think kind of where we are today at 2.5, and where we could be at 2.75 gives us much room to buy back stock.

But, later in the year, as we get down into the low 2s, there is some room and we will take a look at it at that point in time, given market conditions and other factors.

Great.

Thanks for the input.

Thank you.

(Operator Instructions)

Meyer Shields, Stifel Nicholas.

Thanks, good morning, everyone.

Hello, Meyer.

I know we talked about this a little bit, but when you talk about targeting the largest accounts, I guess the opportunity cost is that you have a little bit less time to go after smaller accounts.

And I'm thinking that Marsh and Aon are reasonably well resourced, wouldn't it be easier to compete for smaller accounts that are being serviced by smaller brokers instead of sort of fighting your way upwind?

Let me clarify that we are not -- we like the mix of 70%, 30%.

This is not an attempt on our part to go to 50%, 50%, which is commissions versus fees.

We like being on commissions.

We like where we are.

This is an attempt to simply increase our capability, or our impact in the large account area because we have all the resources sitting here.

And, instead of them being fallow and not being used, or being directed specifically to Reinsurance or Specializations, et cetera, we want to simply say we got all this sitting here with the right organization, with the right direction, and the right kind of focus.

We can grow this business while not changing our emphasis, I repeat, while not changing our emphasis on the middle market or the small account business.

The small account business will be gotten through our networks, as Grahame articulated very well, the middle market we will grow, not by recruiting necessarily, by Sales 2.0, which is a highly specialized focus and sales process that with diagnostics that nobody else has, to my knowledge.

And the larger accounts are simply icing on the cake because we already got all the ingredients of the cake.

Okay.

No, that's very helpful.

I appreciate it.

And, last question, I guess, is there any way of identifying which segment the legal reserve release impacted?

Well, that was recorded at corporate.

So, if you look in our press release in the back, where we have the segments and then we have corporate, that reserve release was down in the corporate area.

Okay.

So, no influence on any of the segments?

Okay, Meyer?

Yes, thanks so much.

You're welcome.

Okay, thanks everybody.

Have a great day.

This concludes today's conference.

All parties may disconnect at this time.