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Willis Group Holdings Plc (NYSE:WSH)

Q3 2010 Earnings Call

October 28, 2010 8:00 AM EST

Executives

Joe Plumeri – Chairman and CEO

Grahame Millwater – Group President

Michael Neborak – CFO

Don Bailey – CEO, Willis North America

Mark Sullivan – Deputy Chairman, Willis Group Holdings Plc, and Chairman and CEO, Willis Global Solutions

Analysts

Mark Hughes – SunTrust

Keith Alexander – JPMorgan

Adam Klauber – Macquarie

Dan Farrell – Sterne Agee

Meyer Shields – Stifel Nicolaus

Cliff Gallant – KBW

Operator

Welcome and thank you for standing by. At this time all participants will be in a listen-only mode until the question-answer session of the call. (Operator Instructions).

Today's conference is being recorded, if you have any objections you may disconnect at this time.

I would now like to turn the call over to Kerry Calaiaro. You may begin.

Kerry Calaiaro

Thank you, and welcome to our third 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 November 28th, 2010 at 11:59 PM Eastern Time by calling 888-385-2289 from within the US or 1-203-369-3262 from outside the US, with pass code. 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 the 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, 2009 as well as our earnings press release for a more detailed discussion of the risk factors that may affect our results. Copies may also be obtained from the SEC or by visiting the Investor Relations section of our website.

Also, please note that certain financial measures we use on the call are expressed on a non-GAAP basis. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release.

I will now turn the call over to Joe

Joe Plumeri

Thank you, Kelly, and hi, everybody, and welcome, and thank you for joining our call today.

On the call with me today are Grahame Millwater, our Group President; Don Bailey, CEO of North America; Michael Neborak, our CFO; and as usual other members, all of the members of our executive team and management team are also here, and will be happy to answer all of your questions.

Let me talk about the conditions that impact the third quarter 2010 and a little bit about the remainder of 2010. I am very happy with what we’ve delivered this quarter and in the year-to-date. We have reported exceptional organic growth in the face of a really tough external environment that is little changed from the last time we spoke.

In the US economic and unemployment remain anemic, a number of European economies also remained pressured. There are some bright spots, particularly among the emerging economies. And in addition, as I indicated the last quarter, the general rate environment remains soft and in the absence of a major loss activity, we see little term, little near-term sign of change.

Looking at earnings, we reported adjusted earnings per share of $0.37 for the quarter compared with $0.53 a year-ago with both years affected by tax items. If you look at adjusted earnings and apply the underlying effective rate of 26%, adjusted earnings per share would have been about the same in both periods.

Our culture of teamwork and discipline has served us well in this environment continues to serve us well with our commitment to growth and our focus on cost control. Our commitment to growth is reflected especially in another 4% organic growth in commissions and fees that we delivered in both the third quarter and in a year-to-date period, so that’s been pretty consistent and our ability to be able to deliver that I think shows the underlying sales cultures that I make reference to. This compares very well to the 2% organic growth that we delivered in the corresponding periods last year.

Each of our segments also delivered organic growth in both the quarter and year-to-date periods. This is especially something that we’re proud of, because all of our operating segments grew, again in a very difficult environment.

In the third quarter, North America grew 2%, where probably the rates are softest around the world and the economy is the worst. International grew 6% and global grew 4%. So across the board, our diversity, our ability to be able to distribute our product again shines through.

This Group continues to be driven in the main by new business generation across all segments. We spend a lot of time on it, it’s something that we’re good at it, and we can better at. Net growth of 13% for the quarter and a steady client retention, so you take the two – so clearly both of those are trending in the right direction, and there is no reason to believe that that trend wouldn’t continue.

I’m also happy that we delivered adjusted margin expansion in the quarter. The 140-basis point adjusted margin expansion largely reflects growth in organic commissions and fees, rigorous expense management, and favorable foreign currency movement, and that’s partly been offset by higher incentive compensation.

What do I mean by incentive compensation? I really mean the amortization of the retention award and higher payouts and higher payouts basically come from North America where we raise the payout during the integration period that was effective at the beginning of this year, so the payouts are higher and we’re getting higher revenue growth out of North America than we got the year before. So as a result, you see the incentive compensation line going up.

We increased the headcount also since last year on purpose, because we’re trying to support and fuel the areas that are growing the most for us. International has been a consistent growth leader for us for a long time over the last couple of years and we want to support that and we want to feed that to make sure that it continues to do that. And our global segments especially we’ve grown and added support levels and resources to our areas in London and across the world.

So even though North America has lowered its head count following the HRH integration, in a lot of other areas we’ve tried to reinforce very, very good growth, so that’s something that we’ve done on purpose. Shaping Our Future also continues to deliver net benefits, around $12 million in the third quarter, even as the number of the programs have become entrenched in the way we do business.

Now let me drill down a little bit into the segment results. North America as I said before has just been terrific. Not much though has changed as it relates to the external environment.

The economy and the recovery remains anemic and protracted and the employment recovery is slow, the rate environment remains soft, and there is little evidence of a turn, you’ve heard that before, I’m just going to tell you what everybody else has told you.

CIAB data for the third quarter indicated rate is down 5% compared with 6% in the second quarter, even in areas where we’re seeing some increases, lower underlying exposure basis or offsetting gains, and we really don’t see much of an improvement in exposures either.

In this environment, 2% organic growth for the quarter and 1% positive on a year-to-date basis is just an unbelievable result, especially when I see what’s happening elsewhere with our competitors. Delivery against the rate wind of 2%, that’s a net new business of 4%, and so we’re very proud of that, and my congratulations to our North American colleagues.

Our producers continued to generate double digit new business growth and client retention even got better. We even saw positive results across a number of regions, including the Northeast, Atlantic, and South Central, and some of the standout cities in the quarter were New York, Boston, Philadelphia, Baltimore, Atlanta, Dallas, and Los Angeles, which is really great about having said that, is that those cities are a blend of former HRH offices and former Willis offices, so that now that our impact in these major cities show the ramifications and results of the acquisition.

Our employee benefit business, our largest practice was up 4%, its second consecutive quarter of growth and a great result in a really tough labor market. So if we can do that in a tough labor market, it tells us again that we’re heading in the right direction as it relates to our value proposition and employee benefits in North America.

Now, our construction practice which is about 10% of our business in North America was down low single digits better than last year, but that’s in an area of the economy that is still not seeing much sign of improvement. So you got 2% improvement in revenue, when 10% of your business is going down. Again that shows great strength and our ability to retain our people and to grow our new business. We continued to see good results in a number of specialty practice areas such as executive risk healthcare and financial services.

North America’s operating margin remained steady at 21.4%. The results that our North American business delivered really reflects I think the success of the integration efforts and the teamwork across our enhanced network, and this success is illustrated by as I said great top line growth and even better client retention and strong producer retention, again in the aftermath of a major integration and a major acquisition which we’re really, really enthusiastic about and proud of.

Let me turn to international, international continues to deliver with organic growth in commissions and fees of 6% in the quarter and 6% year-to-date. And when I say 6% international, that means all of our offices outside of the United States. The new business generation remains in the double digits again against the headwind of 4%. The strength and diversity of our international network I think is reflected in these results, even if some of the economies in which we operate remained pressured.

Latin America, Asia, and Eastern Europe again all delivered double-digit growth with really strong contributions from Venezuela, Brazil, and Chile in Latin America; China and Korea in Asia were simply outstanding; and Poland and Russia in Eastern Europe continued to show great growth. Continental Europe was slightly positive in a seasonably light quarter for those countries.

As a matter of fact, this is a light quarter for international in general, and some of the numbers especially in the margin I think reflect that amidst continued economic weakness in Central Europe, Spain and Italy though among others continued to deliver positive growth.

The UK and Ireland, which is a really good story, also faced challenging economic conditions, but despite that, despite this headwind, they delivered another quarter of positive organic growth, supported by ongoing investments and sales teams and process, again we’re investing in places where we need to invest and support areas that are growing, and the result of that was both of the UK retail had significant revenue growth and Ireland showed some growth for the first time in a long time in an economy that’s still hasn’t gotten much better. The key revenue drivers in the quarter were major accounts and employee benefits.

So the international operating margin was 9.6%, now that was down from the 13.4% in the year-ago quarter, but again I’ll remind you that this is the smallest of our quarters internationally, we had very strong organic revenue growth, which was negated by unfavorable foreign currency movements. But we continue to support current and future growth; for example, with head count increase in international of over 200 from a year-ago. But again on purpose to again feed fuel and seed, a big growth area for us, that’s been consistent throughout the last couple of areas, even during the 2008-2009 meltdown.

As far as our global business is concerned, that segment comprised of Reinsurance, Global Specialties, Faber and Dumas. And Willis Capital Markets also performed well, delivering 4% organic growth against headwinds from rate of about 2% and clients continuing to retain more risk.

Reinsurance had mid single digit organic growth again. I could not say enough about or reinsurance operation it continually are delivering mid single digit organic growth, the revenue drives there continued to be strong new business generation with strong international growth in an area that is continued to be generally soft in a rating environment.

Global Specialties, again mid single digit organic growth. I think our specialisms are the best around, I congratulate them as well. The revenue drivers led by FINEX, in space, aerospace, and construction especially. Growth was really strong through new business and improved retention and then targeting hiring again. A producer of talent and global connectivity.

All part of a plan, all part of specifically and selectively spending our money where we think we can get the most growth both today and in the future, that’s why we are so confident about that. However, their environment again remains tough with depressed world trade and transit volumes, industry consolidation and pressure on financing of construction projects are still very evident.

We have weakness in Faber and Dumas, as they are impacted by a soft wholesale market. Remember that’s our wholesale operation, but continued pressure in the most economically sensitive lines such as bloodstock, jewelry, and fine arts.

Global operating margin was 19.7%, up 90 basis points, from the prior-year period, and helped by organic growth, favorable foreign currency translation impact on our London market business, while we’ll continue again to support the current and future growth of this area as well.

Now, I’d like to turn things over to Grahame Millwater to update priorities for 2010. Grahame.

Grahame Millwater

Thanks very much, Joe. Good morning, good afternoon, everyone. As part of the Group that Joe has discussed, our new business levels have continued to climb with all business units posting double-digit new business wins. We continue to drive this new business to our focus on developing healthy pipeline to prospects in targeted segments and geographies.

It’s important to point out that the diversified nature of the Group in geography, segments, and business mix is purposely designed to ensure robust and sustainable organic growth strategy.

Now, last quarter I talked briefly about the sales platform we’re building in the middle market and the franchise commercial network model for the small commercial segment. Today, I’d like to focus a little bit about our global large account segment.

We handled a significant number of major global accounts, particularly in specialty areas such as airlines, construction, and mining. However, generally speaking, we're underweight in this global major account segment compared to our natural market share, and we have a definitive plan to rectify this.

We’ve been refining our approach to this segment over the past 12 months, using our specialty skills, our global footprint, our analytics, together with our client advocate model to deliver the whole of Willis to these clients’ prospects, we believe we can seriously grow this segment. And our unique team orientated culture together with the integrated way we run the Group helps us to create a unique proposition in this space.

When considering a leader for this business, which we have called Global Solutions, to reflect the needs of these major clients, we wanted someone with real global experience, in-depth insurance knowledge, and the ability to interact with our global clients at the most senior levels. Martin Sullivan fits that description perfectly and we’re delighted to have him onboard. And after six weeks, I can truly say that both he and Willis could not be more excited by the opportunity we have this segment going forward.

Our Global Solutions sets us part of Willis Global, which comprises Global Solutions, Willis Analytics, Global Specialty, Willis REIT, Willis Capital Markets & Advisory, Willis Facultative, Global Markets, Global Placement, and our wholesale business Faber and Dumas. This brings together a really amazing powerhouse of client relationships, specialist skills, research and analytical capabilities, transactional prowess and carrier relationships that we believe that’s absolutely unique in the broker sector. And recently wins are confirming the power of this proposition when focused effectively.

The transformation of our business is a constant and I’m pleased to report that Shaping Our Future continues to deliver substantial benefits. In this quarter, we delivered a further $23 million worth of gross benefits with $12 million net benefits after reinvesting in certain areas which I’ll just go on to point to.

Client profitability in our placement strategy continued to deliver significant incremental revenue for us, while our business model updates such as Shaping Our Future Retail UK and Shaping Our Future London are delivering a transformation in the way we work with our clients.

A substantial portion of the benefits generated from these programs are reinvested to the businesses for future benefit. For example, in this quarter alone, we launched our World Place Initiative, part of our global placement strategy in Milan, in Italy, a rollout of our Eclipse technology platform into our Global Willis Reorganization, following the successful rollout of Eclipse into our London-based Global Specialty. A transformation program for our finance and accounting in this structure has started.

And in ethic, we continue to rollout of our US retail platform, and at the same time we continued to invest in initiatives such as the sales platform in our middle market and shaping of our future retail UK, initiatives which we would think will continue to deliver benefits for us and accolades over the coming years.

So a brief summary. And I handover to Mike, our CFO, to review the financial results. Mike.

Michael Neborak

Thank you, Grahame. I’m excited to be hear and part of this management team. So in the third quarter, we continued to execute with focus on organic revenue growth, cost control and further progress in capital management and debt reduction.

Our reported and adjusted earnings from continuing operations in Q3 2010 were $64 million or $0.37 per share. This includes a $0.02 per share benefit from favorable FX. For comparison, adjusted EPS from continuing operations in the third quarter of 2009 were $0.53 per share. Earnings in both quarters were positively impacted by certain tax items that I’ll talk about later.

As I said, foreign exchange had a positive $0.02 per share impact on EPS and a positive of 130-basis point impact on operating margin year-over-year. That positive impact from FX is principally the net result of dollar strength against the pound sterling where we are overweight on the expense side and dollar strength against the euro where we are overweight on the revenue side. Fortunately, the expense reduction was greater than the revenue reduction resulting in a positive $0.02 per share FX impact in the first to third quarter of 2009.

If rates remain unchanged to the remainder of 2010, we anticipate that the impact on margin and earnings per share in the fourth quarter would be slightly negative, while the full-year impact would remain positive.

Our revenues increased 1% to $733 million in the third quarter of 2010, compared the year-ago period, and increased 3% in the first nine months of the year to $2.5 billion. Reported commissions and fees grew 1% in the third quarter to $723 million and we’re up 3% for the nine months to $2.5 billion. It is important to note that the reported commission and fee growth of 1% in the third quarter was negatively impacted by foreign exchange movements. Organic growth was 4%.

Total investment income of $10 million was largely unchanged from the period a year-ago. While rates are lower, we continued to benefit from our forward hedging program.

On the expense side, total operating expenses were down 2.5% to $627 million, compared to Q3 2009. The salary and benefits piece was $462 million or a 63% of total revenues in the current quarter compared to $449 million or a 62% in the year-ago period. The 3% increase in salaries and benefits was primarily due to increased head count and higher incentive compensation, moderated by the impact of favorable foreign currency movement and lower stock-based compensation expense.

In the third quarter of 2010, salaries and benefits included $28 million of expense related to the amortization of cash retention award compared to $22 million in the year-ago quarter.

Other operating expenses were down 14.6% to $129 million, compared to $151 million in the year-ago quarter, reflecting our disciplined cost management and favorable FX movement. The year-ago quarter included $7 million in charges related to HRH integration costs and in addition other operating expenses in this quarter were favorably impacted by the release of a $7 million legal reserve.

Our reported and adjusted operating margin for the third quarter was 14.5%, an increase of a 140 basis points compared to the adjusted operating margin in the year-ago quarter. As Joe said, adjusted operating margin was positively impacted by continued growth and commissions and fees, rigorous expense management, and favorable foreign currency movements, partially offset by higher retention amortization and producer payout.

Let me now turn now to taxes where our income tax expense for the quarter was $10 million, compared to an income tax credit of $29 million the year-ago quarter. Tax expense in the quarter included a $7 million credit related to the release of a previously recorded tax provision with a statue of limitations had expired.

In addition, the third quarter 2009 tax credit also reflected the release of a $27 million provision, following a change to the UK tax law. The effective tax rate was 15.2% for the quarter and 24.8% for the nine months. The underlying effective tax rate however for both the quarters and nine months was approximately 26% the same as the 2009 full-year rate.

We recorded income from associates of $9 million in the third quarter of 2010, compared to $16 million in the quarter a year-ago, primarily due to our reduced ownership [inaudible].

On the pension side, our UK, US, and international defined benefit pension plans had a combined deficit of approximately $10 million at the end of the third quarter, down from approximately $120 million at the end of 2009, principally due to cash contributions.

Pension contribution payments were $44 million in the quarter and $103 million in the first nine months of 2010. We expect to make approximately $125 million total pension contribution payments during 2010. Pension expense was $9 million in the quarter and $27 million in the year-to-date period.

I am pleased to report that we made some progress on debt reduction and capital management in the quarter and that both Moody’s and S&P reaffirmed our investment grade ratings and stable outlook during the quarter.

Total debt including the revolver was $2.3 billion at the end of Q3, in line with the second quarter. Cash and cash equivalents were $141 million, up slightly from June 30th. During the quarter, we generated approximately $100 million in cash from operating activities and approximately $260 million cash from operating activities in the year-to-date period.

During the quarter, we also added a second revolver which is undrawn in the amount of $200 million, basically with the with a same terms as our existing revolver, and it will be priced if drawn, and again I mentioned it’s not drawn, at LIBOR plus 275 basis points. And the principal reason for entering into that facility was just to give us additional financial flexibility.

And with that, I’ll turn the call back to Joe.

Joe Plumeri

Thanks Mike. So, in conclusion, we’re very pleased with the results through the first nine months, but I want to reiterate our priorities which we have talked about in the course of this call.

One, to reinforce our sales and revenue culture to drive growth, evidenced in 4% organic growth in the quarter and year-to-date. We just think that in this environment that’s outstanding and we need to continue to support that and reinforce that, so that we can remain confident that that will continue.

Second, further execute Shaping Our Future and our growth strategies. And in doing so, continue to selectively invest in growing markets, and that’s people, I talked about that earlier, further develop our Willis Global unit including Global Solutions which Grahame talked about. Enhance our operating platform to support our business units.

What do we mean by that? That’s investments in systems like Epic in the United States which is, or North America is an accounting system, and everything can be driven off of it, continue to support Eclipse here in London, Will Place which is our new placement system. So that these things in building out our platform and enhance the platform to support our business units give us future efficiencies so that we can continue to run the place efficiency and look to drive out cost in all areas of our business, which gives us the ability to maintain disciplined expense management, as Mike said, continue to strengthen our balance sheet.

We think that these efforts position us extremely well for continuous success in the future. Thank you for listening. And we’ll be very glad to answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you. We’re now ready to begin the question-and-answer session. (Operator Instructions). Our first question comes from Mark Hughes with SunTrust. You may ask your question.

Mark Hughes – SunTrust

Yes, thank you very much. Good morning.

Joe Plumeri

Good morning.

Mark Hughes – SunTrust

What is the general outlook for headcount additions as we look at 2011 maybe in the international and overall? Do you plan on keeping up the same pace of investments? Will it taper off a little bit?

Joe Plumeri

We have a very succinct program that we’re looking at to reinforce our ability to be able to produce – continue to produce the business at the levels that we’re producing at. International is a very diversified place, Mark, just to give you an example. It makes sense for us to grow in China. It makes sense for us to grow in Brazil. It makes sense for us to grow in a lot of parts of Latin America. It makes sense for us to grow in the Middle East. It makes sense for us to grow in Russia. These places they’ve been big contributions, and in some cases in emerging markets, we’re market leaders.

So we’re going to have to continue to do what you would expect us to do which is that we’re best in those areas. So our specialisms in London are among the finest and we have to make sure that we constantly reinforce that. And in North America, we’ve done a great job at even reducing our headcount. But, again, where we selectively fine producer hires, we’re going to do that. So it’s not an indiscriminate hiring that’s going on, it is a very calculated, very selective approaching to being able to reinforce our people, reinforce our capability, and you are seeing that in our results that relates to our revenue growth.

Mark Hughes – SunTrust

Would the strategy then be to take any margin outside and reinvest it? So you're talking steady margins?

Joe Plumeri

No, I wouldn’t say that we would give up the ideas to take margin improvement and to reinvest all of that margin improvement. I would say that it’s the ability to be able to grow our top line at levels that we’ve been growing it, which has been very good, not give up all of our margin, but certainly in a selective approach to investing in our resources, maybe give a little bit of it, but expect to grow our margins.

Mark Hughes – SunTrust

Thank you.

Joe Plumeri

Thank you.

Operator

Our next question comes from Keith Alexander with JPMorgan.

Keith Alexander – JPMorgan

Hi, good morning.

Joe Plumeri

Hi.

Keith Alexander – JPMorgan

Hi. I was wondering can you start off by talking about the capital markets activity in the quarter and specifically the impact on global growth? And then, as part of that, can you talk about how the pipeline looks versus six months and 12 months ago?

Joe Plumeri

Sure. The impact of capital markets, which by the way has been outstanding since we hired that Group led by Tony Ursano, has been terrific, has had very little impact on the third quarter. The third quarter as a matter of fact was very, very small, so it was de minimis. We continued to have a very robust pipeline in the capital markets area and we have been retained on a number of fronts.

So I would say that the pipeline, the activity, the amount of consolidation that we possibly see in the business looks like it’s going to continue at pace. But we’re very, very happy with where we are with capital markets. But specifically your question being what kind of an impact was it on the third quarter, which is relatively little, if none.

Keith Alexander – JPMorgan

Okay, thanks for that. My next question is on the investments the company has made over the last several quarters. How long should it take for revenues to catch up and margins to expand, and perhaps if you could talk about it by segment?

Joe Plumeri

Well, I think revenues have caught up pretty good. I mean the reason that the revenues were 4% and continue to lead the league. I don’t know what will happen with the rest of our competitors. But I’m really proud of 4%. I mean I’m proud of North America, 2%. I mean, it appears that where we have invested we’re doing the right thing. And I can see it coming out in some of the accretive hires that we’ve made.

You see some of the investment, in the last question, with regard to capital markets, that was an investment we made, that was a whole team from Bank of America that we decided to hire, and that’s accretive right off the back. So I think that there is a catch-up already. You’re going to see even more of a spread as we seed for the future, as we continue to look to the future to continue to grow our revenue in an environment that continues to be by all accounts soft for a long time. So I’m very pleased, I’m happy that we’re growing the revenue that way we are and looking at our totality of our business.

I would be upset if we had great margin growth and it was at the expense of no revenue and everything on the backside of continuing to watch or and never investment, where we still watch cost very, very, very closely. As I said earlier, we’re making lot of investments in our platform. Our platform which is our service hubs all over the world, our technology hubs all over the world, give us the ability to get future efficiencies that you don’t see today, but you’re going to see those efficiencies in a year or two from now. So the plan is working I think extremely, extremely well.

Keith Alexander – JPMorgan

I get your point about the growth. I guess what I'm trying to ask is when should we expect margins to stabilize, given any – barring any significant changes in the economic environment?

Joe Plumeri

Barring any changes in the environment, I think you should see margins continue to improve on a moderate basis, because I think I have a lot of confidence in our ability to expand our revenue and grow our revenue.

Keith Alexander – JPMorgan

Okay. One last question and then I'll hop back in the queue. You spoke broadly about limited to no exposure growth, but can you differentiate between the lines of business and types of client?

Joe Plumeri

The lines of business, it would take too long to go through each line. But I would tell you that on an across the board basis, I really don’t see and I’m looking at my colleagues as I’m saying this around the room, any increase in exposures at all. We’re still seeing the basic exposure levels that we’ve seen over the last couple of years.

Keith Alexander – JPMorgan

Thank you.

Joe Plumeri

Thank you.

Operator

Our next question comes from Adam Klauber with Macquarie.

Adam Klauber – Macquarie

Good morning, thank you. As your –

Joe Plumeri

Good morning.

Adam Klauber – Macquarie

As your cash generation continues to improve, can you tell us maybe as you look to 2011, what uses of the cash you’re looking at?

Joe Plumeri

I’ll answer a part of the question. Obviously, we still are looking forward to in early ’11, of buying back some stock that we said that early quarter now for a couple of quarters or more. But that’s still on our radar screen and our ability to do that. We don’t believe that you’re going to see much in the acquisition area with regard to use of our cash.

We think from an acquisition point of view rather than same situations that’s about all that you’ll see. But we’re looking towards getting our debt-to-EBITDA down, we’ve talked about that, and deleveraging our balance sheet, and give us the ability to be able to buy some stock back.

Adam Klauber – Macquarie

Great, thank you very much.

Joe Plumeri

Thank you.

Operator

Our next question comes from Dan Farrell. Please state your company name.

Dan Farrell – Sterne Agee

Good morning, and it's Sterne Agee.

Joe Plumeri

Good morning.

Dan Farrell – Sterne Agee

Good morning. Just along those lines on sort of capital management going forward, what level of free cash on the balance sheet would you want to get to be comfortable, start undertaking that. Your free cash was roughly flat this quarter and obviously you’re still doing stuff on the debt side. So at what point do we need to see debt come down to and then the free cash grow to a certain point before you'd consider doing something in that area?

Michael Neborak

So at the end of the third quarter, our debt-to-EBITDA was about 2.4 times and covenants in our debt agreements limit that to no more than 2.5 times. So we – our goal is to get it done to 2.2 times to 2.1 times before we would consider really starting a buyback program.

Dan Farrell – Sterne Agee

Okay. And your comment on acquisitions, I'm just curious why in the US, in your middle market business when you do have some more cash, why you wouldn't be interested in doing some of the smaller M&A, which some of the other companies are doing. It seems like it would be a nice opportunity for fold and things of that nature?

Joe Plumeri

I’ll answer that generally. By the way, Dan, the answer that Mike gave you with regard to our ratios have been consistent. We’ve always said that we want to get around 2.1 times, 2.2 times, and that would make us comfortable. To answer this question, I’ll give you a global answer, and Don Bailey, maybe can answer.

We have about 130 locations in the United States and very emphasis on the middle market. We are developing a culture in the US after a huge integration effort which has been very, very successful. And every please that you need to be and rates the density of our population, our associates, and our producers that you need to be in the US, we’re there. Are there some places and corners of the US? That we’re not sure.

But I think that we’re going to get greater yield out of our investment in what we’ve already done and continuing to reinforce our culture and Sales 2.0 and all of the things that we have planned to grow the middle market, then we would by continuing to make acquisitions. There are others that are making acquisitions one by one by one, when in HRH we did it all at once, we got great efficiencies, we got margins over 20%. So our thinking suggests that that's working, and why change that now? Don do you have anything you want to add to that?

Don Bailey

I’d just add Joe that, as you said, we’ve got the platform in North America that we wanted, and we’re executing on it, and you’re starting to see those results. We’re in all the major cities as you highlighted Joe. We have very good numbers in those major cities and we had a lot of real good numbers in secondary and tertiary cities as well.

So, for us, there might be more niche book plays, book acquisitions that are out there that we can contemplate, but our operating platform right now is very sound. And as Joe said, just running a better business on that platform will produce meaningful yields for us going forward.

Dan Farrell – Sterne Agee

Thanks. Just one other quick item; can you just comment on some of your small account efforts? You talked a little bit about your global and large stuff. Can you talk a little bit about what's going on in that area?

Joe Plumeri

Don.

Don Bailey

Sure. You’ve got – this business that we’re in has generally been more focused on middle market, lower middle market type business. And there is a segment which we’ll refer to as commercial and it’s defined a little differently across the globe within Willis, as you can appreciate, really has to do with making sure you’ve got probably three things to properly conduct that business.

You need critical mass, you need a proper operating platform, and you need some technology. And when you have all three of those, you can actually take that business for the most part out of the middle market operating environment that is in, move it into a more specialized environment, get a lot more margin out of it that you would otherwise, get it frankly profitability in a lot of that space. So we’ve probably got two efforts going on within Willis right now.

One is certainly and just migrating all of our current commercial segment business to that platform and making sure we get profitability through that effort. That’s been going on and will continue to go on. Relatively there are third-party efforts that we can engage and to grow that business as well. So we’ll continue to do that as we go forward.

Dan Farrell – Sterne Agee

Thank you.

Operator

(Operator Instructions). Our next question comes from Meyer Shields with Stifel Nicolaus.

Meyer Shields – Stifel Nicolaus

Thanks, good morning. Let me start with I guess with one question on the international segment. What's the exposure unit trend there? Is that a positive on a year-over-year basis on the aggregate?

Joe Plumeri

I didn’t hear. Would you say that Meyer again slowly? I’m sorry I didn’t catch the whole question.

Meyer Shields – Stifel Nicolaus

No, no problem at all. I'm wondering whether in the international segment, the trend in exposure units is actually, is that flat, is it rising?

Joe Plumeri

Exposure units in international I think are about flat as I said, when I answered the question about exposures, I speak for most of the world, where I don’t see in very many places other than emerging countries. And, of course, I’m eliminating those places which are obviously like Latin America where exposures are up, the emerging countries and Russia and China.

But in the more seasoned mature countries, and I'm looking at Sarah Turvill as I say this, that our exposures are about flat and I don’t see any rise, I’m looking at the UK, I'm looking at David Margrett when I say this, the UK exposures are about the same as well. Our rise in our revenue growth, in our businesses are coming from opening more accounts than retaining our accounts, that’s where it’s coming from. It’s not coming because rates are better or exposures are higher.

Meyer Shields – Stifel Nicolaus

Okay, thanks.

Joe Plumeri

Thank you.

Meyer Shields – Stifel Nicolaus

With regard to the global – I'm sorry, the large corporate account business under Martin Sullivan, is that business fundamentally lower margin than let’s say the current North America business?

Martin Sullivan

Good morning, it’s Martin Sullivan. I’ll turn the microphone around. Not necessarily. I mean, obviously in many areas of the global account segment, there are niche opportunities that actually have very wide margins. And in the first six weeks of my Willis career, I’ve been sitting down with my colleagues and actually scoping the opportunity, and it’s a very large opportunity.

And as Grahame articulated earlier, we’re all very excited about that opportunity. But to be specific to your question, I wouldn’t necessarily assume that in the major account area, we can’t maintain the current level of margins. Obviously we’ll be selective in the RFPs that we respond to and that the accounts that we target, but we expect to make the level of returns that you would expect us to make.

Meyer Shields – Stifel Nicolaus

Okay, fantastic. Thank you very much.

Operator

Our next question comes from Mark Hughes with SunTrust. Your line is open.

Mark Hughes – SunTrust

Thank you. Refresh me on how much of the North American business is benefit, and then what's your take on the impact of health reform on that segment?

Joe Plumeri

Don.

Don Bailey

About 25% of our business is in the employee benefits area as we sit here today. Healthcare reform anybody that’s going to get on this call and give you a definitive forecast of what the impact of healthcare reform is going to be on that business is probably a little naïve. We’ve done as you can appreciate a lot of analysis certainly on our own and through a lot of third parties as to how that reform will ultimately play out.

On a net basis, we believe it actually can be positive for us as we go forward. We think increasingly carriers are going to be looking for more value added intermediaries on a going forward basis, we’re already seeing that and engaging those conversation. We also believe that buyers and employers increasingly are going to be looking for more value-added intermediary, not just transactional players, but those that can bring HR communication strategies, wellness strategies to the table as well. So we believe we’re well positioned in that space.

You can start to play through the advent in 2014 of state-based exchanges and what impact is that going to have in your business. Again you get 20 states currently that are suing the government, and so I'm not sure how quickly they're going to adopt those exchanges. But if you look at Massachusetts and Utah, we don't necessarily see those as they currently exist as being threats to our business.

So I think you’re going to have some of them very small life businesses that are impacted, the individual market maybe impacted, but overall we think employers are going to increasingly need our services, and this business for the most part will continue to be distributed through employers. So we think net-net, we’re well positioned, and this is going to be a good opportunity for us as we go forward. Complexity tends to be a space where we play well.

Joe Plumeri

Just add to that, I think our value proposition is outstanding. You can see by the 4% growth in employee benefits in North America where again it’s 20%, 25% of our business is outstanding.

The value proposition I think plays a bigger part with employers wanting to understand more about what their options are and how they can help their employees, especially in a dwindling expense base, where I only got so much money to spend to help my employees and we’re finding more and more in our value proposition as we talk to our people that employers are asking more questions and looking for more assistance as to the best way to use that dollar that they do have. So it appears that even though we’re not clear about healthcare reform, but we are clear about the fact, right, Don, that people are looking for more and more help.

Mark Hughes – SunTrust

Thank you.

Operator

Our next question comes from Cliff Gallant with KBW.

Cliff Gallant – KBW

Good morning.

Joe Plumeri

Hi Cliff.

Cliff Gallant – KBW

Hi. My question has to do with – there's a I think a market thesis out there that there is a certain large international insurance carrier that had a couple of financial problems a few years ago, which has pressured rates throughout the industry. I was curious if there happened to be anyone there who could comment on whether or not that that is still true?

Also regarding that same insurance company, there was a thesis out there that because this insurer paid lower brokerage commissions, that as the industry changed, or if that company lost market share, that the insurance brokers would benefit from higher the commissions transferring from that company to other insurers. I was wondering if anyone there could comment?

Joe Plumeri

No one here wants to comment on that subject.

Cliff Gallant – KBW

Okay, thank you.

Operator

And our next question comes from Keith Alexander with JPMorgan.

Keith Alexander – JPMorgan

Hi. Can you guys talk a bit about the thought process behind recent initiatives including the Group mining practice, the Captive Insurance facility in Malta, the agri business in the metal and plastics program with Chartis? I know it's a broad range.

Joe Plumeri

Yes, that’s a lot. Those are lot of initiatives. When you talk about the Captive in Malta is simply to expand our ability. I was at the conference in Chicago for self insurance and I told them that Malta was just another way that we wanted to expand our experience there. As it relates to mining and plastics, I mean what this business is about a specialization, this business is about our investment in specialization.

No longer do you go out and say you want to buy insurance or you want buy insurance from us, it’s about understanding – we have a thing called The Willis Cause, and the first piece of the cause is to understanding our clients’ industries and knowledge off those industries. And by having specializations, by enhancing our ability to understand those industries gives us a greater ability to be able to have our clients feel that we understand them. And then as a result of understanding them can give them solutions that nobody else can give him. So you’re going to see us continuing to expand our specialization base.

Keith Alexander – JPMorgan

Thank you.

Operator

And our next question comes from Adam Klauber with Macquarie.

Adam Klauber – Macquarie

Thanks. Just one or two follow-ups. Could you just give us any guidance on the amortization of cash retention payments? They've obviously been growing at a relatively rapid pace. Will that slow down eventually?

Michael Neborak

Well, eventually, yes, it’ll slowdown. In the fourth quarter the amount would be a little bit larger than it was here in the third quarter. And then in 2011, the total amount will be greater than 2010. And early in 2012, it’ll converge, and so there will no kind of year-over-year or quarter-over-quarter increase.

Adam Klauber – Macquarie

Okay. And also can you help us on the tax rate going forward, what can we expect?

Michael Neborak

Yes, I think 26% is a good rate to use going forward. I tell you, it could come in at 26.5%. Well, that depends on our income coming out of North America. But 26%, 26.5% is really the rates that I would use going forward as you model the business.

Adam Klauber – Macquarie

Okay, thank you very much.

Operator

And at this time, there are no further questions.

Joe Plumeri

Okay. Thank you very much, everybody. Have a great day. Bye.

Operator

Thank you for participating in today’s conference. You may disconnect at this time.

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