Willis Towers Watson PLC (WTW) 2013 Q2 法說會逐字稿

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

(Operator Instructions)

Today's conference is being recorded.

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

Now I will turn the meeting over to Mr. Peter Poillon.

You may begin.

Welcome to our earnings conference call, which is being hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings.

A webcast replay of the call, along with the slide presentation to which we will be referring, can be accessed through our website.

If you have any questions after the call, my direct line is 1-212-915-8084.

Please note 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.

These statements reflect our opinions only as of today's date, and we undertake no obligation to revise or publicly update them 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, 2012, 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 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'll now turn the call over to Dominic.

Welcome and thank you for joining our quarterly conference call.

By now you have had a chance to read the news release that we put out last night and have a copy of our slides at the ready.

With me today are Michael Neborak, Chief Financial Officer, Steve Hearn, our Deputy CEO and Head of Willis Global, and Tim Wright, Head of Willis International.

Also joining us today for the first time is Todd Jones, who recently took over from Vic Krauze as CEO of Willis North America.

As you saw in our recent press release, Todd joined with us 10 years ago, and he and Vic have worked closely together for a number of years, with Todd most recently in the role of President of Willis North America and prior to that as national partner for the northeast.

I'm delighted Todd and Vic will continue their partnership as they work to further strengthen and grow our North American business.

While I'm on the topic of introducing new faces, I'm sure you also saw our release this week following our annual shareholders meeting.

We have three newly-elected board members.

Paco Luzon, Jaymin Patel and Jeff Ubben.

In addition, you will also have seen that on July 8, Jim McCann was appointed as Non-Executive Chairman.

These are all highly talented individuals who bring broad expertise in global enterprise, finance, management, teamwork and innovation.

I'm sure that their strong leadership and governance experience will help guide our business forward.

As usual, we will be happy to answer your questions after Mike and I offer our introductory remarks.

So let me turn to an overview of our results.

We continue to make progress this quarter in growing our top line, delivering 6.3% organic growth.

We are very happy with that.

Importantly, this was the third consecutive quarter of solid organic growth in each of our segments, Willis North America, Willis International and Willis Global.

Global led the way with 10.3% growth, with North America and International growing at 5.5% and 2.6%, respectively.

My congratulations to Steve, Vic, Todd and Tim, and their organizations for the continued progress we are seeing in building strong, sustainable revenue growth.

Now, digging into the numbers a bit, our reported GAAP earnings were $0.59 per diluted share in the current quarter.

Importantly, the current quarter had no adjusting items, so our reported and adjusted figures were the same.

This compared to adjusted EPS of $0.59 in the year-ago quarter.

I would point out that this does not really give you the full picture of how we view the underlying improvement in EPS, as there were a few items that we highlighted in our press release which distorted the year-over-year comparisons.

Mike will walk you through those in more detail shortly.

So let's spend a few minutes looking at each of the businesses in some detail.

I'll start with Willis North America.

As I mentioned, North America achieved 5.5% organic growth in the quarter.

In the year-ago quarter, North America organic growth declined, so this is a good result that follows on the back of improving results in recent quarters.

Importantly, growth in the quarter was largely driven by new business wins.

While rate was generally positive, we estimated that it accounted for around 1.5% of our growth during the quarter.

North America's growth was well-distributed geographically across all regions, an important result of the work that the North American team has done to strengthen our business.

The Midwest, West and Metro regions led the way during this quarter.

Also important for the North American business are the two largest practices, human capital and construction.

Both performed well.

Human capital put up strong organic growth in the quarter, coming in at high single digits.

With human capital making up more than 20% of our revenues in North America, that is an important and robust result.

Construction, our second largest practice, grew revenues by low double digits.

We remained bullish on our construction business, as activity is clearly stronger than in the year-ago period.

We also saw good results in other industry practices, including financial services, tech and telecom, and mergers and acquisitions.

Before moving on from North America I want to thank, once again, Vic Krauze for the tremendous job he did in guiding our largest business through one of its most challenging periods, returning it to growth and improving profitability.

I look forward to Vic's continued guidance and counseling in his role as the Chairman of Willis North America.

Let's now move to Willis International.

Willis International grew by a modest 2.6% in the second quarter, which was below the level we have come to expect, but was affected by some delayed revenues.

This portfolio comprises a variety of businesses, including some underperformers as well as real stars, operating in some of the most challenging as well as exciting markets.

Now I don't want to steal Tim's thunder for the Investor Day, but he and his team are implementing a range of compelling strategies to maintain or improve on the performance we have previously seen from International.

Let me provide some detail of International's results for the quarter by region.

Western Europe, despite generally weak economic conditions, reported a low-single-digit increase in revenue.

This was led by strong performances in Sweden and Denmark on the back of new business wins, and modest but still positive low-single-digit growth in Iberia and Italy.

Offsetting this were declines in countries such as Germany, Ireland and the Netherlands.

In eastern Europe, a growing market for us, we saw double-digit growth, primarily driven by our performance in Russia.

In the UK, our business was down low single digits in the quarter.

However, we believe that the actions we have taken to build positive long-term growth in the UK are progressing well.

In Latin America, we saw another quarter of great results, with growth in the double digits.

While the drivers of growth were different in each country, Brazil, Argentina and Peru were especially strong in the period.

Additionally, our Venezuela operations had another very strong quarter.

In Asia, we were up mid single digits, with double-digit growth in China, Indonesia, Malaysia and Taiwan.

That growth was partially offset by declines in Korea and Hong Kong.

Finally, Australasia declined mid single digits in the quarter, attributable to a decline in revenues in Australia.

Uncertain economic conditions and upcoming elections, together with some delayed revenues, had an effect on our results, but we believe that the improvement we had started to see over the last couple of quarters remains on track.

You can see from the description of this quarter's results that International is generally performing fine.

What is driving the business' growth down has been the UK and much of western Europe, both for obvious reasons.

We are working diligently on strategies that will drive better results from those slower growth markets, and remain confident that International will generate long-term growth in its historic 4% to 6% range.

Let's now move to Willis Global.

Willis Global comprises Willis Re, specialty, placement and Willis Capital Markets and Advisory.

Willis Global had a very strong quarter, with organic growth of 10.3%.

Willis Re led the way, reporting growth in the mid-teens.

In turn, Willis Re was led by North America Reinsurance, once again driving growth with strong new business wins and solid retention.

International and specialty reinsurance both grew solidly in the mid-single-digit range.

This was an impressive result once again for our reinsurance colleagues around the globe.

The Global specialties businesses of Willis Global were up mid single digits, delivering good growth from new business.

Across the various specialty businesses, we experienced areas of over- and under-performance, as expected, but most notable was the strong performance delivered by our energy team during the quarter.

With that, I will turn it over to Mike it discuss the rest of the financial results.

I will return later with some final comments before turning it over to you for questions.

Thank you, Dominic, and good day, everyone.

During my comments, I will be referring to the slide presentation that is posted on our website.

In reviewing the numbers, all comparisons are to the second quarter 2012 unless otherwise stated.

As Dominic mentioned, we continued to deliver solid, underlying results, driven by 6.3% organic commission and fee growth.

The published numbers on slide 3, however, show adjusted EPS of $0.59, flat to Q2 2012, and adjusted operating income of $171 million, down slightly from $174 million.

This warrants some further discussion.

If fact, the year-over-year comparison is much stronger after eliminating the unfavorable impact from two items.

First, foreign exchange movements, which reduced operating income this quarter by $11 million.

Second, the change in our remuneration policy from retention award amortization to bonus accrual, which distorts the prior-year comparison by $12 million.

When you factor out those two items, you see a different picture, amounting to an adjusted operating income that increased by $20 million or 12%.

In analyzing our adjusted operating margin, you should understand that the quarter-over-quarter decline is more than offset by those two items, the change in our remuneration policy and unfavorable foreign exchange movements.

When adjusted for these items, our adjusted operating margin actually increased by 110 basis points, in contrast to the150 basis point decline that is shown on slide 3. I hope that explanation helps in clarifying questions about margin that may be on your mind.

Now, in looking at our second quarter 2013 adjusted EPS of $0.59, please follow the progression that I'm about to lay out.

Unfavorable foreign exchange decreased EPS by $0.05, and the lower tax rate in the quarter increased EPS by $0.03.

As such, EPS for the second quarter 2013, on an underlying basis, is $0.61.

This compares to $0.54 in the second quarter 2012, after adjusting for the $0.05 impact from changing the remuneration policy.

So taking all that into account, the way we look at it, this results in a $0.07 or 13% increase in adjusted EPS from $0.54 to $0.61.

Now let me explain our total expense growth in more detail on slide 4.

Underlying growth in total expenses was 7%.

But we know that is an uneven comparison because of the change in remuneration policy that we made at the end of last year.

That discussion brings us to slide 5, which summarizes the quarterly impact from changing that policy.

As discussed in the previous quarter S&B expense for the full year 2012 actually would have been $48 million higher had we been accruing for annual cash bonuses throughout 2012, the way we are doing it now, instead of amortizing retention awards.

The second-quarter impact from this change was $12 million.

You can see that the quarterly impact is somewhat uneven, so we will continue to provide this slide each quarter through year-end.

It is important to remember this change had no impact on cash flow.

Now let me provide some details on the component pieces of our expense growth.

Turning to slide 6, please note the quarterly comparison of salaries and benefits.

Underlying S&B expense increased 6.4% and the main drivers of the increase were a combination of factors.

First, increased headcount of approximately 450 people since July 1, 2012.

Second, increased production incentive payments that resulted from higher commissions and fees generated thus far in 2013.

And third, the year-over-year impact of annual salary increases.

Favorable foreign exchange movements of $3 million partially offset these factors.

In addition to this comparison is the effect of changing the remuneration policy that I just described.

So to cover this, please turn to slide 7. On slide 7, S&P growth is laid out assuming that we had accrued bonuses throughout 2012, as we are doing today.

This is to provide what I would call an apples-to-apples comparison.

As you can see, on this comparable basis, underlying S&B growth was 3.9%, or 250 basis points lower than the straight comparison.

Slide 8 shows the quarterly comparison of other operating expenses.

On an adjusted basis, other operating expenses grew 10.4% in the quarter.

That was a summary of our reported and our underlying expenses.

But as you saw in our press release, we commented on some items that flowed through both our salaries and benefits line and our other operating expense line this quarter.

Our S&B expense this quarter benefited by $10 million of compensation-related accrual reversals.

Conversely, our other operating expenses were hurt by $7 million of VAT-related expenses.

So, with all that laid out, to get to a truer growth rate on our component expenses, you might want to adjust for those items that I just described.

Here's how that math works out.

With all the adjustments made, S&B growth was 5.9%, and other operating expense growth was 5.2%.

I know I have thrown a lot of numbers at you, and I'll be happy to take further questions on them when Dominic concludes his remarks.

But hopefully, this now gives you a better understanding of our expense growth.

Now moving to taxes.

Similar to last quarter, the 21% tax rate in the quarter was primarily driven by the low tax charge against our US income.

As a reminder, our US operations are in a cumulative three-year loss position due to the goodwill impairment in a number of one-off charges recorded in 2011 and 2012.

This requires us to maintain a valuation allowance against our deferred tax assets, so that very little tax charge is booked against our US income.

We expect that this will be the case until our US operations are beyond the cumulative three-year loss position period, which is likely sometime in 2015.

Let me comment on the Associates line, which as you all know is primarily Gras Savoye.

In the second quarter of 2013, this line showed a lot of $3 million compared to a loss of $1 million in the year-ago quarter.

For the full-year 2013, we continue to expect that the Associates line will come in lower than last year as Gras Savoye completes its operational review.

As such, at this time, we still expect the Associates line to be a loss of $1 million to $3 million for the full-year 2013.

Let me wrap up my comments with some thoughts on the balance sheet.

We ended the second quarter with $503 million of cash.

Total debt outstanding at June 30 was $2.3 billion, down slightly from year-end, and during the quarter, we paid down the $55 million balance that was outstanding on our revolver at the end of the first quarter.

Lastly, we just amended our credit facility.

The key points on the amendment are, we pushed out the maturity date on our term loan and revolver to July 2018 from December 2016, and we also increased the size of our revolver from $500 million to $800 million, which simply provides us with more flexibility as we move forward.

With that, I'll turn the call back to Dominic.

Thanks, Mike.

To sum up, I am pleased once again with our top line growth.

I feel that we are delivering on the initiatives that have been discussed over the past several quarters, going back to late 2011.

The many things that affect our performance, pipeline development and management, producer growth, and development and client retention initiatives, are all having the desired effect that we had anticipated and discussed with you in prior quarters.

We believe, however, that there is more work to do and more improvements to be made.

Our goal is to be the best at what we do and, to achieve that goal, we need to continually strengthen our already-outstanding service and analytics to our clients to provide them with resilience for a risky world.

For those of you who have signed up to attend our Investor Day next Tuesday, July 30, or are planing to watch or listen to the webcast, I look forward to the discussion of our strategies on how we plan to serve our clients and thereby grow our business into the future.

Thank you.

We will now be happy to take your questions.

(Operator instructions)

Thomas Mitchell, Miller Tabak.

I had one question about the North American business in that, of course the comparison of 2012 to 2011 was down 3% for commissions and fees, so that 2013 is really up about a little over 2% from second quarter of 2011.

I'm wondering if the underlying trends that you describe -- obviously they are positive versus 2012, but on a continuing basis, is there something underneath that is keeping that business from returning to a more robust level?

Let me give a quick overview here of how we think about that, and then I'm going to hand it over to Todd Jones.

I think we are very excited about the momentum we see in this business.

We all know that this business suffered a period when we were losing some producers and the business was actually shrinking.

And so I think the correct momentum comparison is how we are seeing continued growth, both in retentions, new business won, and the producer force.

And the forward momentum is extremely positive.

But let me hand over to Todd to provide any color on that.

Thanks, Dominic.

In terms of what we see going forward, and obviously, as you know, we don't necessarily provide segment-related guidance.

But the plan for us in North America is, frankly, to continue to build on those foundational elements that we have seen take hold over the course of the last three quarters.

And we are confident that we can continue to refine and build on those elements to continue to drive the good results, and we're obviously optimistic about not only the balance of the year, but as this business as we continue to move forward.

Okay.

And then, on the -- is the process of delays and questions in the Affordable Healthcare Act affecting your business one way or the other?

Yes, good question.

And it is affecting it in a positive way.

As you can imagine, this time extension gives us the opportunity to, frankly, provide more counseling guidance to folks that are struggling with how this is going to impact.

As you probably saw, there was a bill that was introduced to delay it an additional year.

So that just gives us even more time, potentially, to get out there, offer some solutions, talk about our tools, and deliver the expertise that we bill to the clients.

So we think it is a positive thing.

That's great.

Mark Hughes, SunTrust.

Just to follow-up on that question.

How much of the growth do you think is related to the, let's say, uncertainty caused by the healthcare reform in general?

Yes, this is Todd.

That is a really hard one to answer, and I would literally be pulling a number out if I gave it you.

But clearly, it has created an opportunity for us and we are confident it will continue to create an opportunity, but we are not necessarily capturing growth in that framework.

Could you give a little more granularity on rates in the P&C space, specifically in North America?

How you saw 2Q as compared to Q1, and then how they might be trending just very recently?

So let me just start by reiterating what I said before, which is, when people ask us about rate, I do like to remind them that we are affected by global rates.

We are a global firm.

And so rates, yes, in the North American P&C market are clearly important to us, but so are Brazilian facultative risk rates.

So are rates in Western Europe.

So are rates and what's happening in Asia.

So that the -- when we think about rate, the diversity of what we do gives us quite a lot of softening of -- particular volatility in any one market.

With that, let me have Todd address your specific question about North America.

Yes so we definitely saw rates slower in Q2 than we did in Q1, with one exception related to workers comp.

And if you saw some of the material that we have put out in our marketplace realities for the balance of the year on some of the major lines, i.e.

property, we are definitely showing a trend toward flattening to modestly down.

Clearly that is going to be dependent upon the season we are entering, as far as the storms.

But we are definitely seeing a flattening to modestly trending down rate environment.

Dan Farrell, Sterne Agee.

Just a couple of questions.

Firstly, you had a very strong result, I think, in the reinsurance brokerage, particularly given some of the comments we are hearing on market conditions.

I was wondering if you could talk about, or expand a little more, on what is driving the strong organic?

And then also how you think about sustainability there as we go forward?

This is Steve Hearn.

Great question, thank you.

Quickly, congratulations to our reinsurance team, who did an outstanding job in the quarter, across our reinsurance business, but as we have highlighted, in our North American business, particularly.

And I guess at the heart of your question is, was it timing?

Is it sustainable?

For a number of quarters, I have highlighted Willis Re very much as one of the jewels in Willis' crown.

And actually what drove our number in Q2 and in North America was high new business performance and strong retention.

New business in reinsurance, as I'm sure you know, has a long lead time.

So in fact what you saw manifest in Q2 was actually work of last year, as well as earlier in this year, i.e.

the award of the contract and when the money actually turns up being two different times.

In terms of its sustainability, and there has been a lot of comment, particularly around new capital, and certainly we have seen an impact on new capital in parts of the reinsurance book.

Any new capital of any size is obviously going to have an impact on rates.

At the moment, the impact is fairly concentrated to the property cap world in North America.

And again, this raises, I think, a really important point, because new capacity in rate reduction doesn't necessarily correlate to reduced commission in fee income for a reinsurance broker.

The standout business for Willis Re in Q2 was North America, and North America is where the impact has been of this capacity.

So there is good illustration of that as fact.

The client may well see reduced spend in terms of the rate impact.

But for us, it is new earnings, new revenue, new business wins.

So you have really got to analyze what's going on in a reinsurance broker's book to understand the rate impact.

For us, good new business growth in Q2 and good, strong retention is what's driving those numbers.

Thanks, that's helpful detail.

And then just one other question.

You did have margin growth, if you make all the adjustments in this quarter and last quarter.

But with the strong organic, I would have thought that the margin could have been even better.

Is there still some other stuff that is holding back the operating leverage?

And how do you think about margin trending going forward?

We are going to talk about this further in the Investor Day, but I think our view is that we should be continuing to invest in our growth opportunities.

And we did -- in this period of the last 12 months, we have been looking to add people in our growth markets.

And of course, we continue to invest in analytics.

And so that -- those are natural investments to drive growth in the top line.

And parallel with that, we continue, we continue to take a tough look at lower-growth areas and fixed-cost areas to get more operating leverage.

And we remain committed to making sure that we have a positive gap between revenues and costs over the medium-term, but we'll talk about this more in the Investor Day.

Okay.

Those are all helpful answers.

Brian Meredith, UBS.

A couple of questions.

The first one, I'm sorry if I missed this.

If Todd, you said this.

But on the human capital business growth, was there any impact in year-over-year from the contingent commissions?

It was a very small impact.

It was less than $1 million.

Okay.

When are we going to start seeing the real impact of that?

Because I know that was one of the changes that went on in that business.

Brian, I think the expectation is that's going to continue to ramp up during the course of the rest of this year and into the first quarter next year.

And we'll start to see, as we get to more normalized state in second quarter and beyond next year in terms of the impact of contingents on that human capital book.

Right.

And then back on the reinsurance book.

I'm just curious, was any of the growth bolstered by Willis Capital Markets?

It is not in our treaty operation.

We don't add that number into Willis Re's results.

Willis Capital Markets is a separate business.

And how did that do during the quarter?

It did fine, it did grow, but modestly.

Got you.

And then just lastly, on the reinsurance business, you all have been having a lot of success with new business and stuff.

I am wondering if you could talk a little bit about why do you think you are winning this new business?

Is it coming from competitors?

Is it new programs and stuff being put on?

If you could drill down a little bit on that, that would be great.

I would be delighted to, only too delighted to, and apologize in advance for the advert -- or advertisement (laughter).

We're the best (laughter).

No, but in all seriousness, we've focused a lot of effort around our reinsurance business over the last couple of years.

Particularly investment in analytics and differentiating our analytics proposition from even our larger competitors in this space, in terms of embedded analytics totally into our proposition.

So our proposition clear to the client in terms of content, and in terms of the analytics and transactional capability being brought together.

We are very focused in terms of new business.

We only go for business where we feel we can add significant value to the client and reject other opportunities.

So we don't just respond to every RFV or tender opportunity that we are offered.

We are very focused in that regard, and we have been highly successful.

We have won pretty much every opportunity we have turned our attention to during the quarter of last year and into this year as well.

Been very successful.

Great.

Adam Klauber, William Blair.

Just a clarification.

Do alternative within the reinsurance -- do alternative market transaction, in other words, if you help organize a cat bond, does that fall in Reinsurance or Capital Markets?

Yes, in the -- fundamentally, into our Capital Markets business.

It may be an opportunity is uncovered -- or discovered, I guess, by our reinsurance relationship with an organization.

But no, the transaction and execution is done by our Capital Markets business.

Okay.

Has there been reasonable growth in your fees related to those transactions?

I would say there's been more activity.

As I said, our Capital Markets business revenue has grown in the quarter, albeit modestly.

But there's certainly been more activity, yes.

Okay.

Different topic.

There has been a lot of talk about one of your competitors is doing a quarter-share-like transaction with Berkshire in London.

Are you doing any type of similar structures?

That probably falls to me, Steve again.

Yes and no would be the answer.

One, we should say that what our competitor did with that particular capacity provider isn't perhaps as revolutionary as has been heralded.

There are similar arrangements.

In fact, we operate one on our energy portfolio in London.

Have done so for a number of years.

We are -- we have put together a proposition, which we are marketing across the carrier community at the moment, seeking capacity to, under the banner of Global 360.

We think we have done it very differently than our competitors, in terms of canvassing widely to see which carriers offer best solution to our client.

And put client very much at the center of our discovery here of what's available.

And we continue to consider propositions that have been put to us.

But -- so the answer is yes, we are doing something.

But is it a clone of something one of our competitors has done?

Not at all.

Okay, that's helpful.

In human capital, obviously nice quarter.

Could you give us an idea, how much of the growth is coming from more traditional brokerage placement business versus HR consulting business or benefit consulting business?

Yes, it is.

Most of the growth is the transactional business that we are seeing.

So the traditional broking business.

We are absolutely seeing an increase in activity on the consulting side.

And I think we mentioned earlier, just healthcare reform and some of the challenges in any organization on how to comply, and what it means in goals and objectives for a benefit program, create a lot of opportunity to discuss and sell solutions.

But at the end of the day, majority of it was transactional.

Okay.

And is that being helped by increased rates in healthcare?

Or is that more market share gains?

I would call it market share gains.

Okay.

And then as far as the construction.

Obviously, nicely, that area grow, and I know you have a big practice there.

Is that more smaller risks?

Or is that larger construction taking off?

Yes, it is actually -- I would say it's a little bit of both.

Clearly, we are seeing an uptick in the projects work as financing continues to come back online.

So we are definitely seeing some of the larger projects, but it really cuts across the whole spectrum of opportunities.

Okay.

Great.

Mike Nannizzi, Goldman Sachs.

Dominic, I think at last quarter, you implied that margin improvement in Global would be more back half of the year-loaded.

Looks like it came in a bit earlier this time.

And I was just curious, was it maybe less investments in the second quarter?

Was it just that revenues grew faster than you expected?

Or -- if you can just a little context on that, that would be great.

I'll give, first, a perspective and then go back to Steve.

I think we saw very strong revenue growth this quarter, which obviously had the resulting effect on close-through to margin.

And we were very pleased with that.

But Steve, do you want to add anything to that?

Sure.

Yes, we had -- clearly, we had very, very strong new business growth, as I have mentioned before, and particularly in one area of our business, which had an effect on the overall result.

Clearly, as I said, on North American reinsurance business performed particularly well.

And again, I think in the last quarter, we referred to the other parts of Global, which drive some of the expense investments, so we have responsibility for running the regulated entity in the UK, Willis Limited.

And there are some increasing costs around UK regulation.

And secondly, we have responsibility in Global for the placement activity for the entire organization in terms of our carrier management function.

And, by example, the investment in Will Place, and again, that drives some of the expense growth that you see in Global.

But the business units themselves, the core bits of Willis Re, specialty, Willis Capital Markets, are showing generally good growth in revenue relative to the growth in total operating expense.

Great.

So that's not -- the second quarter is not a pull-forward, if you will, of the [marginics].

Okay.

We are not benefiting from timing on either line.

No.

Great.

It's true results.

Okay.

Great.

And then just one question back on Re, I guess.

It is great.

You are certainly winning new business and retention.

It sounds like it is very strong as well.

I guess I'm just a little surprised that alternative capital either hasn't been maybe more disruptive, or that that hasn't been an area, a larger contributor of growth.

Maybe, I think John had mentioned a pipeline and that it takes time for these transactions to move through.

If we look at that pipeline from here, what do we see?

And is there any color on the capital market side, where maybe some of that activity might be on the come?

I'll probably give three quick answers.

One will be a little bit of repetition.

For us, North America performed very strongly for us on reinsurance.

We are a significant intermediary in Florida.

And yet Florida is where the impact of new capital has probably been felt the greatest in the reinsurance world.

So please, there isn't a correlation, necessarily, between rate and what a reinsurance broker will earn.

Reason for us, particularly year-on-year, is we won a lot of new business from our competitors last year that wasn't in our revenue last year and is in our revenue this year as new business.

The clients' rate may have gone down.

They might actually choose to buy more, but the rate has gone down.

But that doesn't necessarily mean it reduces our own, in that case, because it is new business.

It is 100% growth for us, if you like, at a client level.

Secondly, longer-term prognosis in terms of new capital in the reinsurance world, if not the insurance world, is subject to lots of debate at the moment, internally, externally with clients, et cetera.

And you'll hear very, very different views of how fickle, sustainable, that new capital may or may not be.

My personal opinion is that it is a significant development, and certainly has the potential to be significant.

But that is not, thirdly, a Willis comment.

We have plenty of opportunity to earn, both from the arrival of this new capital in terms of advising our clients, as well as, frankly, given our relative market share, an opportunity for us to develop conquest business from our competitors.

So I don't see it as a threat for us.

Got it.

I get that last part.

I guess it just sounds like you are growing your share of a shrinking pie, if the pie is shrinking because the alternative capital stuff is coming in -- would come in to you through a different part of your business.

So I guess it would sound even more pronounced in your terms of taking market share from peers.

Does that make sense, or is that not right?

Yes, sort of.

It does.

It does make sense.

The real thing that is driving our reinsurance business at the moment is retention of existing clients and acquisition of conquest business from our competitors.

Traditional reinsurance business that we are winning from our competitors.

Okay.

Great.

Jay Cohen, Bank of America Merrill Lynch.

I guess for Mike, the tax rate.

Obviously first half was relatively low, and you talk about, I guess, using some of the deferred tax asset.

Can you -- given that situation, can you give us some guidance what the tax rate should look like in the second half and in 2014?

Okay Jay, so it is rather complicated, and I say that because it is very sensitive to where that income comes in, geographically.

So for example, here in the second quarter, I think at the first quarter I had mentioned that our tax rate in Q2, Q3 and Q4 would be somewhere between 22% and 26% each of those quarter.

And we came in, here in the second quarter, at -- rounded up to 21%.

So I was a little bit low and off that range, principally because more income came in in North America than what we had budgeted for.

The sensitivity of the situation is that, it is a little bit perverse.

The more income we have in North America, the lower our tax rate is going to be overall.

Because that income is not getting a tax rate against it.

So what I would tell you is that for the full year, I believe the full year rate will come in somewhere between 22% and 24%.

Obviously, if we booked a tax rate of 19% in the first quarter and 21% in the second quarter, it is going to be higher in Q3 and Q4.

I would just like to characterize it as 22% to 24% for the whole year.

Q3 is very difficult, because it is our smallest net income quarter, so it is really sensitive to where the changes might be in the geographic distribution of that income.

And what about for next year, at this point?

It should still be, I would assume, aided by your tax situation?

Next year is going to be similar, at least as we see right now, to our situation here in 2013, because we'll still be within this three-year loss period, if you will.

So therefore more or less not permitted, under GAAP, to book a tax provision against our North America profits.

(multiple speakers) Just somewhere in 22% to 24% for next year as well?

I'm sorry, Jay?

Somewhere between 22% and 24% for 2014 as well?

Yes.

Great.

Meyer Shields, KBW.

Can you -- this is just for -- a few modeling questions.

The VAT charge and the accrual reversal.

What segment were those?

Where did they hit?

The VAT charge, about $5 million was in International and $2 million was in our Global segment, so that is the $7 million.

Yes.

And then the accrual reverse basically was $5 million positive in Global, $3 million in International, and $2 million in North America.

Okay.

That is very helpful.

I think Dominic had mentioned 450 people added since the end of June or end of July of last year.

Can you give us a sense of the timing of that?

So we can expect it and make sense growth?

450 people.

Just to give you -- so most of those happened in the third and fourth quarter of 2012.

On a net basis here in 2013, I think we have added 80 people.

Okay.

And Dominic also mentioned delayed revenues in the international segment.

Is that something we should anticipate coming back in the third quarter?

I think Dominic meant delayed revenue, meaning deals that got delayed, pushed into the third quarter, which is an ongoing occurrence each quarter.

So I think our third quarter -- I don't think you should look at our third quarter as being impacted by that comment.

It's going to happen and not be impacted very substantially by that at all.

Okay.

And do the modified credit facilities have any impact on the run rate for interest expense?

No.

They were all renewed at the same LIBOR plus 150 basis points that we currently pay.

Okay.

Great.

Jay Gelb, Barclays.

I wanted to touch base on the pre-tax adjusted margin.

I know there were a bunch of one-time items in 2Q.

I'm trying to get a sense, compared to the second half of 2012, is there anything to prevent that pre-tax adjusted margin improving, relative to the as-stated numbers from back half of '12?

I just want to get a sense if there are any other anticipated one-time items.

There is no anticipated one-time items in Q3 and Q4 coming up.

I have to recall what happened in Q3 and Q4 last year.

Maybe we can handle that offline, because I just don't recall what was there.

But we certainly can go back and find that out for you.

Okay, yes.

I guess more importantly, directionally, when you talk about the underlying perspective in 2Q actually showing 110 basis points of margin improvement year-over-year, but for a couple of items.

Is there anything that prevent that from not showing up in the back half, in terms of dated margin improvement?

We have to grow our revenues like we grew our revenues here in the second quarter.

And as Dominic mentioned, we continue to invest quite a bit in our growth markets.

And at the same time, we are looking hard at reducing the costs in our lower-growth markets.

I see, okay.

I think we'll talk about this more at the Investor Day.

Great.

And then have there been -- given any thoughts to resuming share buybacks?

Since there hasn't been any for the past three quarters?

Right now we have no plans to do share buyback.

But we are going to talk about the topic of capital allocation very, very specifically at Investor Day on Tuesday.

Okay.

Brett huff, Stephens Incorporated.

Two quick ones.

You had talked a little bit about rates in North America.

And you had gone through some of the different major categories, and I only caught part of that.

Could you -- I know you mentioned property, specifically, that you were seeing that might sovereign.

Can you just go through those major categories that you outlined again for me?

Yes, so I'll bucket if in just three areas, property, casualty and then financial lines, which we tracked as well.

So in the property market, we see for the balance of the year a flattening to a modestly downward trend.

In the casualty market, call it flattening to still modestly up.

And a lot of that is going to depend upon jurisdiction, obviously.

But not the same kind of trend we are seeing in property.

And in financial lines, similar as to what I said in property, flat to modestly down.

And the drivers of that, is this just an excess capital question?

Is it maybe underwriters not being as disciplined?

What is the driver of those?

I won't call it lack of underwriting discipline.

But I'll -- definitely excess capital.

Certainly performance of the underlying portfolios within the various underwriters.

And frankly, the lack of catastrophes that we have seen in some of those areas as well.

So all of those things combined to create an environment, depending -- again, depending largely on the product and the geography that you are operating in.

Great.

That is helpful.

And then one final question, too.

I think you had talked about construction as being particularly strong, or a highlight in -- I think it was North America.

Can you just comment on that?

Sounds like it is up year-over-year, but any particular color you can give us on that would be helpful.

Sure.

This is Todd again.

Construction had a terrific quarter, and I too would like to offer my congratulations to my colleagues in that business.

And it wasn't in one specific area.

We saw it across all of our geographies, both in terms of size of projects large and small.

So it was really a balanced recovery.

One, I think, aided by an improving finance market and some of these deals getting funded, but also the fact that we just have a very large and differentiated construction business across North America.

Great.

That is what I needed.

Mike Nannizzi, Goldman Sachs.

Yes, just one quick follow-up.

On the financing, Mike, or actions, I guess, in terms of delaying the maturity aids of the revolver and the credit facility.

Anything coincident about that in the option date of the Gras Savoye transaction?

I think we look at that, as well as a lot of other opportunities that may come to be in the market.

And so we had the opportunity to extend it out and to increase the size of the revolver, which just gives us a lot more financial flexibility.

So we took the opportunity that was presented to give us more financial flexibility, which may be helpful in Gras Savoye, might not, depending on what we decide to do about the option, and then just in a normal course of operating our business.

Great.

Josh Shanker, Deutsche Bank.

I just want to go over the headcount a little bit more.

You said you added, I guess, 80 people since the beginning of the year.

I wondered if you could talk about what the gross adds were?

The people you added, whether they were client-facing or not, and where you have been growing?

Generally -- it is Dominic here, we have been adding people in line with our strategy.

So we are obviously adding people in where we see revenue-growing opportunities.

So in the growth markets in Tim Wright's world of International.

And we have definitely added some people in Steve's world of Global, and there have been some public announcements about that, about people that have been added in that world.

And Todd continues to have year-on-year growth in the Producer model.

So when you added all that up, you see growth.

At the same time, as we grow the business, we have to mildly continue to grow the fixed infrastructure or compliance, audit, et cetera, to take account of more activity.

To what extent have the new hires brought in new business at this point in time, and that's fueling some growth, maybe particularly on the reinsurance side?

Yes, I probably think two comments.

One to just elaborate on something Dominic said.

But yes, I can pick up the Re one as well.

In the global number, we will be head count that came to us through an acquisition in London, which is of Prime Professions, which was an acquisition for us that I think brought in about 45 people.

So you'll see that in Global.

And then as Dominic says, we continue to invest in high-growth high-margin operations.

That includes our reinsurance business, and we have hired some people in there.

And absolutely focused on production and client service and analytics.

Absolutely.

We -- this isn't about filling out back office positions.

It is very much client-facing activity.

And to the extent that reinsurance growth related to new hires?

No, you won't -- as I said earlier, you -- the key driver of revenue in Q2 was new business we won last year.

And business that we were on RFP, tender response, et cetera last year.

So it was existing resource.

But absolutely, as we bring in production staff into reinsurance, hopefully you'll see that recognized in successful growth going forward, for sure.

I appreciate all the color.

Meyer Shields, KBW.

Just one I missed.

The corporate and other expense line was, I guess, lower than it had been for awhile at $19 million.

Is that a good run rate going forward?

That is a good number.

It usually runs somewhere between $20 million and $25 million.

Sometimes as low as $15 million, but $19 million is a good number.

Okay.

We joke around a lot, because we have, obviously, items in there that are related to certain foreign exchange get recorded into corporate.

Balance sheet for foreign exchange typically gets recorded in corporate, so it does jump around.

Things like the amortization of our intangibles, which we keep, are steady.

Then there are items that create a little bit of volatility, like some of the foreign exchange that ends up being booked there.

Okay, that helps.

Thomas Mitchell, Miller Tabak.

This is just a short follow-up.

On the reinsurance business, we have heard that there seems to be a trend, maybe it is a relatively long-term trend, for primary insurers to gradually become increasingly sophisticated in their decisions on whether they are going to buy reinsurance or keep business.

And where they -- slicing and dicing it by lines and by tranches.

I'm wondering if that feeds into your strengths?

Or even if you agree that that is a trend?

I'm just interested in your comments.

Yes, I would say Thomas -- thank you, Thomas, it's a -- (technical difficulty) We got a crossed wire there.

So yes, I -- the trend is absolutely right.

It has developed over a number of years, the client, in effect, becoming more sophisticated, their needs and understanding becoming more sophisticated.

And this is really where analytics has come to its fore, being able to, as you described it, slice and dice a portfolio to optimize the reinsurance spend in terms of where the premium is going to and what they're shifting from their own balance sheet into the reinsurance community.

Absolutely it is becoming increasingly sophisticated.

That plays to the intermediary who best deploys analytic capability to their client base, and I think we do that exceptionally well.

And certainly in any research that we have done blindly on the reinsurance buyer's perspective on Willis Re.

The feedback is generally, if not always, that we have a very, very strong analytics proposition, as well as very strong broking talent in terms of execution.

So as the client becomes more sophisticated in their needs, we have been able to deliver upon those needs.

And I would attribute a lot of the recent success to being very good at it.

Okay.

At this time, we have no further questions.

Thank you all very much for your attention, and we look forward to seeing those of you who are able to join us on Tuesday at our investor conference in New York.

Thank you very much.

This concludes today's conference call.

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