Willis Towers Watson PLC (WTW) 2013 Q3 法說會逐字稿

(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.

Thank you.

Welcome to our third quarter 2013 earnings conference call, which is being hosted by Dominic Casserley, Chief Executive Officer of Willis Group Holdings.

A webcast reply of the call, along with a slide presentation to which we'll 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 related 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 for those estimated or anticipated.

These statements reflect our opinions only as of today's date.

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 reconciliations can be found in our earnings press release.

I'll now turn the call over to Dominic.

Welcome.

Thank you for joining our quarterly conference call.

By now, you've 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; Tim Wright, Head of Willis International; and Todd Jones, Head of Willis North America.

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

Let me turn to an overview of our results.

Overall, these results are in line with the targets we laid out at our investor conference in July.

Revenue growth in the mid single-digits, a positive spread between revenue and cost growth and good cash flow generation, all of which underpins, in our view, shareholder value creation.

We, as an organization, are very pleased to have achieved those targets this quarter.

However, to be clear, we told you during our investor conference that we may not hit those targets every quarter.

In fact, it is likely that there will be quarters when we exceed them and quarters when we miss.

Our goal is to achieve the targets, on average, over the median term.

This quarter, we continued making steady progress in growing our top line, delivering 5.7% organic growth.

We are pleased with that.

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

International led the way, with 7.8% growth, while Global and North America grew nicely at 6.4% and 3.9% respectively.

I congratulate each of the leaders and all of our associates around the globe for their great efforts in continuing the strong performance in revenue growth over the past 12 months.

Now, our reported GAAP earnings were negative $0.15 per share in the current quarter.

But that result was impacted by the $61 million net charge we took in August, related to the refinancing activities that we executed to take advantage of the favorable debt markets.

As a result of that refinancing, we pushed out maturities, issued our first ever 30-year debt and reduced the overall cost of our debt.

On an adjusted basis, meaning excluding the early extinguishment charges, adjusted earnings per share were $0.19.

This compares to adjusted earnings per share of $0.22 in the year ago quarter.

However, once again this quarter, this is not really an apples to apples comparison.

Had we accrued bonuses throughout 2012, instead of amortizing retention awards, our third quarter 2012 salary and benefits would have been $17 million higher.

Our adjusted earnings per diluted share would have been $0.07 lower.

So, on an apples to apples comparison, the $0.19 in third quarter 2013 compares with $0.15 in the year ago quarter.

We discussed that in our press release.

Mike will walk you through that in greater 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 3.9% organic growth in the quarter.

This is another solid result that is essentially in line with what we have seen out of this segment now for four straight quarters.

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

While rates were generally positive, we estimate that they accounted for a little less than one-third of our growth during the quarter.

It is very good news that North America's growth was well distributed geographically across most regions, an important result of the work that the North American team has done to strengthen our business.

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

Looking at the growth from a different perspective, analyzing our industry and practice segmentation, we saw growth in both of North America's largest practices, human capital and construction.

Human capital recorded low single-digit organic growth, excluding market derived commissions such as contingent commission in the quarter.

Construction grew by mid single-digits.

While we are on the subject of human capital, I thought it may be helpful if I provide a brief update on the Willis Advantage.

The Willis Advantage is a private exchange that delivers a range of healthcare solutions primarily to middle market commercial clients in the United States.

We define the middle market as anywhere from 100 to 5,000 lives.

The Willis Advantage enables employers to administer benefits within a defined contribution model, structured around an online insurance marketplace with robust decision support tools.

We announced our insurance exchange offering in May of this year, presuming that our clients would be looking at it as a potential alternative for 2014 and beyond.

We believe that our offering is unique, in that we are the only entity that has an approach to address the underlying cost of healthcare by integrating a health management approach as an option.

We have asked carriers to provide enhanced terms and conditions for clients that adopt our formal Health Outcomes program as part of their exchange solution.

Thus far, many have agreed to enhanced underwriting terms and conditions, including first year premium reductions to account for the better than average risk.

Clients and prospects have been very receptive to our approach.

We have had significant interest.

We are engaged with literally hundreds of clients and prospects and currently have 30 to 40 clients and prospects in advanced discussions for 2014 enrollments and another 30 to 40 clients for 2015 enrollment.

Additionally, we have had numerous marketing opportunities, to be in front of prospects to discuss Willis' insurance exchange platform as well as our human capital capabilities, beyond exchanges.

That has been, and we expect will be, a factor in the growth in our practice.

Let's now move to Willis International.

Willis International grew strongly at 7.8% in the third quarter, bringing organic growth for the nine months to 4.5%.

The third quarter growth was a very good result given some of the challenges we continue to experience in the United Kingdom and western Europe, which together made up around 50% of International's revenues in the quarter.

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

As we continue to work to turn that region around, as we discussed during our investor conference.

On a positive note, the UK real estate business performed very well in the quarter.

In western Europe, amidst continued generally weak economic conditions, we reported essentially flat revenue growth.

However, once again, there were marked differences between countries with strong performances in Iberia, Sweden and Norway on the back of new business wins and solid retention.

Those gains were offset by declines elsewhere, primarily in Germany and Italy.

With these results in the UK and western Europe, there were clearly very strong results elsewhere around the world to get us to 7.8% overall growth for Willis International.

So let me provide some detail of International's results for the quarter in the other regions.

In eastern Europe, we recorded growth in excess of 10%, primarily driven by our performance in Russia which grew mid-teens.

Latin America grew solidly, once again, with mid-teens organic growth.

Brazil, Argentina and Venezuela were particularly strong during the period with excellent new business wins.

Asia had an exceptionally strong double-digit growth quarter with very strong growth in Hong Kong and China.

Finally, Australasia had a very good quarter with growth in excess of 10%, partly as a result of revenue timing that moved from the second quarter, as we described last quarter and partly driven by a pickup of new business and very strong retention in the region.

This was the best quarter for our Australian business in some time and a sign of the progress we have been making to improve our operations there.

Tim Wright told you, during the investor conference in July, that the International team is reviewing businesses that do not fit our core strength and competences around the globe.

For instance, during the quarter, we sold our book of small commercial clients in England and will now focus on serving that type of client base for our Willis Commercial network.

It is worth noting that the buyer of that book of business is a member of the Willis Commercial network.

Let's now move to Willis Global.

Willis Global comprises Willis Re, Specialty, Placement and Willis Capital Markets and Advisory.

Willis Global had another good quarter with organic growth of 6.4%.

Willis Re led the way again with growth in the high single-digits.

The Specialties reinsurance business [set out], recording growth in the mid-teens driven by broad new business growth and improved retention rates.

Within Specialties reinsurance, both marine or non-marine businesses were strong.

North America reinsurance business recorded growth in the high single-digits, with solid new business across the region.

International reinsurance business grew mid single-digits with solid growth in Europe and Asia-Pacific offset by a decline in Latin America.

The Global Specialty businesses grew mid single-digits with good growth from new business and continued solid retentions.

The Specialties business achieved strong performance in financial and executive risks, fine art, jewellery and specie and construction.

Willis Capital Markets and Advisory revenues in the quarter were essentially flat to last year's comparable quarter.

With that, I will turn it over to Mike to 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.

Good day, everyone.

During my comments, please refer to the slide presentation that is posted on our website.

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

As noted in the first two earnings calls this year, the change in our remuneration policy from retention award amortization to bonus accrual, distorts the comparison to prior period's expenses and therefore to prior period's EPS and operating margin.

This quarter that difference was about $17 million or $0.07 per diluted share and 230 basis points of operating margin.

I'll walk through those impacts as we go through the numbers.

As Dominic mentioned, we continued to deliver solid, underlying results in our seasonally smallest quarter, driven by 5.7% organic commission and fee growth.

The published numbers on Slide 3, show adjusted operating income of $76 million and adjusted EPS of $0.19 per share, both down from the respective figures last year.

However, if you factor out the $17 million impact from changing our remuneration policy, our adjusted operating income would have increased by $11 million or 17% this quarter.

Our adjusted operating margin would have increased by 100 basis points.

Likewise, for adjusted EPS, if you factor out the $0.07 per share impact from changing our remuneration policy, that measure would have increased by $0.04 per share or 27%.

Foreign exchange movements had no impact on our operating income and EPS figures this quarter.

Revenues were negatively impacted by $4 million and expenses were positively impacted by the same amount, so a wash.

Now let me explain our total expense growth in more detail on Slide 4. Underlying growth in total operating expenses was 7.6%.

A like for like comparison of our expense base shows 4.9% growth after adjusting the third quarter 2012 for the change in remuneration policy.

Let me now talk about what drove that growth.

First, salaries and benefits.

Slide 5 shows the quarterly impact from changing our remuneration policy.

As we have discussed previously, our S&B expense for the full year 2012 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 impact this quarter was $17 million.

You should note that there will be a $15 million impact on the fourth quarter comparison.

After that, you should be happy to know that our 2014 compensation comparison will be on a consistent basis.

You will not have to hear about terms apples to apples, like for like and change in remuneration policy.

Turning to Slide 6, you see that underlying salaries and benefits expense increased 8.4%.

Fully, 360 basis points of that increase was due to the change in remuneration policy.

On a like for like comparison, underlying S&B expense was up 4.8%.

The main drivers of this growth were a combination of headcount levels that increased by about 3%, since October 1, 2012 and the impact of annual salary increases.

I also want to point out that the $17 million compensation difference had a more negative impact on the reported margins in Global and International.

In the case of Global, 490 of the 780 basis point decline in the operating margin relates to the change in remuneration policy.

The remaining decline is mostly due to headcount additions in reinsurance, placement and compliance.

Plus, there was some acquired expenses from a small acquisition that closed in June.

International's reported margin, which increased by 30 basis points was negatively impacted by 280 basis points as a result of the change in remuneration policy.

Slide 7 shows a quarterly comparison of other operating expenses.

On an adjusted underlying basis, these expenses grew 6.7% in the quarter.

That growth was driven primarily by higher professional fees and business development expenses.

Before I move on to discuss taxes, let me first spend a moment discussing our debt management activity in the quarter.

It was a busy quarter in that regard and in my view, a very successful one.

As I mentioned on our last call, we amended our credit facility.

We pushed out the maturity on our term loan and revolver to July 2018.

We also increased the size of our revolver from $500 million to $800 million, which simply provides us with more financial flexibility.

During the quarter, we also issued $525 million of senior notes.

$275 million with a 30-year maturity and $250 million with a 10-year maturity.

We used the proceeds from those notes to buy back $521 million of our outstanding 2015, 2017 and 2019 maturities through a tender offer.

In conjunction with this activity, the Company recorded a loss on debt extinguishment of $60 million.

We also recorded a $1 million expense for tender related fees within our other operating expense line.

Those charges were adjusted out of our reported results in calculating our adjusted EPS and adjusted margins.

In summary, those actions increased the weighted average maturity of our debt by four years, while reducing the weighted average debt cost by approximately 20 basis points.

So for the cost of executing this transaction today, we get lots of benefits way out into the future.

Moving on to taxes, which I'm sure you have noted, the reported tax rate this quarter is highly unusual as we reported $11 million of tax expense on a pre-tax loss of $15 million.

This requires a bit of explanation.

Over the previous two quarters, we have discussed that our US operations are in a cumulative three-year loss position, due to the charges in goodwill impairment we recorded, dating back to 2011.

We also mentioned that US GAAP requires us to maintain an evaluation allowance against our deferred tax assets and that very little tax charge will be booked against our US income.

We also cannot record any tax benefits against US net losses.

Since the debt we redeemed during the quarter was outstanding in the US, the charge was recorded there.

The result was that our US operations had a significant loss in the quarter and the tax benefit cannot be recorded until we move out of the cumulative three-year loss position.

When looking at the quarter's results on an adjusted basis, meaning excluding the debt extinguishment charges, the adjusted tax rate is about 24%, which is in line with our expectations for the quarter.

Moving now to the associate's line, third quarter of 2013 showed a loss of $1 million, compared to a loss of $2 million in the year ago quarter.

For the full year 2013, we still expect the associate's line to be a loss of $1 million to $3 million, as Gras Savoye completes its operational review.

As a result, we expect the associate's line in the fourth quarter will be a loss of $12 million to $14 million.

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

We ended the third quarter with $623 million of cash, up $120 million from June 30.

Although the third quarter is our seasonally smallest quarter for net income, cash generation is typically strong, due to collections of receivables.

Our cash balance also benefited from other positive movements in working capital in the closeout of two in the money derivative instruments.

We settled the interest rate swap attached to the 2015 bonds that we redeemed this quarter.

We settled the treasury rate lock that was purchased in June ahead of the tender and refinancing transactions we completed during early August.

Finally, we benefited from proceeds received during the quarter from employee stock option exercises.

On this point, we are closely monitoring the amount of share dilution, resulting from employee option grants.

Going forward, we will consider repurchasing shares from time to time to offset that shareholder dilution.

I think that is very much in line with what we told you in July at our investor conference when we said that we would use our cash in ways that we believe are in the best interest of our shareholders.

Finally, total debt on our balance sheet at September 30 was about $2.3 billion, down slightly from year end and at quarter end our $800 million revolver was undrawn.

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

Thanks, Mike.

At our investor conference, we laid out our strategic vision that we believe will allow us to grow revenues, drive operating leverage and increase cash flow.

We discussed where we would compete and how we would compete.

In our discussions about how we would compete, we told you we want to innovate to ensure we are bringing the best solutions to our times, invest selectively in new talent, better technology and M&A, where we see the appropriate opportunity and connect all of Willis to make it much easier for associates to bring all of the Firm to our task.

Touching on that connectivity point, let me tell you what we have been doing since that investor conference.

We know the value of working together across Willis.

Our clients expect and deserve that from us.

To help deliver this, we have started making changes to our management structure that will make it easier for Willis associates to work as one team to serve clients better and thereby drive more cross selling.

In that context, we have introduced new global industry roles and new global product roles, which we described in detail in our press release of October 24.

These leaders will work with existing geographical, regional and office heads to make sure that we provide the full range of products and solution to all clients in every industry around the world.

All of us at Willis want to improve our value proposition to clients by delivering the full range of Willis' global industry and risk expertise locally.

Willis is at its most compelling and is most successful, when we combine our local teams in a country with our global specialist expertise.

The organizational changes we are making will go a long way to ensure that we achieve this across our entire business around the world.

That is very exciting for all of us.

We will now be happy to take your questions.

(Operator Instructions)

Thomas Mitchell, Miller Tabak.

Even looking at things on an adjusted basis, which I think is correct, there is no reason not to look at things on an apples to apples basis.

If we look at your revenues per share and go back to 2011, because the third quarter of 2012 was borderline miserable.

Your growth in revenues per share has been very, very modest over the last eight quarters.

So I guess what I'm wondering, is there reason to expect that the differentiation between revenue growth and expense growth from here will expand so that the operating leverage that you can get out of it, falls through to the bottom line on a per share basis a little more quickly?

That is probably a reasonable question, but we are focused on delivering cash flow to our shareholders through a combination of revenue growth and some margin expansion.

We describe in our investor conference, we are -- as you know, not in the business of providing quarter by quarter or year by year projections or guidance.

But the general direction of what we are trying to do was lay it out very clearly in the investor conference.

So we will absolutely be focused on making sure that we deliver that cash flow, to shareholders on a growing basis.

Separately, I'm just wondering a little bit whether the expense growth that you saw in the quarter is something that we should continue to expect?

Again the underlying expense growth, apples to apples, or whether or not there were factors that made it a little bit more expensive?

Or there was more investment in people and capabilities than we would expect on a going forward in other quarters?

Well, I think my answer is going to be the same again, which is as we described at the investor conference.

Willis is very much a global company.

You heard about some of the growth rates we are finding and achieving in some of our markets.

As investors, you would want us to be investing behind growth opportunities.

So when we are seeing double-digit revenue growth opportunities or high very single-digit revenue growth opportunities on a continuing basis in many of our markets, we of course will be hiring behind those.

We have to balance that with productivity improvements elsewhere and thinking very carefully about some markets which we may not want to invest behind so much or even exit, as you've heard we have done in a small way in England in this quarter.

So it will be a balance.

But let me be clear, where we see sustained revenue growth with good margin opportunities, we are going to add people and invest behind them.

Thank you.

Greg Locraft, Morgan Stanley.

Just wanted to get some color from you guys on the pricing dynamic in the P&C marketplace.

You can answer in any way you see fit, whether by line, by geography, all of the above or all-in numbers, however you think it makes sense to analyze.

Well thanks for the question.

As you know, we have issued a number of views publicly about what we think is going on in the market.

But let me turn it over to Steve Hearn, who can provide us with a bit of an overview of what we see going on.

Steve?

Thanks, Dominic.

Greg, I'll try and do the all of the above, in terms of comment.

I think it is a particularly interesting time in terms of rate, both in reinsurance and insurance as the industry works through the impact of what's been a relatively quiet claims period -- impact of so-called new capital and programs such as our own Global 360.

So if I start perhaps with reinsurance, I think what we see at the moment and for the immediate future I break it down through the three business that we operate.

Firstly, Specialty reinsurance business, where as I think you know, we're the market leader.

With a couple of exceptions, we see these rates down say 5% or so.

A couple of exceptions, aerospace reinsurance we see as down more, perhaps 10%, on occasion even more.

Our marine reinsurance business, which we would see as largely flat, which is really reflecting the loss experience in that class.

Secondly in reinsurance, we look at our International reinsurance book.

We'd see that as probably about 5% down on a risk adjusted basis with a few perhaps, obvious exceptions like UK and French auto, which are up.

Finally, for reinsurance on North American business.

Here we see probably cut down 20%,25%, which we think is consistent with what we saw in the mid-year renewals.

Casualty may be flat to down 5%, something like that.

On the insurance side, again, I'll probably break it down the three ways we look at our business.

Firstly, specialty insurance, which we'd see generally flat with a gain maybe the exception in the aerospace business, which we would see down by as much as 10% or even more and upstream energy which we would also see as down.

Our International insurance business, as you would understand a very difficult one to generalize about, given the vast range of countries that Tim and his colleagues operate in.

But I think we'd conclude there is a general trend towards property rates coming off a bit and worker's comp continuing to trend upwards.

In Willis North America, property and casualty up 2.5% to 5.5% respectively, something like that.

Human capital and personal lines may be up about 3.5%.

Important, I say this each time I get a similar question on the earnings calls, I think it is important to remind everybody that rate fluctuations don't necessarily bleed directly into our own earning.

With rates down people sometimes buy more.

We certainly see that in reinsurance.

Additionally, we have driven some very strong new business growth.

So, while the rate may be down on an expiring policy with somebody else, it's new income to us.

Finally, of course, we have some income on a fee basis.

So I hope that gives you some flavor of we think is going on.

Yes.

That's an excellent answer, very, very thorough.

How should we be thinking about -- I mean the reinsurance segment has done very well.

Should we be worried about the earnings trajectory as pricing pulls in for that segment?

Really that's an 2014 and beyond kind of question.

You guys are operating really well right now, it looks like another good quarter there.

It is Greg.

I'll take that one as well, Dominic, if I may.

Yes.

Another great quarter out of Willis Re.

People are going to get tired of me say that.

I'm not getting tired saying it, I can tell you.

It is a great result.

Largely driven, as we said -- as Dominic said in his commentary, by new business as well.

So it is not by accident.

This is very much sustainable business growth that's driving these numbers, as well as good retention.

Obviously the debate is around what happens in terms of property cap, new capital whether that bleeds into other product classes or out of North America, which is largely where it is concentrated at the moment.

So, that is one factor, which obviously is going to have some sort of impact on the reinsurance world.

Again, I would repeat, lower premiums don't necessarily mean lower earnings.

We do find people buying more, particularly outside the larger reinsurance buyers when rates are coming down.

There has been a lot of public comment around the larger reinsurance buyers, retaining more, buying less reinsurance capacity.

But again, that doesn't necessarily flow through in terms of the reinsurance into [meet Re]'s earnings, because often, in fact -- always, you'll find a reinsurance into meet Re or two, engaged in providing advice and modeling around that risk retention activity.

I think we feel very good about Willis, really, it continues to perform very well, particularly given its market share in a couple of jurisdictions, notably North America, we still anticipate good performance out of that business.

Okay.

Thank you very much.

Mike Nannizzi, Goldman Sachs

Maybe the on expenses lines, first off, on the comp side -- on the salary and benefit side, can you kind of break out the headcount increases versus the salary component?

Is that possible?

The head count increases that I referred to as being roughly 3% over the last 12 months break out -- North America is essentially flat to up a little bit; International is between 4% and 4.5%; Global is up between 6% and 7%.

So that is kind of split between reinsurance placement and some of the other activities that Steve referred to.

Then our corporate expenses headcount are up about 3%.

Okay.

So is that, I mean is that sort of as far as the implied salary increases, is that how we should be thinking about the way that you are looking at annual compensation costs for existing employees?

Is that 3% ish increase?

No, no, it's Dominic here.

He was giving you the headcount increase here --

Oh I see.

Yes.

I'm more interested in the line item.

So, I'm trying to understand.

If you add to the headcount increases basically what we call same-store merit salary increase of about 2% across the board.

Obviously there is a lot of differentiation, some people get zero, some people get more, but on average, it's about 2%.

The 3% headcount increase over the -- I was trying to explain the expense growth of third quarter plus that 2% gives that you that 4.8%, 4.9% true expense growth in our S&B line that I referred to.

Got it.

Great.

Thank you.

I appreciate that.

Then on the other trend line I think the press release mentioned some business development and other costs.

Is there any way that we can try and peel out some of those items just to understand kind of what is underneath?

Well some of them were related to the investor conference and all the activity leading up to that in July and August.

Some of it relates to some consulting expenses that we incurred, to support that effort from the beginning of the year through July.

So all the expenses really of that nature.

Okay.

Then can you also walk through like the year-over-year change in the corporate line?

That was a pretty substantial decline.

There is a laundry list of things that are included there.

But is there anyway to highlight the items that most impacted the year-over-year change?

The year over year change is mostly -- in the third quarter of 2012, we had a $12 million settlement for our India JV.

So that was a one-time.

The difference between the third quarter this year and last year is purely that charge that was there in the third quarter last year and not there in this quarter, 2013.

Great.

Thanks.

Then last question, just on Gras Savoye, can we, an update there?

I mean it sounds like you are expecting sort of a similar number in the fourth quarter as previously.

Any update there on the restructuring actions?

Is there, in terms of improving profitability or on the leverage side, given that you've taken some actions there?

Anything as far as new debt actions that you might expect?

And any change to your potential option exercise in 2016?

Thanks.

So let me take the first or the last part of that and then hand over to Tim Wright, just to give you an update on the restructuring that's going.

Our position remains the same on, we have to make a decision about whether we exercise our option in the spring of 2015.

We would actually close the transaction in 2016.

We remain very interested in Gras Savoye, of course, it not often you get the opportunity to buy a leader in a major market who also has a range of very exciting growth opportunities around Africa and the Middle East and bits of Asia and eastern Europe.

So we look at the assets and it is also a firm that we have known for many years.

So we really understand how it works.

Obviously however, we have to keep an eye on how the major economies it works in are performing.

So that is why we are happy to have this option.

We are also interested in how it is performing on its underlying business.

There are no specific debt changes, we would expect, related to this in the near future.

So let me hand over to Tim just to give you an update on where we stand in the operation improvement.

Thank you, Dominic.

Michael, on Gras Savoye, just a reminder, if we need to -- this is a business that has a very strong position in the French market.

It's the market leader.

It's been somewhat challenged in recent years, a combination of the market environment and the need to restructure that business.

There is a relatively new leadership team there.

As we have discussed before, they are going through a process of restructuring that business and that is going well.

That takes time, but it is going well.

So there is nothing new to report on that.

Also the restructuring, I should stress is both operational to help with the cost side of the equation.

But it is also focused on driving growth, both in France and in their international operations.

Great.

Thank you.

Adam Klauber, William Blair.

A couple of questions on the healthcare exchanges.

Great to see you getting traction.

Could you give us an idea of how many lives you think you'll have by the end of the year for this selling season, number one?

Number two, could give us an idea I guess how much of the interest level building at your clients?

Then number three is, how are the brokers doing selling?

It's sort of a new proposition for them.

Are they ramping up on it?

Let me -- I'm going to turn it over to Todd.

But I think the overall message we have here is, we took our time to enter this market, because we wanted to really understand it.

We didn't rush in, as I said, we only launched our discussions in May.

We have taken a very deliberate approach built around having it as part of our overall objective package of offerings that we have for our clients.

So that we can enter into a full consultative discussion with them.

But we are excited about both the level of debates we are having and the specific opportunities around the private exchange that are emerging.

That's been our posture.

Let me hand it over to Todd to give you some more detail on trends and how the dialogue with the clients is going.

Yes.

Thanks Adam.

Obviously it is very difficult for us to forecast how many lives we are going to have on this thing, going forward.

But as we have future calls and can give future updates on the performance of our exchange and the trends we are seeing, yes, we'll certainly do that.

That is probably a good segue into your second comment about interest, which has been sort of going back to Dominic's prepare comments, it has been overwhelming in terms of the interest of our client base and prospective clients on just trying to understand the dynamics of the exchange marketplace -- the public and private exchange marketplace, understanding their position around, a defined contribution model and how that works, going forward.

So it has provided a great platform for us to go out and meet with clients and prospects, talking about that.

But as well as our other offerings within human capital.

Finally, your last question, which is a really good one on how are they doing with selling this.

As Dominic mentioned, we rolled this out in May.

We spent a good part of the summer sort of educating and training our human capital professionals on not only the offering, but what's going on in the marketplace, et cetera, which was a big shift for us in terms of training.

I think like anything, the more comfortable you become with the subject and the repetitive conversations that are happening with clients and prospects.

You just get more comfortable in selling the concept.

All along, our goal was to be sort of an objective advisor in this process, not pushing people to one solution, but providing a range of options and looking at it in terms of their risk profile, their relationship with their employee base and how they want to manage that going forward.

All in all, we have been really encouraged by the progress that we have been making and the work that we have done in that space.

Thanks.

One follow-up on human capital.

I have heard that commissions for middle market health insurance -- generally, there has been a moderate pressure in commissions, but you are still growing.

So does that mean you have been able to take market share in that area?

Yes, Adam.

It is Todd again.

I think to answer your last question, yes, I think we are taking market share in that regard.

I don't know if we have seen necessarily the downward pressure on commission rates that you're referencing.

Obviously, compensation is a bit of a fluid issue in that space.

But I think, as I look at the trends in that market that we play in, I would look at the growth as definitely gaining market share.

Okay, thanks a lot.

Meyer Shields, KBW.

Two outlook questions if I can?

One, is it too early to know or to expect full year operating profits for Gras Savoye in 2014?

Tim, do you want to answer that question?

As you know, we don't -- we provide some guidance, which we have done in terms of the fourth quarter.

All I'd say about 2014, is that we are on track in terms of our medium term plans with Gras Savoye.

Okay.

A similar question, hopefully this doesn't contravene your approach to guidance.

Corporate segment operating income, is there any sort of underlying run rate that we can assume?

Well the corporate segment, let me step back Meyer, and just tell you what is in that corporate segment again.

So we have the intangible amortization in that segment.

So that is the only line that is pretty fixed, because we know it is scheduled.

So we know what that number is going to be every quarter.

Then we have other things related to foreign exchange hedging and some valuation -- reevaluation foreign exchange on our balance sheet, which runs through there, so those items are pretty unpredictable.

So therefore it jumps around a lot.

So to go back to the intangible amortization, that is about $14 million a quarter.

It comes down slightly as you go out.

But that is the number that is set.

Then everything else revolves around foreign exchange.

Then to the extent that we have special charges.

For example, that is the line where we took our operational review charges back in the first quarter this year.

That is the line where we took the goodwill impairment in the fourth quarter of last year.

So all those kind of one-off items typically get booked into there.

Also in the third quarter of 2012, as I mentioned, the settlement that we had to get out of our India JV was recorded to that line.

So it's very difficult to predict the real run rate other than that $14 million of intangible amortization that runs through it every quarter.

Okay.

That's actually very helpful.

Thank you.

Jay Cohen, Bank of America Merrill Lynch.

A couple of questions.

The first is, fourth quarter 2012, it looked like Global had a pretty big jump in organic growth.

As I recall, there were some unusual items.

Can you talk about what the comparison looks like this year fourth quarter versus last year fourth quarter in that segment?

Yes.

I should take that.

Thanks Jay.

Capital Markets is the answer.

What is Capital Markets is fundamentally the answer to your question.

They had a significant Q4 last year.

You know the nature of that business very well, it is lumpy and unpredictable.

But significant when it comes home.

Certainly we have a very active pipeline, an active engagements at the moment, whether they close in Q4 or not is obviously yet to be determined.

Can you remind us what the sort of overage was in that quarter?

Was there any unusual large transactions?

Any numbers behind that?

So Jay, in that quarter there, it was lots of transactions.

I think the largest one that got recorded was about a $3 million, $3.5 million fee.

So, I think in total, the revenues were somewhere in the $10 million to $15 million range.

I thought north of that.

But, yes, it was -- I guess what you're looking for is, was it a one item that drove it?

It wasn't.

It was a pipeline that actually looks better (inaudible) pipeline we're looking at, at the moment.

Got it.

The second question on healthcare exchanges, obviously other companies have jumped into this a bit earlier than you.

They made significant investments as they ramped up their capabilities for this product.

You are obviously wading in a little bit slower than some others.

Is there still a material amount of investment that you have to make to be competitive with say, the Aon's of the world, which has put a lot of money into this?

You are right, Jay.

We did think very carefully about this, both making sure we got our market positioning right for our target client base.

We wanted to make sure we were providing the exact right market positioning and the product that would work.

I can't comment on others' investments, but our investment was in a controlled way.

We do not, at the moment, envision significant additional investment beyond what we have already spent.

Now, the market might change, things might evolve but at the moment we're comfortable where we are that we have a highly competitive product for the market segment we are targeting.

That's great.

Thanks Dominic.

Brett Huff, Stephens Inc.

This is John Campbell in for Brett Huff.

You guys mentioned some delayed rev in International.

Last quarter it does sound like that helped the Australasia result in 3Q.

But can you maybe just pinpoint how much of that rev rolled over from 2Q?

Then maybe just to what extent, if any at all, that additional rev benefited margins?

Tim, do you want to take the Australia question?

Yes.

Thanks for that, John.

Australia's just again, a bit of context -- Australasia, Australia in particular was in that first category, I talked about at the investor conference, of turn around.

The performance you saw in the quarter was a combination of some positive timing that came out of Q2.

That I think we talked about in the Q2 call and also underlying growth.

But that -- I would say the mix of that was pretty balanced.

So it is not just one piece of timing that is driving the growth there, it is a combination.

We are actually seeing improved new business wins and high retention.

In terms of the margin, yes, that did drop through to the margin in Australasia in the quarter.

Okay.

I guess it is fair to say it was just a small amount of rev coming over from 2Q?

Yes.

As I say, the uplift we saw was a consequence of the two things.

But we had growth in the quarter in excess of 10%.

The key point, I think, is that only part of that was the result of the change in business.

It was timing.

It wasn't revenue recognition, it was business that normally would have been in Q2, that moved into Q3.

But we're still seeing good underlying growth, which is great to see in a business that hasn't had that for some time.

Great.

Thanks for the color.

Then, just as a follow-up.

Is there a particular leverage ratio you guys are setting out as a medium term or near term goal?

It is Dominic here.

No, we have stated in the investor conference, that we believe the investment grade company is very important to us.

That we are going to manage our growth agenda within that context.

We have no desires beyond that.

We're making sure that our balance sheet meets the needs of being an investment grade company.

We obviously are in dialogue with our lenders in that context and that we can execute our growth agenda.

Okay.

Great, thanks guys.

Doug Mewhirter, SunTrust Robinson Humphrey.

I was trying to I guess follow-up on the rate movements, looking at North America and the P&C.

Have you seen I guess a disruption or a maybe a little more sustainability to positive rate movements from the recent troubles at the -- some smaller, mid-sized companies like Tower Group and Meadowbrook?

Or do you think that there's still -- the supply and demand is starting to balance out?

No -- it is Steve again, Doug.

Thank you for the question.

No, I think, probably more relevant is the larger debate around capital arriving in the reinsurance world, its impact on primary markets, those types of things that are driving, probably as much as any in attitudinal view of what's going on for a rate perspective.

Added to which, as I said earlier, the relatively benign claims period that we are experiencing.

So I think those are probably more material to what's happening to the rates.

So just so I understand your answer.

You are saying that actually the increase or the, I guess the increased cheapness of reinsurance is actually putting pressure on the primary market?

You are actually seeing that filter in?

We are, certainly, in some parts of the world, yes.

But again, I think it is more about attitude than actual reality of what is happening.

I think there is an awareness of reinsurance rating that's out there, that is driving a primary insurance view of rate, rather than the absolute reinsurance capacity that is being deployed.

Does that make sense?

Yes.

Thank you.

That is a very good answer.

That is all my questions.

Thank you.

Jay Gelb, Barclays.

Could you give us a bit more insight on the Willis 360 program in terms of what that could mean for top line and margins in future years?

Jay, thanks for your question.

We have developed G360 with great care.

We did not jump into this opportunity, but instead thought about it very carefully and talked to lots of people to come up with a proposition which we think is particularly is good for our clients on a sustainable basis, which was the criteria we had to use.

Let me turn over to Steve, who has been heavily involved in this, to talk through how that's been developed.

Thanks, Dominic.

Thanks, Jay.

I think the short answer to your question is, it's too early to determine the impact on our bottom line or our top line for that matter.

But let me give you a little bit more color of what we've been doing and where we are and why we are excited about this new initiative.

As Dominic said, we have been very thoughtful in our approach here, with an overarching objective of trying to provide something that is going to be sustainable, better outcomes for our clients, not just a quick reaction or a quick turn, but something that is sustainable.

We have been very public about what we have been doing -- public over an extended period talking to capacity providers, far and wide.

Over 40 organizations, have engaged with us on the subject.

I think I described the outcome at the moment in terms of what we have announced, we are launching really in three areas.

Firstly, what I describe was traditional providers, who are looking to provide additional capacity or diversify from a product line perspective.

Secondly, reinsurers, who themselves are looking to diversify and perhaps move up the chain.

Finally, what I described, as emergent capacity, such as that coming out of places like China.

I would say, we see this as more of an evolution than a revolution in terms of what's going on here.

Our motivation has been very much about the client.

I think my answer to your question probably is, that if we do that and maintain the client focus, we'll sell more insurance and we'll retain more business.

That should benefit our shareholders, as well as our clients as we move forward.

That is certainly our plan.

But it is very early days.

Okay, thank you.

Separate issue, the Supreme Court recently heard oral arguments in the Stanford Financial litigation.

I was hoping you could provide your updated perspective on the potential outcome of that case?

Whether you have any reserves established against it?

Well, Jay, thanks for your question.

It is Dominic here.

As we have said before, we were pleased that the Supreme Court agreed to hear the case.

The Court, remember, is addressing a technical legal issue that was only the first of many legal issues, we pointed out to the trial court.

If we win at the Supreme Court, obviously we will be delighted.

But everyone should understand that if we quote lose that review, there are a host of additional legal issues that will still need to be addressed by the District Court.

In other words, the case will be in much the same posture as it was four years ago.

We continue to be ready to fight the allegations of the case every step of the way.

So that is our view on that.

Okay.

Are there any reserves established against it currently?

No.

Okay.

Thanks very much.

Darren Marcus, MKM Partners.

So I was just curious to get some more color on the healthcare exchange product that you guys have.

For example, is it fully insured versus self insured?

How many carriers do you have on the exchange?

Do you guys have a retiree product?

Or is it just an active exchange product?

Thanks.

Thanks for your question.

Let me have Todd give you a bit more detail on the Willis Advantage exchange.

So, Darren, let me -- I tried to jot down your questions, let me know if I missed any.

It is a single carrier product for active employees only.

So we are not looking to attack the retiree market.

There was one other question you had in there that I think I missed.

Just how many carriers that you've got?

Oh, fully insured versus self insured?

Fully insured, single carrier, active.

Got you.

Okay.

Thank you very much, appreciate it.

Brian Meredith, UBS.

A couple ones here.

First, Dominic, I'm curious.

Could you give us some insight into what you think is going to go on with western Europe?

It's flat right now.

What is your read?

Are things picking up at all for you guys?

So Brian, I'm happy to give you a perspective, but I'm actually going to be each happier to allow Tim to do that.

As he spends his time really focused on the detail of that.

I can tell you before he starts, he is going to give you a, it's complicated.

I'll turn it over to Tim.

Okay.

Thanks, Dominic.

Brian, it is complicated.

(laughter) Obviously, Europe's a very big business for us.

It's about 40% of International revenues, as you know.

It comprises many different markets.

They vary considerably.

So from quarter to quarter and from country to country, you'll see quite a lot of movement.

But in terms of general themes, Europe is obviously, in a macroeconomic sense, in a better shape than it was a few years ago.

We would not be getting people to [usurp] that.

In terms of our business, we expect to continue to take share by growing in low single-digits and maybe moving that up to mid single-digits.

That is our anticipation.

But that is going to be a result of the combination of lots of ups and downs and variations from country to country, which are not entirely driven by the macroeconomic environment.

It depends on the segments we can compete in, the businesses that we have, et cetera.

But as I said at the investor conference, we're confident that we can continue to take share in a flat to low growth environment in Europe through innovation and the things I described at the investor conference.

Great.

Thanks.

Then, one for Mike.

Mike, is there any early read you can give us on what your pension expense and pension funding may look like in 2014, given where we are with interest rates?

Yes.

That is a great question.

We don't do that analysis until here in the fourth quarter, so I don't have a read for 2014.

But I'll justify remind you of one thing.

We have an agreement with the trustees, which comes up for renewal at the end of this year.

It usually takes quite awhile to negotiate that.

So for the near term in 2014, we'll be kind of paying into the funding agreement that existed at the end of 2010, so this one gets renegotiated.

Okay, terrific.

Then just lastly, any chance you have got free cash flow, for the quarter?

Just a quick request, is it possible to get a cash flow statement with your earnings release going forward, just given that cash flow is now kind of the important metric for you?

Listen we -- that is our goal.

At some point during 2014, I hope we'll be able to do that.

Today, the basic reason why we don't do it, is because we have a cash flow statement to be quite honest, sometimes it is very difficult to find out the reasons for movements.

To provide a cash flow statement without being able to explain to you the reasons for movements doesn't seem to be very productive.

The goal is to have that sometime during 2014.

Great.

Thank you.

Josh Shanker, Deutsche Bank.

I'm sorry about all the exchange questions, but it is a hot topic right now.

Can you talk a little bit about three years ago or two years ago a client of yours wanted some help with their healthcare benefits?

How you guys would get paid for servicing that need?

In an exchange world, how you get paid going forward?

We'll do the two years back first and then talk about the private exchange, how we are getting paid for that.

Todd, do you want to take that?

Yes.

So, Josh, effectively our compensation will work in a very similar manner today as it did two, three years ago.

We get paid commission or fees to consult on a placement or a transaction.

In doing that transaction, we could also earn additional income out of the sale of ancillary products beyond just the health and welfare products that we would normally transact.

I think if you are trying to get your head around migrating from sort of one mile to the other in terms of how we feel about our compensation, near term, we feel the same in terms of how we are comped historical levels to the future levels.

I think the one thing we are excited about is the opportunity to sell additional products and services in through that exchange platform that don't necessarily currently exist today.

So we see it as a terrific opportunity going forward.

To the extent, on early exchange will your composition be at just sort of mediated by having to pay liaison a part of it?

No.

We've essentially taken that into account.

In terms of that relationship, in order to deal with any costs relative to the platform.

Thank you for the answers.

Bob Glasspiegel, Janney Capital Markets.

What is the Gras Savoye restructuring charges that are running through current year numbers that may not be existing next year?

It looks like you're projecting Q4 to be down severely versus a year ago, which I suspect has charges, even though the full year number's coming in, in line with earlier guidance.

Bob, this is Mike here.

So the first three quarters of the year, very little charges have come through.

I mean we are anticipating the charges really to come through in the fourth quarter and Q1 in 2014 potentially.

Okay.

So any just general comments on what the underlying earnings are doing in that business ex charges?

Is it sort of running at break even and you are making investments that will lead to profits?

Tim, do you want to -- It's Dominic.

Tim, you should talk about that.

But the first thing we should understand, this is still a profitable business.

Just restructuring is about making it more profitable.

Tim?

I mean the business is making money on an underlying basis.

I'm sure the aspiration is that it could make more over time.

That is the reason for the restructuring.

But as I said, there is a medium-term plan, The shareholders of Gras Savoye, including Willis have agreed.

They are heading in the right direction.

It is a very -- I would say it's a gloss.

It's a very positive development of the business.

We feel very good about what the leadership team at Gras Savoye are doing.

Okay.

Maybe I'm missing something, but it is, you are not reporting much in profits in equity and associates.

Are there other losses that are dwarfing the profits that Gras Savoye is doing or is it your acquisition accounting?

Well there is other associates that we have included in that line item.

Gras Savoye is the largest, but there are other relatively large ones as well.

Not anywhere near the size of Gras Savoye.

That line item is a combination of their operating income that they have.

Plus they have some debt that they owe to us.

So it is pretty complicated, when you factor in all the pieces and trying to dissect it, where we present it in a consolidated form back to Gras Savoye.

Bob you just can't do that.

Okay.

Last question.

If we multiply the 20 bips of interest savings and the $2.3 billion is that the right base to get $4 million of annual interest savings pre-tax?

I don't think you are going to get $4 million from where we are today.

For example, in the third quarter, we booked $30 million of interest expense.

I think the number going forward it's going to be closer to $31 million.

There were some adjustments around the refinancing this quarter.

The number had been about $32 million to $33 million earlier in the year.

So I would look at $31 million plus going forward.

Okay.

Maybe I missed something.

You said you are going to save 20 basis points on the change?

Or did I get the wrong number?

No, I said that for the -- we reduced the effective cost of the portfolio of debt that we have outstanding by about 20 basis points from the actions that we took to refinance those notes that we have tenders for.

So you are saving 20 basis points on $2.3 billion of debt?

Is that the right basis that we should apply the savings to?

Yes.

But then there is amortization, for example all the costs that we had to set up the bank facility, the costs that we had in terms of the discount on the bonds for the underwriters and the other costs get capitalized.

They get amortized against what I just described there.

So you might not see what your -- the math that you are doing, you are not going to see it displayed that way on our financial statements.

Okay thanks for the clarification.

Appreciate it.

At this time, we have no further questions.

Thank you very much, everybody for your questions.

We really appreciate them and your interest in Willis.

We look forward to talking to you again about the year end.

Thanks very much.