Willis Group Holdings Public Limited Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.30.13 | About: Willis Towers (WLTW)

Willis Group Holdings Public Limited (WSH) Q3 2013 Earnings Call October 30, 2013 8:00 AM ET

Executives

Peter R. Poillon - Director of Investor Relations

Dominic J. Casserley - Chief Executive Officer, Director and Member of Executive Committee

Michael K. Neborak - Group Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Steven P. Hearn - Chairman of Willis Global and Chief Executive Officer of Willis Global

Timothy D. Wright - Chief Executive Officer of Willis International

Todd Jones - Chief Executive Officer of Willis North America

Analysts

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

John Campbell - Stephens Inc., Research Division

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

Jay Gelb - Barclays Capital, Research Division

Darren Marcus - MKM Partners LLC, Research Division

Brian Meredith - UBS Investment Bank, Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Robert Glasspiegel - Janney Montgomery Scott LLC, Research Division

Operator

Welcome, and thank you for standing by. [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.

Peter R. Poillon

Thank you, and 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 replay 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 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.

Dominic J. Casserley

Welcome, and 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.

So 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 near medium 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 at 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 and 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 and 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've seen out of this segment now for 4 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 1/3 of our growth during the quarter. It's 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 commission, such as contingent commissions in the quarter and construction grew by mid-single digits.

While we're 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 will be looking at it as a potential alternative for 2014 and beyond.

We believe that our offering is unique in that we're the only entity that has an approach to address the underlying cost of healthcare by integrating a health management approach as an option. We've asked carriers to provide enhanced terms and conditions for clients that adopt our formal health outcomes program as part of their exchange solution. And 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 and we have had significant interest. We're 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 enrollments.

Additionally, we have had numerous marketing opportunities to be in front of prospects to discuss Willis' insurance exchange platform, as well as Human Capital capabilities beyond exchanges and that had been, and we expect will be, a factor in the growth in that practice.

Let's now move to Willis International. Willis International grew strongly at 7.8% in the third quarter, bringing organic growth for the 9 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 U.K., our business was down mid-single digits in the quarter as we continue to work to turn that region around as we've discussed during our investor conference. On a positive note, the U.K. 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 U.K. 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 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 regions. 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 strengths and competencies 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 by our Willis Commercial Network. And it's 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 REIT, 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 stood out, recording growth in the mid-teens, driven by broad new business growth and improved retention rates. Within specialties reinsurance both Marine and Non-marine businesses were strong.

North American 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 retention. The Specialties business achieved strong performance in financial and executive risks, fine art, jewelry and specie and construction. Willis Capital Markets & 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'll return later with some final comments before turning it over to you for questions.

Michael K. Neborak

Thank you, Dominic, and 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 2 earnings calls this year, the change in our remuneration policy from retention award amortization to bonus accrual distorts the comparison to prior periods expenses and therefore, to prior periods 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 continue 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 prospective 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, and 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've 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 and 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 and you will not have to hear about terms like 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 were some acquired expenses from a small acquisition that closed in June.

International's reported margins, 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, and 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, '17 and '19 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 4 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. As I'm sure you've noted, the reported tax rate this quarter is highly unusual as we reported $11 million of tax expense on a pretax loss of $15 million. This requires a bit of explanation.

Over the previous 2 quarters, we've discussed that our U.S. operations are in a cumulative 3-year loss position due to the charges in goodwill impairment we recorded dating back to 2011. We also mentioned that U.S. GAAP requires us to maintain a valuation allowance against our deferred tax assets and that very little tax charge will be booked against our U.S. income. We also cannot record any tax benefits against U.S. net losses.

Since the debt we redeemed during the quarter was outstanding in the U.S., the charge was recorded there. The result was that our U.S. operations had a significant loss in the quarter and the tax benefit cannot be recorded until we move out of the cumulative 3-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 Associates 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 Associates line to be a loss of $1 million to $3 million, as Gras Savoye completes its operational review. As a result, we expect the Associates 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 units in working capital and the close out of 2 in-the-money derivative instruments. We settled the interest rates swap attached to the 2015 bonds that were redeemed this quarter and 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.

And 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.

Dominic J. Casserley

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 clients; 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 clients.

Touching on that connectivity point, let me tell you what we've been doing since that investor conference. We know the value of working together across Willis and 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've introduced new global industry roles and new global product role, 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 solutions 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 the 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 and that is very exciting for all of us. We will now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Thomas Mitchell of Miller Tabak, you may ask your question.

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

We've been looking at things on an adjusted basis, which I think is correct. There's 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 8 quarters. So, I guess what I'm wondering is, 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?

Dominic J. Casserley

It's a reasonable question. Look, we are focused on delivering cash flow to our shareholders through a combination of revenue growth and some margin expansion, which we described in our investor conference. As you know, no one in the business are providing quarter-by-quarter or year-by-year projections or guidance, but the general direction of what we're 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.

Thomas Spikes Mitchell - Miller Tabak + Co., LLC, Research Division

And 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, that there's, 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?

Dominic J. Casserley

Well, I think my answer is going to be a same again, which is -- and 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 our 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 heard we've done in the 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.

Operator

Our next question comes from Greg Locraft of Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

I just wanted to get some color from you guys on the pricing dynamic in the P&C marketplace. You can sort of answer in any way you see fit, whether by line, by geography, all of the above or all in kind of numbers, however you think it makes sense to analyze.

Dominic J. Casserley

As you know, we've issued a number of reviews 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?

Steven P. Hearn

Thanks, Dominic. Greg, I'll try and to do all of the above in terms of comment. I think it's 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 the 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'll break it down through the 3 business units that we operate. Firstly our 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'd see it down more, perhaps 10%, on occasion, even more. In our Marine Reinsurance business, which we would see as largely flat, which is really reflecting the loss experience in that class. And secondly, in reinsurance, we look at our international reinsurance book and we'd see that as probably about 5% down on a risk-adjusted basis with a few, perhaps obvious exceptions like U.K. and French auto, which are up. And 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 midyear renewals and casualty may be flat to down 5%, something like that. On the insurance side, again, I'll probably break it down to 3 ways to look at our business. Firstly, specialty insurance, which we'd see generally flat with again, 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 that the general trend towards property rates coming off a bit and Worker's Comp continuing to trend upwards. And Willis North America, property and casualty up 2.5% to 5.5%, respectively, something like that. Human Capital and Personal Lines may be about 3.5%. Important and I say this each time I get a similar question on the earnings call, I think it's important to remind everybody that rate fluctuations don't necessarily bleed directly into our own earnings and with rates down people, sometimes by more, we certainly see that in reinsurance. And additionally, we've driven some very strong new business growth. So while the rate may be down on an expiring policy with somebody else, this is new income to us. And finally, of course, we have some income on a fee basis. So I hope that gives you some sort of the flavor of what we think is going on.

Gregory Locraft - Morgan Stanley, Research Division

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 it's an '14 and beyond kind of question. You guys are operating really well right now. It looks like another good quarter there.

Steven P. Hearn

It is, Greg, I'll take that one as well, Dominic, if I may. Yes, another great quarter out of Willis Re. Maybe people are getting tired or me saying that, I'm not getting tired saying it. I can tell you it's a great result. Largely driven, as we said, as Dominic said in his commentary, buying new business as well. So it's not by accident. This is very much sustaining business growth that's driving these numbers, as well as a 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's concentrated at the moment. That's one factor, which obviously is going to have some sort of impact on the reinsurance world. Again, I repeat, lower premiums don't necessarily mean lower earnings and we do find people buy more, particularly outside the larger reinsurance buyers when rates are coming down. There's 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 intermediaries earnings because often, in fact always, you'll find reinsurance intermediary or 2, engaged in providing advice and modeling around that risk retention activity. So I think we feel very good about Willis Re, it continues to perform very well and, and particularly given its market share in a couple of jurisdictions, notably North America, we still anticipate good performance out of that business.

Operator

Our next question comes from Mike Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

So just maybe on the expenses lines. First off, on the comp side, on the salary and benefits side. Can you kind of break out the headcount increases versus the salary components? Is that possible?

Michael K. Neborak

So the headcount increases that I referred to is being roughly 3% over the last 12 months breakout, North America is essentially flat to up a little bit. International was between 4% and 4.5%. Global is up between 6% and 7%. So that's kind of split between reinsurance, placement and some of the other activities that Steve referred to. And then our corporate expenses headcount are up about 3%.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. And so is that -- I mean, is that sort of part of the implied salary increases? And I mean, is that how we should be thinking about the way that you're looking at annual compensation cost for existing employees is that sort of 3-ish percent increase? .

Dominic J. Casserley

No, no, no. It's Dominic here. He was giving you the headcount increase here.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Oh, I see. So you -- yes, I'm more interested in the line items. So I'm trying to understand...

Michael K. Neborak

If you add to the headcount increases, basically what we call same-store merit salary increases, about 2%, across the board obviously. There's a lot of differentiation. Some people get 0, some people get more, but in average, it's about 2%. The 3% headcount increase over those, just trying to explain the expense growth of the third quarter plus that 2% gives you that 4.8%, 4.9% true expense growth in our S&B line that I referred to.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And then on the other trends line [ph], 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's underneath?

Michael K. Neborak

Well, some of them were related to the investor conference, all the activity leading up to that in July and August. Some of it relates to some consulting expenses that we incurred as it -- to support that effort from the beginning of the year through July. So all the expenses really, of that nature.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay. And then can you also walk through like the year-over-year change in the corporate line? That was a pretty substantial decline. I mean, there's a laundry list of things that are included there, but is there any way to kind of highlight the items that most impacted the year-over-year change?

Michael K. Neborak

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

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And then last question just on Gras Savoye. I mean, can we get an update there. I mean, it sounds like you're expecting sort of 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 you may have taken some actions there? Anything as far as new debt actions that you might expect and any change to your potential option exercise in '16?

Dominic J. Casserley

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 how the restructuring is going. Our position remains the same on we have to make a decision about whether we exercise our option in the spring of '15 and we would actually close the transaction in '16. We remain very interested in Gras Savoye of course. It's 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, the Middle East and bits of Asia and Eastern Europe. So we will look at the asset and it's also affirmed 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 our performing so that's why we're happy to have this option. And we're also interested in how it's 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.

Timothy D. Wright

Michael, on Gras Savoye, just a reminder, if we need to. This is a business that has very strong positions 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 and 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's going well. So there's nothing new to report on that. And also, the restructuring, I should stress, is both operational to help with the cost side of the equation, but it's also focused on driving growth, both in France and in their international operations.

Operator

Our next question comes from Adam Klauber of William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

A couple of questions on the health care exchanges. Great to see you're gaining traction. Could you give us an idea of how many lives you think you'll have by the end of the year for the selling season, number one? Number two, could you give us an idea, I guess, how much of the interest level building at your clients? And then number 3 is how are the brokers doing selling? It's sort of a new proposition for them, are they ramping up on it?

Dominic J. Casserley

So let me -- I'm going to turn 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. And as I said, we only launched our discussions in May and we have taken a very deliberate approach both 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're excited about both the level of debates we're having and these specific opportunities around the private exchange that are emerging. So that's been our posture. So let me hand over to Todd to give you some more detail on trends and how the dialogue with the clients is going.

Todd Jones

So obviously, it's very difficult for us to forecast how many lives we're 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're seeing, we'll certainly do that. And that's probably good segue into your second comment about interest, which has been sort of going back to Dominic's prepared 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, both the public and private exchange marketplace, understanding their position around a defined contribution model and how that works going forward. So it's 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. And finally, your last question, which is a really good one on how were they doing with sort of selling this. And as Dominic mentioned, we rolled this out in May and 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 sort of 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. So all in all, we've been really encouraged by the progress that we've been making and the work that we've done in that space.

Adam Klauber - William Blair & Company L.L.C., Research Division

And one follow-up on Human Capital. I've heard that commissions for middle-market health-insurance, generally, there's been a moderate pressure in commissions, but you're still growing. So does that mean you've able to take market share in that area?

Todd Jones

Adam, it's Todd again. I think to answer your question, yes. I think we are taking market share in that regard. And I don't know if we've 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.

Operator

Our next question comes from Meyer Shields of KBW.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

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?

Dominic J. Casserley

Tim, do you want to answer that question?

Timothy D. Wright

As you know, we provide some guidance, which we've 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.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And similar question and 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?

Michael K. Neborak

Well, the corporate segment, just let me step back, Meyer, and just tell you what's in that corporate segment again. So we have the intangible amortization in that segment. So that's the only line that is pretty fixed, because we know schedules, so we know what that number is going to be every quarter. And then we have other things related to foreign exchange hedging and some valuation, revaluation foreign exchange on our balance sheet, which runs through there. So those items are pretty unpredictable. So therefore, it jumps around a lot. So if you go back to the intangible amortization, that's about $14 million a quarter, it comes down slightly as you go out, but that's the number that's set. And then everything else revolves around foreign exchange and then to the extent that we have some special charges, for, example, that's the line where we took our operational review charges back in the first quarter this year, that's 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. And 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.

Operator

Our next question comes from Jay Cohen of Bank of America Merrill Lynch.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

A couple of questions. The first is, fourth quarter 2012, it looked like Global had a pretty big jump in organic growth. And 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?

Dominic J. Casserley

Capital Markets is the -- actually, 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's lumpy and unpredictable but significant when it comes home. And certainly, we have a very active pipeline and active engagements at the moment. Whether they close in Q4 or not is obviously, yet to be determined.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Can you remind us what the sort of overage was in that quarter? Was there any unusually large transactions, any numbers behind that?

Michael K. Neborak

So Jay, in the 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.

Dominic J. Casserley

I think north of that but yes, it was -- I guess what you're looking for is was it a 1 item that drove it, it wasn't. It was a pipeline that actually looks very similar to the pipeline we're looking at, at the moment.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Got it. Second question on health care exchanges. Obviously, other companies have jumped into this a bit earlier than you and they made significant investments as they ramped up their capabilities for this product. You're obviously wading 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 Aons of the world which has put a lot of money into this?

Dominic J. Casserley

You're right, we did think very carefully about this, both making sure we got our market positioning right. For our target client base, we want to make sure we were providing the exact right market positioning and the products that would work. We can't comment on others' investments, but our investment was in a controlled way. And we do not, at the moment, envision significant additional investment beyond what we've 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.

Operator

Our next question comes from Brett Huff of Stephens Incorporated.

John Campbell - Stephens Inc., Research Division

This is John Campbell in for Brett Huff. You guys mentioned some delayed revs in International last quarter and it does sound like that helped Australasia result in 3Q. But can you guys just maybe just pinpoint how much of that rev rolled over from 2Q and then maybe just to what extent, if any at all, that additional rev benefited margins?

Dominic J. Casserley

Tim, do you want to take the Australia question?

Timothy D. Wright

Australia is just, again, a bit of context Australasia, Australia in particular, was in that first category I talked about at the investor conference of turnaround. And 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 they -- I would say, the mix of that was pretty balanced. So it's not just one piece of timing that's driving growth there, it's a combination and we're actually seeing improved, new business wins and high retention, so -- and in terms of the margin, yes, that did drop through to the margin in Australasia in the quarter.

John Campbell - Stephens Inc., Research Division

Okay. So I guess it's fair to say it was just a small amount of rev coming over from 2Q?

Timothy D. Wright

As I say, the uplift we saw was a consequence of the 2 things but we had growth in the quarter in excess of 10% and 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've 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.

John Campbell - Stephens Inc., Research Division

Great, and just as a follow-up, is there a particular leverage ratio you guys are kind of setting out as a medium-term or near-term goal?

Dominic J. Casserley

It's Dominic here. No. We have stated in the investor conference that we believe being an investment-grade company is very important to us and that we are going to manage our growth agenda within that context. We have no desire beyond that. We're making sure that our balance sheet meets the needs of being an investment-grade company and we obviously are in dialogue with our lenders in that context and that we can execute our growth agenda.

Operator

Our next question comes from Doug Mewhirter, SunTrust Robinson Humphrey.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

I was trying to I guess, follow-up on the rate movements in North America and the P&C. Have you seen, I guess, a disruption or maybe a little more sustainability to positive rate movements from the recent troubles that some small or midsize companies like Tower Group and Meadowbrook or do you think that there's still -- the supply and demand is starting to balance out?

Steven P. Hearn

No. It's Steve again, Doug. No, I think probably more relevant is the larger debate around capital arriving in the reinsurance world is impact on the primary markets, those types of things that are driving probably as much as anything, an 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're experiencing. So I think those are probably more material to what's happening in the rates.

Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division

So just to -- just so I understand your answer, you're saying that actually, the increase or the I guess, the increased cheapness of reinsurance is actually putting pressure on the primary market, you're actually seeing that filter in?

Steven P. Hearn

We are, certainly in some parts of the world, yes. But again, I think it's more about attitude than actual reality of what's happening. I think there's an awareness of reinsurance rating that's out there that's driving a primary insurance view of rate rather than the absolute reinsurance capacity that's being deployed. Does that make sense?

Operator

Our next question comes from Jay Gelb of Barclays.

Jay Gelb - Barclays Capital, Research Division

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

Dominic J. Casserley

We've developed the 360 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 critically is good for our clients on a sustainable basis, which was the criteria we had to use. Let me turn over to Steve who's been heavily involved in this talk through, how that's been developed.

Steven P. Hearn

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're excited about this new initiative. As Dominic said, we've been very thoughtful in our approach here with an overarching objective of trying to provide something that's going to be sustainable, better outcomes for our clients, not just a quick reaction or a quick turn, but something that's sustainable. We've been very public about what we've been doing and public over an extended period, talking to capacity providers far and wide. Over 40 organizations have engaged with us on the subject and I think I'd describe the outcome at the moment in terms of what we've announced we're launching really, in 3 areas. Firstly, what I described as 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; and finally, what I describe as emergent capacity such as that coming out of places like China. I'd say we see this as more of an a evolution than a revolution in terms of what's going on here. Our motivation has been very much about the client and 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, and that should benefit our shareholders as well as our clients as we move forward, that's certainly our plan. But it's very early days.

Jay Gelb - Barclays Capital, Research Division

Separate issue, the Supreme Court recently heard oral arguments in the Stanford Financial litigation. I was hoping you can provide your updated perspective on the potential outcome of that case and whether you have any reserves established against it.

Dominic J. Casserley

It's 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 "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 at much the same posture as it was 4 years ago and we continue to be ready to fight the allegations case every step of the way. So that's our view on that.

Jay Gelb - Barclays Capital, Research Division

Okay, and are there any reserves established against it currently?

Dominic J. Casserley

No.

Operator

Our next question comes from Darren Marcus of MKM Partners.

Darren Marcus - MKM Partners LLC, Research Division

So I was just curios 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 and do you guys have a retiree product or is it just an active exchange product?

Dominic J. Casserley

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

Todd Jones

So Darren, let me -- I tried to jot down your questions, let me know if I miss any. So it is a single carrier product for active employees only. So we're not looking to attack the retiree market. And there was one other question you had in there that I think I'd missed.

Darren Marcus - MKM Partners LLC, Research Division

Just how many -- so how many carriers have you got -- fully insured versus self-insured, I'm sorry.

Todd Jones

I'm sorry, so fully insured, single carrier, active.

Operator

Our next question comes from Brian Meredith of UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple of ones here. First, I'm curious, could you give us some insight as to what you think is going to go on with Western Europe. You're at flat right now, kind of what's your read is, are things picking up at all for you guys?

Dominic J. Casserley

Brian, I'm happy to give you perspective but I'm actually going to be even happier to allow Tim to do that. He spends his time really focused on the detail of that. I can tell you before we start, he's going to give you a "it's complicated", but Tim?

Timothy D. Wright

Brian, it's complicated. Obviously, Europe is a very big business for us, it's about 40% of International revenues as you know, and it comprises many different markets and 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 in a few years ago. We would not be the only people to observe 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's our anticipation but that's going to be a result of a 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 segments we 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 in the investor conference.

Brian Meredith - UBS Investment Bank, Research Division

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

Michael K. Neborak

Yes, that's a great question. We don't do that analysis 'til here in the fourth quarter, so I don't have a read for 2014. But I'll just 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 a while to negotiate that. And so for the near term in 2014, we'll be kind of paying into the funding agreement that existed at the end of 2010 until this one gets renegotiated.

Brian Meredith - UBS Investment Bank, Research Division

And then just lastly, any chance you've got free cash flow for the quarter and just a quick request, is it possible to get a cash flow statement with your earnings release going forward, given that cash flow is now kind of an important metric for you?

Michael K. Neborak

That's our goal and at some point during 2014, I hope we'll be able to do that. Today, the reason, basic reason why we don't do it is because we have a cash flow statement. To be quite honest, sometimes it's very difficult to find out the reason for movements and to provide the cash flow statement without being able to explain to you the reasons for movements doesn't seem to be very productive. So the goal is to have that sometime during 2014.

Operator

Our next question comes from Josh Shanker of Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

I'm sorry about all the exchange questions but it's a hot topic right now. Can you talk a little bit about 3 years ago, 2 years ago, a client of yours wanted some help with their health care benefits, how you guys would get paid for just servicing that need and in an exchange world, how you get paid going forward?

Dominic J. Casserley

We'll do the 2 years back first and then talk about the private exchange, how we're getting paid for that. Todd, do you want to take that?

Todd Jones

Yes. Josh, effectively, our compensation will work in a very similar manner today as it did 2, 3 years ago. We get paid commissions or fees to consult on a placement or a transaction. And 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. So I think if you're trying to get your head around migrating from sort of 1 mile to the other in terms of how we feel about our compensation, the near term, we feel the same in terms of how were comp'd historical levels to 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.

Joshua D. Shanker - Deutsche Bank AG, Research Division

And to the extent under the exchange -- will your compensation be at all dis-intermediated by having a paid liaison a part of it?

Todd Jones

No. We've essentially taken that into account in terms of that relationship in order to deal with any cost relative to the platform.

Operator

Our last question comes from Bob Glasspiegel of Janney Capital Markets.

Robert Glasspiegel - Janney Montgomery Scott LLC, Research Division

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 the year ago, which I suspect has charges even though the full year number is coming in, in line with earlier guidance?

Michael K. Neborak

Bob, this is Mike here. So for first 3 quarters of the year, very little charges have come through. We're anticipating the charges really to come through in the fourth quarter and Q1 in 2014, potentially.

Robert Glasspiegel - Janney Montgomery Scott LLC, Research Division

Okay. So any just general comments on what the underlying earnings are doing in that business x charges? Is it sort of running at break even and you're making investments that will lead to profits or...

Dominic J. Casserley

Tim, do you want to -- it's Dominic. Tim should talk about that but first thing we should understand, this is still a profitable business. This restructuring is about making it more profitable. Tim?

Timothy D. Wright

Yes. I mean the business is making money on an underlying basis. I'm sure the aspiration is that it can make more over time and that's the reason for the restructuring. But as I said, there is a medium-term plan. The shareholders of Gras Savoye are including with it, have agreed and they're heading in the right direction. So very -- I would just say as 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.

Robert Glasspiegel - Janney Montgomery Scott LLC, Research Division

Okay. Maybe I'm missing something, but it's -- you're not reporting much in profits and equity in Associates. Are there other losses that are dwarfing the profits that Gras Savoye is doing or is there acquisition accounting or...

Michael K. Neborak

Well, there's 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. And that line item is a combination of their operating income that they have plus they have some debt that they owe to us and so it's pretty complicated when you factor in all that pieces and trying to dissect it where we present it in a consolidated form back to Gras Savoye. Bob just can't do that.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Okay, last question. If we multiply the 20 bps of interest savings and the $2.3 billion, is that the right base to get $4 million of annual interest savings pretax?

Michael K. Neborak

Well I think -- I don't think you can get $4 million from where we are today. So for example, in the third quarter, we booked $30 million of interest expense. I think the number going forward is going to be closer to $31 million. There were some adjustments around the refinancing this quarter. The number had been about $32 million -- $32 million to $33 million earlier in the year. So I would look at $31 million, $31-plus million going forward.

Robert Glasspiegel - Janney Montgomery Scott LLC, Research Division

Okay. Maybe I missed something. What you said you're going to save 20 basis points on the change? Did I miss or get the wrong number?

Michael K. Neborak

No, I said that 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 all these notes that we tendered for.

Robert Glasspiegel - Janney Montgomery Scott LLC, Research Division

So you're saving 20 basis points on $2.3 billion of debt, is that the right basis that we should apply the savings to?

Michael K. Neborak

Yes, but then there's amortization. For example, all the costs that we had to set up the bank facility, the cost that we had in terms of the discount on the bonds for the underwriters and the other costs get capitalized and they'd get amortization against what I just described there. So you might see what you're -- the math that you're doing, you're not going to see it display that way on our financial statements.

Operator

At this time, we have no further questions.

Dominic J. Casserley

Thank you very much, everybody, for your questions. We really appreciate them and your interest in Willis. And we look forward to talking to you again about the year end. Thanks very much.

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