Jardine Lloyd Thompson's (LLTHF) CEO Dominic Burke on Q4 2015 Results - Earnings Call Transcript

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Jardine Lloyd Thompson Group plc (OTC:LLTHF) Q4 2015 Results Earnings Conference Call March 1, 2016 4:00 AM ET

Executives

Dominic Burke - Group Chief Executive

Mark Drummond Brady - Deputy Group CEO

Charlie Rozes - Group Finance Director

Analysts

Ben Cohen - Canaccord

William Hawkins - KBW

Nick Johnson - Numis

Joanna Parsons - Stockdale

Barrie Cornes - Panmure Gordon

Eamonn Flanagan - Shore Capital

Dominic Burke

Well, good morning ladies and gentlemen and welcome to our 2015 Preliminary Results Presentation. We are pleased to be able to present a good set of results that reflect the sustained overall momentum of the business.

Before I start, let me introduce my colleagues, Mark Drummond Brady and Charlie Rozes who joined us in September of last year as the Group Finance Director.

As usual, this presentation has been structured into three sections: Firstly, I will run through our trading performance, focusing on the results of our larger businesses. You will find a more detailed breakdown of all of our operating businesses in the supporting slides included at the back of your packs. Secondly, Charlie will provide additional commentary on some of the more detailed financial aspects of our results. I will then return to give some additional detail on our U.S. Specialty and UK Employee Benefits businesses, as well as provide a perspective on the factors that are driving our long-term revenue growth momentum, set against the market outlook. Finally, I will summarize the outlook for the future after which we will take questions.

Turning first to the key highlights of the year, JLT delivered a resilient performance in 2015. We achieved revenue growth of 6% at constant rates of exchange including 5% in our Risk & Insurance business on an organic basis. We established JLT Specialty as a true specialty powerhouse following its successful merger with Lloyd & Partners and the combined business strongly positioned for further growth. It delivered a 19% increase in its trading profit in the period, with revenues up 7%. We cemented JLT Re’s status as one of the world’s leading reinsurance brokers following the completion of our integration of TW Re’s US platform. It delivered a 24% increase in its trading profit for the year.

We completed a successful first year in the build-out of our US Specialty platform. The business has strong momentum and continues to attract some of the very best talent in the market. Today it has a headcount of nearly 180 people and delivered revenues of nearly $36 million. We delivered strong growth in our emerging markets businesses in Asia and Latin America. Together, these businesses delivered organic revenue growth of 8% in the year. These highlights were delivered despite the weak insurance and reinsurance rating environment and the further deterioration in the macroeconomic environment over the year.

With the Board confident in the business’s underlying trading performance, the total dividend for the year increased by 6% to 30.6 pence. Looking at the key elements of the Group’s overall financial performance in more detail, total revenues increased by 5%, or 6% at constant rates of exchange to £1.16 billion with overall organic revenue growth of 2%. As anticipated, the underlying trading profit decreased by 5% to £187.5 million with underlying PBT reducing by 7% to £170.1 million. As a result, the trading profit margin reduced from 17.8% to 16.2%. This reduction in the Group’s trading profit reflects, both our investment in building out our US Specialty operation and the specific challenges faced by our UK Employee Benefits business in 2015.

It is important to note that excluding the US investment of £20.5 million in the year, the Group’s underlying profit before tax would have increased by 3% and the Group’s trading profit margin would have increased to 18.4% when compared to 2014. This reflects the strong performances delivered by our Risk & Insurance businesses and the continued success of our International Employee Benefits operations as well as cost control in the year. Our reported PBT reduced by 3% to £155 million which includes the impact of exceptional costs of £15.1 million and as a consequence reported EPS decreased to 47 pence.

Turning now to the performance of our two trading divisions, our Risk & Insurance businesses, which represent some 75% of the turnover of the Group, grew revenues to £866.6 million, an increase of 6% with market-leading organic revenue growth of 5%. This is in line with previous years and demonstrates the resilience of our strategy and our franchise. Both our Specialty and Reinsurance businesses achieved solid 19% trading profit margins. Revenues within our Employee Benefits operations increased by 2%, but reduced by 6% on an organic basis. As previously indicated at our quarter three interim, this result reflects a reduction in the revenues of our UK Employee Benefits operation, which fell by 14% on an organic basis as a result of the specific challenges it faced.

I will talk later about our plans for this business, which we are confident will see year on year financial progress. Our International Employee Benefits operations achieved 21% revenue growth or 7% on an organic basis after another good year. Looking now at the performance of our larger businesses individually.

JLT Specialty generated revenues of £311.2 million in the year, showing revenue growth of 7%, or 4% on an organic basis. Trading profit increased by 19% to £68.3 million, with trading margin increasing 200 basis points to 22%. This is a strong result given the continued fall in insurance pricing, achieved in challenging market conditions, demonstrating the strategic and operational logic of the merger between JLT Specialty and Lloyd & Partners. The combined business is now a Specialty powerhouse, as evidenced by a significant number of client wins during the year.

Particularly noteworthy has been the performances of our Aviation, Credit, Political & Security and Financial Lines businesses, which have been able to translate their specialist knowledge into a stream of important client wins. JLT Specialty now has new leadership in place following the planned succession of Paul Knowles to the role of CEO and Lucy Clarke as his Deputy and this new team is continuing to drive collaboration with JLT’s other specialty businesses around the world, in particular our developing US platform, strengthening of course our global specialty proposition.

During 2016, we will be taking the opportunity to merge UK Thistle operation into JLT Specialty. This reflects Thistle’s drive into Specialty segments and will improve the client offering, simplify the Group’s structure and generate greater efficiencies. JLT Specialty’s revenue growth prospects are set to continue in 2016, supported by the further investments we are making in Specialty areas such as Marine, Financial Lines, Cyber and General Aviation and our proven ability to consistently win market share.

Turning now to our other larger Specialty businesses. Combined, these businesses delivered £381.8 million in 2015. Starting with our Australian and New Zealand businesses, organic revenue grew to 6%, but reported revenues reduced by 4%, when compared with the previous year, as a consequence of the movement of the Australian dollar versus sterling. At constant rates of exchange, the trading profit increased by 13%, but again this was impacted on a reported basis. The business secured a significant number of client wins in the year, including both one of the largest construction companies and one of the largest oil and gas companies in the region. Its progress reflects the success of its strategy of establishing itself as a Specialty player. The momentum has allowed the business to continue to invest in strengthening its team in its key Specialty areas. Today, this business operates from more than 30 locations and has more than 850 employees.

Turning to Asia. Despite a difficult macroeconomic environment caused by the slowdown in China and falling commodity prices, Asia has delivered an encouraging performance. Revenues grew by 7% to £76.6 million, with organic revenue growth of 3%. Trading profits grew by 12% on a reported basis, but were flat on a constant rate of exchange basis. Good progress was seen in our Hong-Kong, Philippines and Vietnamese businesses in particular, whilst our Financial Lines and Credit & Political Risks businesses also had a good year. Under the new leadership of Dominic Samengo-Turner as CEO and Warren Downey as his Deputy, we are encouraged by the prospects for this business in 2016.

Our Latin American operations business delivered strong results, with revenues increasing by 16% on an organic basis. Our trading profits increased by 10% to £21.3 million, with the business successfully collaborating with our other offices around the world. Energy, Surety, Cargo, Power and large industrial Property and Casualty is where we are winning significant new business. Set against its domestic macroeconomic backdrop, our Brazilian business, in particular, delivered a good performance.

Our US Specialty business generated revenues of nearly $36 million, which equates to £23.3 million, in its first full year of operation. This demonstrates an acceleration from the $11 million delivered at the half year and the growing revenue momentum of this business. The business also secured a number of important client wins during the year which were not booked in 2015, but that will benefit 2016. As anticipated in our Q3 interim statement, the net investment spend in the period of $31.4 million, which equates to £20.5 million, was lower than previously advised. While total revenues were short of our initial expectations, this was largely due to the business taking a more prudent and selective approach to hiring, given the volume of approaches we have received. This is important as we are seeking to grow our franchise by identifying the very best people. The level of client and market support remains impressive, and I will provide some further details on our growth ambitions for this business in 2016, later in this presentation.

Turning now to JLT Re. JLT Re delivered a strong performance in 2015, with revenues increasing by 5% to nearly £174 million and organic revenue growth of 2%. Trading profits increased by 24% to £32.4 million. This is reflected in an improved trading margin of 19%, with the business completing the successful integration of the TW Re US platform, as well as driving further operational efficiencies. Particularly noteworthy in 2015 has been the growth delivered in Asia as our capabilities and reputation in the region, have grown. This performance was pleasing when set against the continued decline in the reinsurance rating environment during the period.

It is worth noting that since acquiring the TW Re business just over two years ago, we have seen property cat rates fall over 30%. The appointment of Ed Hochberg as the CEO of our North American reinsurance business has been well received by our clients, markets and our colleagues. The business is well positioned for growth, building on its already strong US Regional, Public Sector and Natural Cat practices as well as targeting other areas such as Transportation and Workers Compensation.

We have continued to invest in talent, selectively hiring in key growth areas, as well as in analytics, where we are adding to our existing offering with new tools and capabilities that further increase our ability to serve insurers and reinsurers on their largest and most complex risks.

As we enter 2016, there are signs that demand for reinsurance is increasing. We have seen significant reserve strengthening on long tail lines of business for a number of large carriers, and a recognition that at current pricing, reinsurance is an extremely efficient form of capital. The business has had a good first of January renewal season and remains well-positioned for future growth.

Turning now to our UK Employee Benefits business: Reported revenues in our UK and Irish business for the period were £167.4 million, a reduction of 9% when compared to the previous year. Trading profits were £12.8 million, with the trading margin falling from 20% to 8% for the year. This disappointing performance reflects the challenges that we highlighted at the time of our interim results and in our Q3 interim statement.

Firstly, a significant slowdown in project work and new business due to the uncertainty created by government-led changes to the UK occupational pensions market. Secondly, the structural impact of the Retail Distribution Review on our commission revenue, where we saw insurers opportunistically choosing to end commission payments in advance of the expected deadline of 2016. We booked our last tranche of commissions-related revenues in 2015. This amounted to £5 million, which will not be repeated in 2016.

Given the above, we gave guidance in November that we anticipated that full year revenues in UK Employee Benefits business would reduce by a mid to high single digit percentage when compared to 2014 and that trading profit would be in the low to mid-teens, and this has indeed been the outlook and outcome for the year.

Despite the challenges of 2015, this is a solid business with a strong offering and attractive range of capabilities in a market that continues to need and value our services. The business has been under the new leadership of Bala since early October. And we are now implementing plans to reorganize the business with a flatter structure which is better able to respond to today’s dynamic marketplace, while continuing to invest in technology and the client proposition. This repositioning will result in a reduction in headcount as certain layers within the business are removed. It is anticipated that this will deliver ongoing annualized savings in the range of £14 million, for one-off cost of £12 million. We would expect savings in 2016 to be in the region of £9 million of the estimated annual savings. Later in my presentation I will provide some further detail around this business.

Turning now to our international Employee Benefits businesses, these delivered combined revenues of £121 million, an increase of 21%. Our Asia operations achieved organic revenue growth of 5%, despite headwinds in Indonesia, notably from the introduction of a mandatory state-sponsored healthcare scheme and some impact from the restructuring of our operations in Singapore.

PCS, our High Net-Worth life insurance broking business, had a solid year, despite the slowdown in the Chinese economy. Demand for healthcare insurance and consultancy is still strong in Asia, with supporting demographics to suggest this will continue.

Our Australian and New Zealand businesses are also progressing well, with organic revenue growth of 18%. This was supported by the successful execution of our strategy to focus on the return-to-work sector, with our acquisitions of Recovre and Alpha now making us one of the largest providers of rehabilitation services in the region. The integration of these businesses has gone well and we see further opportunity to expand in this area as clients seek an integrated occupational health and return-to-work service. As expected, the trading profit margin has reduced for the combined Australian Employee Benefits business as Alpha and Recovre are intrinsically lower profit margin businesses.

In Latin America, organic revenues grew by 12%. This reflects the investments we have made across the region in building our capabilities and expanding our offering. This has included opening a number of new offices in Brazil, to target larger regional clients working in close collaboration with our colleagues on the Risk and Insurance side of the business.

I’ll now hand you over to Charlie.

Charlie Rozes

Good morning, everyone. Let me start by reiterating Dominic’s opening remark. This is a good set of results that reflects the sustained, overall momentum of our business.

So, this morning I’d like to focus on the underlying performance of JLT and talk about three important aspects of our results: First, the year-on-year movement in our underlying profit before tax; second, a more in-depth review of our costs than we have shown in the past; and finally, the composition and utilization of our debt facilities and funding. Within your packs are all the usual slides but some of them I’ve moved into the appendix at the back.

Turning first to our underlying profit before tax. This chart shows that in 2014, we reported an underlying profit before tax of £183 million. That included the £2.7 million cost of our US Specialty build-out. Without that cost, our underlying profit before tax would have been £185.7 million. Putting the US build-out to one side so as to better explain the year-on-year movements across the Group, our Insurance Broking businesses added £24.4 million of trading profit in the year. That was a strong performance, especially given the market conditions. It also highlights the Group’s revenue growth momentum as well as efficiency gains that were principally delivered by the TW Re integration and the merger of JLT Specialty and Lloyd & Partners.

As Dominic mentioned, UK Employee Benefits was significantly impacted by changes to the pensions landscape in the UK. That led to a £23.2 million reduction in its contribution to Group profits. At a Group level, that impact was partly mitigated by a one-off reduction in our head office costs which provided a year-on-year positive impact of £5.5 million.

The disposal of our stake in Siaci, our French associate, was the main reason for the year-on-year reduction in Associate earnings. That disposal in May 2015 meant that we had four months of income, approximately £4 million that will not recur in 2016. As a result, we believe that Associate earnings in 2016 will be approximately £2 million. Taken together, all of these elements delivered an underlying profit before tax of £190.6 million, excluding the US investment costs. That compared to £185.7 million in 2014 and it represented an increase of 3%.

Before moving on to costs, I’d like to make a few points about revenue and profit phasing in our financial results.

As many of you know, we have some distinct seasonality in our revenues and they’re mainly a function of renewal periods in Risk & Insurance. These occur primarily at the half year and the full year marks. That’s a trend that I don’t think will change significantly, and both periods are critical to us. For example, in 2015, the four months around these periods being December/January and June/July, delivered nearly 50% of our full year revenues. That’s important because it affects our phasing and the build-up of our profits during the year particularly as these months span both sides of our half year and full year reporting periods.

Over the past two years, underlying profit before tax, generally, has been phased with just under 60% in H1 and the balance in H2. Now, in 2015, this split was primarily driven by profit erosion in UK Employee Benefits in the second half. For 2016, I believe underlying profit before tax will be split roughly 45% in H1 and 55% in H2.

I’d like to turn now to costs. Our headline cost to income ratio was 84% in 2015. That’s 2 percentage points higher than the previous year but there are specific reasons for it. The drivers were the combined effects of the US Specialty investment and the performance of UK Employee Benefits. These drove a 4% increase in the ratio. And that was partly offset by improved cost efficiencies in other businesses and the reduction in Head Office costs. Our merger of JLT Specialty with Lloyd & Partners had a positive impact on the cost ratio in the year. In addition, finalization of the TW Re integration drove a reduction in the ratio for JLT Re. The reported cost ratios of our Risk & Insurance businesses remained broadly flat but again that included the US investment. Excluding this, our Risk & Insurance cost to income ratio would have reduced to 78%. In our international Employee Benefits businesses, the cost to income ratio increased by 4 percentage points, driven by the changing mix of our Australian business.

Now while this slide helps explain our cost efficiency and is a metric I will focus on more closely in the future, I think it’s equally important to look at operating leverage which I’m going to show on the next slide.

By operating leverage, I mean the differential in growth rates between total revenues and operating costs, also sometimes referred to as Jaws. This slide helps explains this. Unlike the point-in-time snapshot given by a cost to income ratio, operating leverage indicates how we are managing revenue and cost growth simultaneously over time. It also provides some insight to the relationship between cost flexibility versus revenue. In a growing business like JLT, with a high proportion of staff costs, keeping costs in line with, or better than, revenues is critical to ensure that total revenue growth translates into sustainable trading profit.

In 2015, the operating leverage across the Group, excluding the US investment, was approximately 1%, even with UK Employee Benefits. This is a level consistent with prior periods. And tracking JLT’s operating leverage over the past few years, including a difficult 2015, demonstrates how, over time, we’ve kept cost growth in check with revenues while still growing profits. I’ve not included the initial revenues and costs of our US investment at this stage, as this business is largely starting-up from scratch. But for the core franchise, we are managing costs and balancing cost savings while consistently driving new investment.

Now, let me turn to cash flow. Operational free cash flow has shown a strong improvement year-on-year as the next slide shows. JLT continues to generate consistently high levels of EBITDA. We generated £244 million in 2015. We increased operational free cash flow from £118 million in 2014 to £177 million in 2015. And that was despite a higher level of net investment spend in the US and the erosion of trading profit in UK Employee Benefits. The move from a net cash outflow of £129 million in 2014 to a net cash inflow of £48 million in 2015 was principally due to movements in acquisitions and disposals, the most significant of which was the receipt of £80 million from the sale of Siaci, coupled with a net inflow from the change in working capital compared to the outflows of previous years.

When I look at some of the uses of cash, the principal items are acquisitions, taxes, share purchases for staff remuneration and dividends. In terms of acquisitions in 2015, we completed nine transactions across both Risk & Insurance and Employee Benefits. They were mainly bolt-on deals to complement and build further capabilities in our existing businesses and geographies.

Our effective tax rate in 2015 was 26.8% and the range of corporation taxes paid consumed £37 million, and that’s a level consistent with previous years. We’ve increased the cash dividend for 2015 to 30.6 pence per share, while the total dividend paid in 2015 was £63 million and that reflects the Board’s confidence in the underlying performance of the Group.

I’d like to turn now to funding. The Group continues to be well-funded with an appropriate mix of short and long-term debt, with a range of maturities. The Group currently has total medium and long-term committed debt facilities of approximately £920 million and we’ve got significant headroom in place to finance further growth and expansion of our business.

In January 2016, we agreed with our relationship banks an extension of our core revolving credit facility by a further one year to a new maturity date of 2021. The Group’s total revolving credit facility now stands at £500 million. We’ve worked hard to use our strong cash flows to reduce net debt, so by the end of 2015 it stood at £426 million. That compares to £474 million at the end of 2014.

As the chart indicates, there has been an increase in the net debt to EBITDA ratio over the last few years. That was driven by the acquisition of TW Re, build-out of US Specialty, and our continued program of small acquisitions. In 2015, the net debt to EBITDA ratio reduced to 1.7:1. That remains comfortably within our bank covenant and continues to reflect an investment grade profile.

Net finance costs were £22.9m in 2015 and I believe will be at a similar level for 2016, subject to acquisition spend. We will continue to invest in our businesses in line with our strategy and you can be assured that cash flow improvements, driven by EBITDA growth, will mean that our net debt to EBITDA ratio should remain within a conservative range.

Now let me now give some color and explanation around some of the exceptional items in 2015 that were unrelated to the operating performance of the business.

Net exceptional costs were higher than our half year guidance, principally due to an increase in acquisition costs and the net cost of litigation, both of which arose in the second half. The sale of Siaci was completed in the second quarter, and as announced previously, resulted in an £18.6 million gain. The final integration costs of the TW Re transaction were £5.6 million higher than anticipated. That was mainly due to a one-time charge relating to certain pension arrangements in the US, which will benefit profits in future years. The integration costs associated with acquisitions completed in 2014 and the first half of 2015, in respect of Ensign, Recovre and Liberty Asset Management, cost an additional £1.9 million. We also incurred acquisition costs in respect of transactions completed in the second half of 2015 of a further £800,000. Restructuring costs, primarily driven by the merger of JLT Specialty and Lloyd & Partners, also came in slightly higher than anticipated at £9.9 million. Lastly, during the second half of 2015, the Group saw an increase in litigation. That was mainly related to commercial disputes, the net cost of which was £1.6 million for the year.

Looking to 2016, I expect we will incur approximately £12 million of exceptional costs associated with the restructuring of UK Employee Benefits. In addition, there will also be some restructuring costs related to the integration of Thistle UK into JLT Specialty. I’ll update you on the expected costs and benefits of this project at the interims in July.

As I indicated earlier, we’ve included some additional views on the financials in the Appendix, including details around the balance sheet, hedging and business performance. What I wanted to do today was focus on three key areas: The year-on-year movement in our underlying profit before tax; a more in-depth review of our costs; and the composition and utilization of our debt facilities and funding.

As I look into 2016, conditions remain challenging but we will focus on the things we can control, like costs. Our financial fundamentals, like costs; funding; cash flow; and foreign exchange hedges are all in excellent shape and have been among the positives I’ve found since joining JLT in the autumn.

As I said at the start, there is good momentum in the business and the financials we’ve shown you this morning will support that in the future.

And on that note, I’ll hand back to Dominic.

Dominic Burke

Charlie, thank you. And once again, I’m glad to have you on board.

I’d now like to spend some time on the US build-out and our plans in the near-term for our UK Employee Benefits businesses. Starting with the US, we remain focused on driving growth, with our investment in the US, a key element of our strategy to position the Group as the world’s leading specialty-focused broker and to increase our exposure to the US economy, which continues to be the world’s largest insurance market.

While our business is still in the early stages of its development, we are delighted with the momentum and progress after just one year. The business now employs around 180 people and this will rise steadily over the course of this year. It has now established fully-functional offices in 13 cities, supported by a robust operational and infrastructure backbone, giving us the foundations upon which to target those regions where we see a concentration of client demand and economic activity in our chosen specialty sectors. It has also built real strength and depth in its key specialty lines, Aviation, Cyber, Energy and Financial Lines and established strong platforms in areas such as Credit, Political & Security, Entertainment, Reps & warranties, Real Estate and Construction, with further investment to come this year. And, of course, all of this is in parallel to our complementary with, our US Reinsurance broking business.

The US brand is now truly established in the United States and this has been helped by the US Specialty’s close working relationship with JLT Re. The two businesses together now number around 400 people in the US and not only are they sharing offices and analytical capabilities, but they are also actively working together to prospect, win, and service clients.

The lack of internal barriers and the close working relationship between the two businesses is a genuinely distinctive attribute compared to our competitors and is enabling us to put forward a very different client proposition from that of the other global brokers. This is continuing to help us attract the best talent in the market and is transforming our ability to compete for global accounts. The US Specialty build-out remains on track and in 2016, I anticipate revenues to approximately double in the year and the net investment spend to be similar to that of 2015.

I have already detailed the factors that adversely impacted the results of our UK Employee Benefits business in 2015. I have also described the actions that we are taking to improve its profitability and its return to year-on-year revenue growth. It is important to remember that our UK Employee Benefits operation is a well-balanced business, made up of four complementary components, each of which has a strong position in the market. The business is characterized by a large proportion of reoccurring revenues backed by long-term contracts; but it also offers opportunities to benefit from industry changes and technology developments.

As the UK’s largest provider of administration solutions to private sector pension schemes, JLT is well-positioned to secure new business, as companies’ Defined Benefit schemes are run off, and to benefit from the growth of Defined Contribution arrangements. We also see further significant benefits from the application of technology and automation in this area.

As a market leader in pensions and benefits consulting, ongoing economic and regulatory changes will stimulate demand from employers and trustees as the current market confusion abates. Our specialist software operations provide and service one of the most widely-used pension administration platforms in the country, while BenPal enables companies to manage the full range of employees’ benefits on a single application.

Finally, we have a growing investment management business, which already has some £5.3 billion under advice. Given the strong positioning of the components that constitute our UK Employee Benefits business, and the fact that the new management team is now firmly established and focusing on exploiting the market opportunities it faces and delivering a significant improvement in the business’s profitability, we believe that this business will grow over the coming years and move to approximate 15% trading margin by the end of 2017.

The Group faces a number of headwinds and risks as we go into 2016: An insurance and reinsurance rating environment which remains under real pressure due to excess capacity, the absence of significant catastrophe losses and the fact that the attritional losses that might have been expected at this stage in the cycle are not yet coming through; the slowdown in the emerging markets; falling energy and commodity prices; foreign exchange volatility; and ongoing structural changes to the UK occupational pensions market.

Our focus is on those factors that we can control ourselves. We will maintain our revenue growth momentum and cost discipline built over the last ten years. Our specialty-led strategy sets clear blue water between us and the competition. Our model continues to enable and drive growth at the expense of our competitors by winning market share. We have a distinctive, entrepreneurial culture that allows us to attract and retain some of the very best people in the industry. People are beating a path to join us.

Compared to some of our competitors, we have real stability in terms of strategic vision and leadership. For example, in the last 12 months alone, we have handed the baton to a new generation of leaders within JLT Specialty, Employee Benefits, Australia and Asia. The majority of these people have been promoted from within JLT and are steeped in our culture and values. We have all the benefits of being an agile, nimble business compared to our much larger competitors, while having a global footprint and network that none of our smaller competitors can come close to matching. We are truly in a class of one.

We continue to expand our geographical reach, with active initiatives in South Africa, Middle East, Argentina, and China and of course the USA. These investments both help us tap into local demand growth and make us more reliant and credible to our clients. We have established ourselves as one of the world’s leading reinsurance brokers, creating a new runway for growth as well as bringing analytical tools and capabilities to our clients right across the whole Group. We have a strong track record in identifying and integrating acquisitions where there remain many interesting opportunities. We continue to see significant opportunities in the emerging economies of the world where there are real growth prospects for JLT. This is a function of our high quality people and our distinctive offering, as well as our specialty capabilities that are aligned to the underlying drivers of economic growth such as globalization, infrastructure and ageing populations. We therefore remain confident in our strategy, our platform and our continued ability to grow.

Thank you very much. We’ll now take some questions.

Question-and-Answer Session

Q - Ben Cohen

I am Ben Cohen at Canaccord. I had two questions. Firstly, could you say a bit more about where you see organic revenue growth to the larger insurance divisions this year? I guess I am specifically interested in terms of the London market businesses and also the more emerging market exposed areas. And the second question -- and I guess it relates, so you said that the revenue growth in the U.S., the new initiative there was a bit disappointing because you kind of held back on hiring. I was just wondering if you could kind of give a bit more visibility or a bit more behind your comfortable remarks about doubling the revenue growth in the US for this year and what would be the swing factors around maybe doing a bit more or what could cause that to come up a bit short? Thank you.

Dominic Burke

Ben, I don’t remember using the word disappointing referenced to our US build out. I said less than our initial expectations. I don’t think I translate that to disappointing. Remember, in the second half we achieved $25 million of new revenues in the operation because of the $11 million in the first half. So, the run rate as we went to the second half gives me that confidence around the number I’ve given you. Also with coming to the end February, we are now at the end of February, so we know what we’ve won already this year. So, we think that guidance that we’ve given you has a lot more robustness around it than this time last year. And after all, we were talking about in sense [ph] business where we’re only establishing people and offices. So, I hope I’ve answered that question.

In terms of organic growth in the larger and emerging market businesses, well I’ll speak about the larger businesses. And Mark has been doing a lot of travelling this year; he has already been to many of the emerging markets. So, perhaps you can comment on emerging ones and I’ll take the larger.

I think we’re in great shape. I think when you look at even in areas where obviously with the oil and gas prices, the decline in capital spend; the loss of employment, the consolidation in that sector, we had a remarkable year in 2015, in maintaining a strong revenue and client relationship position and building that business. So, we’ll benefit as those headwinds abate. But I think when you look at what we achieved in Aviation and Credit, Political, so in Cyber and Financial Lines, we continue to see our opportunity of winning market share. And increasingly we are seeing the collaboration between our Specialty businesses around the world building the capabilities of JLT and making us more relevant to larger and larger clients. And our position around the table, the opportunities we’re being afforded by tender processes gives us the confidence that we really are taking real traction. And I think we would expect a similar outcome as what we achieved in prior year.

We’ve always said we are much more aligned to GDP growth than we are around the rating environment. Obviously there are some macro headwinds in terms of GDP. But as I sought to bring out in my presentation, the drivers of economic growth aren’t necessarily aligned with GDP. If you look at infrastructure spending in Latin American power and transportation for example, you will see significant investment continuing in Brazil and in Colombia and places such in Latin America, which are skill sets, so very aligned to and therefore we are getting the opportunity to really grow our business.

Mark, do you want to talk about the emerging market, although given I just talked about Brazil.

Mark Drummond Brady

I think you answered the question, but let me just add a couple of things. You asked specifically about where we see organic growth potential in emerging markets. I think it partly goes towards where our market share already is. Dominic’s talked about Brazil which has had a obviously a dreadful macroeconomic background but our market share and the retail market is relatively modest, say we’ve been building from a modest base and it has been one of our largest successes in 2015. We’ve also I think got a product range in a number of those markets, which allows us to ride, if you are not the insurance cycle but there are some cycles of economic activity. So for example, you’ve heard quite a lot of mention in Dominic’s presentation across number of our businesses about the particular success of our credit, political and security risk division. And I think -- and also we mentioned security, particularly in Latin America and Brazil. There are some very specific opportunities around those areas at the time when the macroeconomic and geopolitical landscape around the world is volatile, as I’ve managed in 30 years of being a specialist in those sorts of areas.

This is a huge opportunity for us to give advice and confidence and response to our solutions to clients. So, we see that in Latin America, we see it in our very rapidly growing businesses in the Middle East; we’ve got opportunities in Africa. We’ve become a major player in the reinsurance space to multilateral and national export credit agencies for example. And I think in Asia, we’ve still got a long way to go in building out our specialty businesses in some of the smaller businesses that we have across that region. Remember we are in 15 or so countries in Asia, very strong dependency historically on the larger businesses. But Dominic mentioned in particular our success in Vietnam; we’ve got great activity in the Philippines; we’ve got significant growth potential in Indonesia right across the emerging markets, given our deployment as it currently is and given the opportunities around in the economies that we’ve got significant space to build and develop on our skills and capabilities that we’ve developed, based in London and we are increasingly exporting around the world. And I haven’t even mentioned the United States.

William Hawkins

Thanks. William Hawkins from KBW. I wanted, Charlie, and possibly Dominic, if you could talk a bit more about the outlook two key ratios Charlie that you presented on. I’m guessing, with the headwinds that you flagged to revenue, the operating leverage ratio becomes increasingly important. And so you’ve flagged it to be constant at about 1% for the recent past, are you going to be seeking to increase that ratio? And the flip side from that is therefore is it inevitable that you seek to improve the cost to income ratio for the core business from the 82% base line. And then concluding around all that, it kind of feels me that there might be some incentive to have another efficiency driving the group at some point through this year. And so, again when you’ve been talking exceptional issues, you’ve given us some of the classified [ph] businesses in the core businesses there incentive for another efficiency driver?

Dominic Burke

Charlie will answer that. Let me just -- two specifics, no to your question around another operational driver, no. We continue to manage cost tightly. In relation to the operating revenue, we have only said consistently over the ten years that we’re not going to put ourselves hostage to fortune to a particular number. If we think the opportunity to invest in our business is there, we will invest. We have no sense of actually having a target. We want to run our business operationally as efficiently as we can, we’ll only discipline ourselves to do that. And I think Charlie’s slide evidently shows that to be the case. So, no to any cost efficiency drivers that’s large or exceptional or in any way we have impact on our business, beyond that I’ve already announced this morning. And this is a point of hostage of fortune question. So, Charlie, maybe the first two questions?

Charlie Rozes

Yes. As I think about operating leverage, I mean I’m looking at it over periods of time, not necessarily one quarter to the next or something like that. I mean, I think even in that the trend lines that I showed, there were instances in there when the Group’s operating leverage was negative. But, what I want to be able to do is to stand back at any point in time, and particularly looking at the core franchise, so looking at those businesses that those still growing are more in a self-funding, pay as you go type state as opposed to the U.S., which I think is a bit different at this stage of the journey. Just to make sure that we’re keeping those two things in check because I think in any growing business, the moment those two things cross, cost and revenue growth and then they go in that direction for a period of time, then quite frankly, we or any company is going to have big problem. So, I look at it over a long period of time. So, in terms of quarter to quarter, I’m not as focused on it. But again as I look at when the business has given any forecast or just things like that, that’s one of the things that I’m looking at.

In terms of just thinking generally about cost, I think it is fair to say, I mean we’re going to be sweating the cost base, probably more than we have before. I think all companies probably at this stage are doing that. So that’s probably not a surprise. JLT arguably isn’t doing that for some time anyway, we’ll continue on that same focus, so.

Nick Johnson

Hi, there; Nick Johnson from Numis, couple of questions, firstly on reinsurance. Could you just elaborate please on your experience of the 1st January renewal season? To what extent if any growth in revenues been a function of increased reinsurance demand that you mentioned, and also client wins or both? And with reinsurance price reductions arguably abating, should we expect a stronger growth number from the reinsurance business in ‘16? And secondly in terms of Asia, slightly slower organic growth for the Employee Benefits business in ‘15; in terms of the macro environment in China worsened in the second half of last year, so should we therefore expect pretty tough first half in Asia or have the negative factor to moderation a bit? Thanks.

Dominic Burke

I think it’s fair to say that the price reductions we experienced with the 1st of January were greater than we had anticipated. I think it was -- we’d anticipated perhaps low single-digit reduction and ourselves 15% to 20% reductions, which was not anticipated. We had a number of significant wins. We also increased our penetration on a number of different programs. So, net-net, we are a winner. I think in terms of your statement that you think that the rate reductions were abating, I don’t know who you are talking to but this is not our experience for moment in time. What we can say and I did say in my presentation is that we are seeing some behavioral changes. When you start seeing large insurance increasing their reserving, you start to think. When you see people starting to buy stop loss programs, which is not more in activity that you would see at the level it is currently today, you sought us realize people are running on fuels; there isn’t much margin left in many of the pricing that’s existing today. So, whilst I’d not call end of the soft market, I think we can safely say we’re at the bottom. And I think, insurers have very little flexibility and very little room to maneuver now since where they are. So where that leads them that will be for each and every insurance company to look at their own business model and their own balance sheet. But from our perspective, right now, we’re still seeing exactly what we have experienced indeed in the reinsurance space, the 1st of January renewals were much softer than we anticipated.

As to our prospects organized for the business, well, we did promise you last year that we’d achieve 20% trading profit margin in 2016. So, I can firmly reaffirm that ambition and prospect for us. And I think we will see a good strong performance in our reinsurance business in 2016. There is no question that the combination of TW Re and JLT Re has been as much, if not more than we had, really has greater reinsurance power house with increasing penetration with many of the major global insurance which is clearly our target market as well as servicing the regional practices and the regional market in the U.S. and the London market here. So, I think we’re in a good place attracting a lot of talent, retaining our talent. And I think we’re confident about the reinsurance platform.

In terms of Asian Employee Benefits, I think our second half in our benefit business was broadly the same as our first half. There is no doubt China’s slowdown had an impact. But our benefit business out there in Asia now is a significant business, generating over 70 million of revenue, 76 million of revenues in 2015. Remember, it was a very small business three, four years ago. We still see the healthcare market as a really big opportunity for us. We see the EHH [ph] acquisition maybe China at the end of last year, I think where prospects are very strong, our PCS business has got a good pipeline. Overall net-net, will it be some impact? Yes. But do I think that our prospect is still strong from good organic revenue growth? Yes, I do.

Joanna Parsons

Thank you, Joanna Parsons from Stockdale. Few questions, if I may please. Firstly, quite a lot of management changes last year. Perhaps you’d like to give us a little bit more comment about why some of those changes were necessary. Did they create any duplication of the business during ‘15 and can we expect further in ‘16, or are we now in the more stable situation? As regard to UK EB, my firm was a little bit surprised by the amount of project revenue that was in the business more than I’d anticipated. And perhaps if you could give us a little bit more of a feel going forward as to how you see the split between recurring revenue and project revenue. On the litigation provision, does that include provisions for the cases that are being put by Aon and Willis? And if not, can you give us some guide about provision there? And on the US Specialty side, I would imagine that your peers are getting a little bit pitchy [ph] about the growth that you’re showing and obviously the teams that you’ve taken on board. How are they responding to that; are you expecting to see further competition from them next year and perhaps gloves off a little bit more?

Dominic Burke

I will leave Charlie to deal with the litigating provision per se and then I’ll speak after him around the point of -- around competition. Management changes, I was very specific in my presentation to say the planned succession. So, I’ll come back to EB, but the succession of the appointment of Nick Harris who I noticed the back of the room, as Deputy CEO of Australia is absolutely something we’ve been planning as our succession planning for number of years. Paul Knowles and Lucy Clarke absolutely planned, part of the succession planning that we’ve been undertaking. Bala’s appointment in the UK that is not something I anticipated doing in 2016, but one something I anticipated doing in 2017. So, it came no surprise to him or to the Board of my strategy see numbers of that appoints taking place just the year the appointment took place. And I needed to specifically address the issues and challenges the business faced. And I thought Bala was the right man for the role. And I have -- my confidence in that judgment only grows each day, as we go through the challenges and addressing challenges as we all today.

So, they we were very planned successions. There will be more to come when appropriate. But they are, as I very clearly made the point, they are people that have built their careers in JLT, have fostered and enjoy the values and the culture of the organization and will drive those on as each successive manager will move the concept of an organization as it should be. I’m very confident that the new generation of leadership within our business around the world with Dominic Samengo-Turner and Warren Downey in Asia, not to forget them, are all, as I say speak to the JLT values and culture. So, I’m excited that they’ll be drivers of growth and chase going forward.

In terms of the UK Employee Benefits business, when we have long-term contracted contract, that’s for the basic administration of pensions and providing the consultancy such as the tri-annual actuarial valuation. The project work spins off the back of those contracts, like de-risking, data cleansing, early retirement programs, flexible benefit consultation with employees. If that type of project work, which employers slowed down on doing in 2015, as they saw the fog descend around occupational pensions and pension schemes of personal pensions as the chance continues to see pensions as a way to balance his own books. We’ve seen a lot of commentary about what might or might not happen in the forthcoming budget, might be the chance would be to go and find the money elsewhere, not in the pension sector. But we’ll see what transpires. So, that’s the type of project. So, that work hasn’t gone away; that work is still got to be done. It’s still in the pipeline. The de-risking, the early retirement, the enhanced transfer values, all the methodology that trusties now have in front of them to manage their pension schemes is work that still sits there, and it’s just a matter of letting the fog lift, we see where the government really wants to take pensions in this country.

Charlie, the U.S. litigation provision?

Charlie Rozes

Just coming on to litigation, I mean in terms of litigation, we did a rise in litigation in the second half of last year. I mean that was a -- it was a different mix of disputes, commercial disputes that had come up. In terms of the two parties that you mentioned, we haven’t disclosed specifically what the provisions are or if you will, who they are for -- or what cases. So, we haven’t given that discloser. But what we did say and what you’ll see in the back in the provisions note is that we did a take provision in 2015 related to the case or cases involving contractual disputes, employment contractual disputes. So, we will take a provision when we think we can quantify, when we think there is probability, not just because it might be possible some day. So, as we go forward, we’ll share more as things move forward.

Dominic Burke

Let me try and put that into context, which I think your final question to get. Since 2010, through 2015, our headcount has grown by 11.7% compound every year. We estimate about two-thirds of that is generated organically, one-third by acquisitions. So, we attack talent from our competitors. And if you recruit talent from you competitors, you run the risk of litigation. We’ve managed that risk carefully, as you’d expect us to do. But, we have no control over what others might allege against us. I suggest that we judge this on the outcomes. But perhaps all of that is of indication of our success and our ability to attract the talent from our competitors as a client first organization and organization that doesn’t run itself with conflict of interest. So clearly, we’re getting the attention of our competitors, not just in the U.S. but everywhere else around the world.

Barrie Cornes

Good morning. It’s Barrie Cornes from Panmure Gordon. Number of questions and first of all, I am getting slightly confused on these exceptionals over the last 10 years. There aren’t that many years that I can remember, if any where there haven’t been exceptionals below the underlying line, if you like. And going back to Will’s comment, I am just surprised that you got the U.S., which you haven’t seen as an exceptional, which you take in above the line, which is great where you’re getting 180 odd employees. You are going to let employees down in UK Employee Benefits and you take that as a cost below. So, could you just talk me through as to why it’s not an ongoing business expense, you’d only pick up that? And the other side of that is I think Charlie mentioned that Thistle was going to be an exceptional integration cost into specialty, I wonder if you could give us a flavor on the cost of that or likely cost. And the last question really is to just see whether there is any change in the FX hedging policy also as it was previously, please.

Charlie Rozes

In terms of exceptionals, I mean how I think of those are I mean these will generally be focused on larger, either programs or events, things that generally we will publically disclose. So, where I draw a distinction with that is when you get to more, what I would consider to be garnered variety BAU type maybe severance cost or restructuring or things like that, if you will, people running the business month in and month out, we won’t badge those as exceptional. But when we have a larger program like a loadstar, when we have a large program like TW reintegration, and again it’s public; I think people are aware of it. I do think there is distortive effect that it would otherwise have if we just left it in the numbers themselves.

As I’ve looked at financial, just to calibrate my own thinking around and coming into the organization, I think this year what we’ve shown is actually a reduction on where we were ‘14 and in ‘13. I think ‘13 and ‘14, we were around £23 million of exceptionals I think to each in those years. I mean you collaborate that against revenues or underlying PBT, again in those years, issue I think you read about 2% of revenues, up 13% I think of underlying PBT. This year in 2015, we were below those two numbers. When I go back before that actually, exceptionals were there but I think they were much smaller quantums than they’ve been before. I think maybe within the last few years we’ve really hit a bit of the growth spurt now. But we’ll be transparent about them; we’ll try to guide where we can. The market ultimately will make a determination as to whether, if you will, could be and should be included or excluded from earnings. But we’ll take a decision particularly around the larger items to generally exclude those.

In terms of especially UK, as I said, that as compared to the work around UK ED is probably more early days in that. So rather than hazard some guesses, I’d rather give you some more precise forecast around that but that work is getting underway more recently. I suspect by the time we at least get to the half year, I’ll be able to give some more precise guidance about cost and above the line, below the line benefits and things like that.

Your last question about FX, no significant changes to the hedging policies that we have consequently around dollar, Aussie dollar et cetera. So, there aren’t any big changes there. But needless to say with the way rates have been moving certainly in the fourth quarter last year, I mean we have been doing quite a bit of activity in the space to try to hedge our revenue exposures, but no significant changes to the programs themselves.

Dominic Burke

One final point about the balance of our hedging, Charlie, in the context of a more natural hedge within the business?

Charlie Rozes

Yes. I mean we do have parts of our operation where we do create, if you will, kind of natural hedges between revenue and cost and where we’re making profits, and in some places we’re running losses. I mean there are some different parts that we’ve never quantified precisely. But we do have places where we do run a bit of a natural hedge given the international operation and the growing earnings in different parts of the Group.

Unidentified Analyst

Just a question about your cash flow, obviously, a very strong performance in 2015 characterized by exceptionally good management and working capital and the balance between acquisitions and disposals. Could you maybe elaborate a little bit on both of those positions and how you see them evolving?

Charlie Rozes

In cash flow terms, I mean the big event that we had coming through in the year was finally the receipt of £80 million coming from the sale of Siaci. I mean that in of itself is a bit of an extraordinary event. I think to get into some of the particulars around working capital, I think it’s getting into looking at how we are seeing movements in receivables and payables year-over-year. I do think you are getting into some timing shifts and some timing differences in the sense we swung from a negative into a positive into the year. Will that continue? It’s hard to say. But I don’t think there is any particular story around what we’ve seen here.

Eamonn Flanagan

Thank you. Eamonn Flanagan from Shore Capital. And just interesting commentary on the dividend, and Dominic in respect to certainly EBITDA that I was looking for but it’s clearly a fairly a big comment on us. And have you got a figure in mind in terms of once all this kind of solved and all this noise that was going as what sort of cover you should be in and for?

Dominic Burke

I think we don’t have a set dividend policy, as you are aware. And I think the Board looks as our dividend payments based upon underlying trading. I think the dividend payment we made and don’t think I knew the dividend payment we’ve made is in line with that that’s the seven successive year of a similar level of growth which has been approximate to six to seven. So, I don’t know there’s particular statement being made one way or other. It’s just consistency of outcomes that you are seeing over the period.

As to dividend cover, I think you’ve got to look at the underlying business. We knew when we set out on the journey of the US, we gave guidance at the time it’s going to cost us, something in the region $80 million. I’ve given guidance, at this stage I remain of the belief that we will be at around that sort of approximate level; we will no more as we travel through 2016. But clearly that was going to be an investment. It’s not only that that’s the cost of the P&L but of course is the infrastructure cost of building out 13 offices and profiling them, the upfront nature of the cost of investment and building the office network and the infrastructures. So, net-net, the capital cost is quite significant. But we realize that; we have plan for that; we have a very strong robust cash flow and funding preposition, as Charlie’s informative slides this morning demonstrated.

So, I think we are not concerned of the dividend cover very well. I remember back in 2006, maintaining the dividend when we had less than once times dividend. So, I’m not suggesting where it’s going to go back to those days, but I think we have confidence about the underlying business of JLT and the revenue momentum that will ultimately drive the outcomes for all stakeholders. I think we are very confident about where we are.

Charlie Rozes

Dominic, the only thing to add to that, I think if you look at, as we thought about the dividend and were to set it -- recommend setting it for this year, if you look at just the last five years, we’ve generally been in the range of about 1.6 to 2 times. So, we’re maybe at the lower end of the range this year for all the reason we’ve talked about today. But as Dominic said, you go back to the years preceding that and the cover was actually much, much lower. So, I feel like we are in a sensible place, certainly for this year.

Dominic Burke

Well, before my voice gives up, thank you all very much for attendance. And we look forward to see you at the end of July. We’ll be able to say around for a little longer here. Anybody who needs to ask, my colleagues are here. And some of my colleagues -- the operating companies are also here. So, they’re there to give you some further guidance. Thank you all for attending.

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