All right, everybody. Thank you very much. I'm going to get started here. I'm here to introduce Dominic Casserley. Dominic's the CEO of Willis, one of the largest international brokers in the world. Willis has a global reinsurance platform, a retail platform as well as a wholesale business, and we're going to sit here and talk a little bit about each of those, and take your questions should you have them. Before we get started, Dominic's going to give you a few words about Willis' business, and then we'll sit down. Thanks. Dominic?
Thanks very much. Good morning, everybody, and thank you for joining us this morning. I'm going to do a quick canter through our business for those of you who don't know it as well. We are a global risk advisor and broker. We've been around for a very long time. We are truly global. We're 17,500 people. We operate around the world in over 400 offices. We have a number of market leading products and services, and we're the leading authorities in a number of areas of risk management and insurance placement. We have a lot of analytical capability, and we obviously are deeply involved in all of the issues of development of the global economy, extreme weather events, et cetera, are crucial to what we do.
We're focused on the theme that unites us is providing our clients of all types resilience for a risky world so that they then can then go on and invest for the future. We think we have a number of attractive fundamentals as a firm. We do operate fundamentally in attractive growth markets. Long-term structural drivers in the economy, GDP, trade, inflation, and importantly, demographic changes are in our favor. There is increased penetration of what we do in a number of developing markets, which means that we get a growth multiplier over and above the underlying GDP growth in those markets. Of course, the world is becoming more complicated. New risks are emerging, risks are evolving, and that leads to increased need for advice and insurance placement. We are geographically diversified. We have clients across all industries and all client types and sizes.
About 85% of what we do is broadly related to what you would call property and casualty, and 15% to employee benefits or healthcare issues. We think quite naturally that 15% will gradually grow as a proportion just organically if we did nothing else. Three and a half billion dollar revenue company in 2012. Very strong operating and EBITDA margins, generating over half a billion dollars of cash from operations. In 2013, we've seen steady growth of over 5% in the first three quarters of the year. In the end of July, we laid out our medium term plan.
We said that we wanted to deliver good mid-teens total shareholder returns over the medium term based upon mid-single digit organic revenue growth, a positive spread to costs of at least 70 basis points, and we saw flattening capital expenditure and pension funding needs driving improving cash generation over the years. We said we'd use that cash, obviously, to continue to invest in the business for growth for the long-term cash generation. Very carefully looking at truly value creating M&A opportunities, and I'll come back to that. Obviously, we want to see a steadily rising dividend on an ongoing basis, and we will obviously think about repurchasing shares as we manage our cash going forward. Doing those things on this page, we believe can deliver a mid-teens TRS over the medium term. How do we think about growth opportunities?
We do see our growth coming from rebalancing our portfolio towards faster growing geographies, industries, and sectors. That does not just mean Latin America and Asia. It means, for instance, within North America. Focusing on those geographies and industries where we think there will be above average growth, and we will be managing our portfolio accordingly. We do see a large opportunity to truly deliver one Willis to our clients. Anyone who knows this industry at all will know it's quite siloed historically between different components. That's true of the industry. We do think that Willis has an opportunity to actually break out of the pack here and do a better job of delivering the total firm to our clients around the world. We are active in thinking about new uses of capital in the insurance space. We launched something called Global 360.
It's a lot of work this year involving new capital sources coming in which had not been active in particular aspects of our book. We are continuing to look at innovative ways of changing the placement markets, always with the views and opportunities for our clients being the guiding principle. We are active in healthcare. In North America, we have a significant business targeted at the upper middle market and middle market. As a prime market, we are obviously in the exchange business. We have something called the Willis Advantage out there in North America. Happy to talk about that in more detail. We see opportunities for growing our employee benefits business around the world. We will look at M&A. We have an attractive opportunity, we think, potentially to acquire a company called Gras Savoye. We own 30% of it already.
We have an option to actually close the deal in 2016. We have to make the decision in 2015. It would bring us the number one position in France and the leading position across Africa, and additional build-out of our positions in Eastern Europe and parts of the Middle East. We think that's an attractive opportunity, but we obviously will keep an eye on the state of the French economy before we finally have to make a decision. We're looking at other opportunities, but critically, we're adopting a very disciplined net present value approach to investing in M&A. The way you can fritter away cash generation in this business is by poorly designed M&A activity. I assure you, we have a very disciplined approach and have clearly been rejecting many more opportunities we've seen this year than we have pursued. That's the basic story.
I have to click you through these pages to make sure that we have done this formally. With that, I'm very happy to turn over to Mike and discussion.
Great. Thanks, Dominic. I guess, going back to one of your slides where you're talking about capital deployment, you listed the order there in terms of investing. There were four items, I guess. Investing in a business, M&A, growing the dividend, and buybacks.
Yeah.
Is that the order that you're thinking about? It would seem like the dividend is a pretty prominent goal.
Yeah. No, it's not the order.
Okay.
No. We are pretty committed, obviously committed, to growing our dividend according to the growth of our business broadly, right? We think that's an important part of, again, our target of delivering mid-teens TRS, right?
What I think you have to look at is we're focused on that's what we would like to do over the medium term. That's the returns we think the business can legitimately deliver on a sustainable basis. The ways we do that are obviously a mixture of short-term returns of cash.
Right? Through dividends and share repurchases.
Medium-term delivery of ongoing value so we can continue to return cash into the future, right? Our task as a management team is to balance those things. I don't want to give you a sense of that's the order.
Okay.
I do want to say that it is our job as a management team to balance the mixture of delivering short-term cash versus investing to have the wherewithal to deliver cash in 2018, 2019, 2020, right?
I see.
Right? That's what we'll be balancing, and those are the four tools we have broadly to do that.
When we think about, you mentioned NPV as a measurement tool for evaluating M&A.
Acquisition, yeah.
How should we think about the threshold for evaluating investments in the business? I imagine you.
Similar.
Similar approach.
Similar. Right. Of course. Let me tell you why we're focused on NPV. I'm a great believer in what really matters in life is cash. Right? In particularly in this business, in acquisitions, it is relatively easy to make earnings-accretive acquisitions, which may actually not create value.
Because this is a business where there's very few assets, a lot of goodwill. Under GAAP, you know what happens to that goodwill. It does not go through the P&L any longer. Suddenly you're left with, I'm borrowing at 5%, a huge part of the asset I bought never goes through my P&L. Surprise, surprise, it's earnings accretive, right? It may be a disastrous transaction from a cash-on-cash NPV view. We think, given the particular peculiarities of a people-intensive business, you have to be very careful to look at, show me the cash we're going to get for the cash we've used. Right? That's how we think about it. Of course, internal investments, same view. Same view, right? The two things have to be compared and contrasted.
What sort of timeline do you look at in terms of evaluating?
Well, it's not very interesting, really, to try and project much beyond four or five years because you're into sort of-
Right
do you believe those numbers, really? Right? We look carefully at that sort of timeframe.
For internal investments, if you're not seeing some sort of return within 12, 18 months, you probably aren't getting market traction. Right?
Right. I guess, on that front, I imagine there are some initiatives that have a longer lead time than others.
Sure.
Right. Where maybe you can't see the return come through over one to two years, I guess. I don't know if healthcare exchange as an initiative is, if you would consider it an initiative or just kind of an extension of an offering you already have.
How do you think about that in terms of how you're allocating resources and if you will continue to grow the resources that you are allocating to that?
Yeah. Just to make sure everyone has the context for that, we have a business in North America, largely in the healthcare space.
Which we call our human capital business in North America. Which is less than 10% of our firm globally.
Okay.
Right? Let's just make sure we have context.
Sure.
Right? We've watched the private healthcare exchange space in North America very carefully. Our business is targeted Though it has some Fortune 100 clients, its core client base is just a step below that, 5,000, 7,000 staff, employees, and down a bit. We spend a lot of time talking to our clients and prospects in that space. We've developed something called the Willis Advantage, which importantly, they told us, "Look, one of the reasons you, Willis, are taking market share in this space is that you have a national offering which builds in a wellness offering into your offering, and you have negotiated very good offerings from the key carriers because of your national clout and the size of your firm. You need to be able to replicate that on your health exchange.
Okay.
recognizing that, we spent some time working with carriers and designing the program and training our entire staff to be able to talk to our clients about it. By the way, our clients also told us, it's not clear we're going to want to move on a private exchange. Many of them will not. What it has enabled us to do is for everybody who wants to talk about it's the hot topic.
Right.
we've had more client meetings in this healthcare space to talk about exchanges, which after an hour and a half have then gone off into a much more traditional area.
Right.
It's enabled us to talk to a whole range of prospects who are today not Willis clients. They recognize in the space that they're in, not the mega, but the next layer down, the best national offering with the best research and the best clout with the carriers is the Willis Advantage. Clearly. it's been a wonderful door opener for us. We're talking to people to start. They sign up for 2014, or we're talking to people about 2015, and these have lead times, these changes in healthcare programs.
I'm sure we will sign up a large number of people. Actually, it's real economics for us is also it has again reinforced Willis's positioning in our target market as the lead player.
If I'm not mistaken, you partner with Liazon.
We do.
Great. Did the recent announcement have any impact on your offering? Do you expect it to?
Well, it's produced all Liazon's competitors picked up the phone and called us immediately. We're very happy where we are, but we're in a nice position of having alternatives. I think it's fair to say we are rather important to the Liazon platform, and therefore to Towers in this space. I'm sure they will serve us appropriately and fully in a differentiated way. If that was not true, we have options.
In terms of allocating resources, back to the initial question is, what sort of investments would you need to make? I'm guessing that Liazon is more the infrastructure. For you, it's going to be around marketing knowledge.
I assure you, the investment for us to date has largely been made.
Okay.
Largely been made. We've invested in designing the product, working with Liazon, and therefore ability to work with other platforms if need be, working with all the carriers and training our staff. We're out in the market. Now, as this thing evolves and who knows how it's evolved, we may have to invest in other ways. In terms of, is this thing ready to go to market, to talk to clients, to start operating across the whole country in all our offices? Done.
You mentioned upfront one of your slides that you see employee benefits as a growing.
Yeah
portion of the pie. How big of a driver of that is this initiative or is it-
No. Our North American human capital business is growing nicely. We also have employee benefits businesses in other parts of the world. Basically, it's what I said earlier. All the demographic issues that you read about every day are alive and well, unfortunately. Unfortunately, they're leading to healthcare problems around the world, and they are powering our healthcare businesses in other markets too. Other countries are dealing with the same problems in various degrees, and North America is dealing with.
Great. I can't really see. This light is awfully bright. I can't actually see very well.
The gentleman over here.
Right here on the side? Yep. Can we get the mic? If you wouldn't mind waiting for the mic.
Good morning. Good morning. You talked about CapEx and pension flattening out and then reducing. Can you quantify that some more for us? I wish I could. The CapEx, I think we've got a reasonable handle on how. It's the mixture of the two, though. Those who know our company know it well will know that we have a significant defined benefit pension funding, old style defined benefit pension funding needs. Anyone who's in that space knows that in the last few years, the combination of historically flat investment and poor investment returns for a lot of people and very low long-term rates inflating the value of liabilities created funding issues for a whole swathe of pension funds. I think we believe, subject to negotiation that is ongoing, that some of those trends are better than they were a few years ago.
I cannot tell you, I cannot predict exactly how that will turn out. If you believe that the trend in long-term rates is probably slightly up versus what it was a couple of years ago, that will be to our benefit.
What about CapEx? How much has it been historically and where do you see it going?
No, we deliberately blended those two together. We're not a hugely capital-intensive business, but we do have to invest in new systems, occasionally some new property, et cetera. I think what we're saying is we've had a couple of large projects which have been flowing through the P&L, and more importantly, through the cash flow statement, over the last couple of years. They are starting to wind down, leaving us room to refresh with new ones. We've had a couple which have been very large, and they are starting to trail off. I'm not saying we're going to necessarily cut CapEx, but we have room in the CapEx budget to launch a number of new initiatives if we wanted to and still keep our spending in good shape. That's what's going on there.
Okay. Back to me for a minute. If you do have a question, raise your hand and move it around like this. I can't actually see very well from here. One question, I guess, reinsurance markets, has been maybe other than healthcare exchange , an area that you, I would imagine, get a lot of questions on. How do you see the market developing given the changes that are afoot now, and what is Willis doing to assert its leadership position in the reinsurance market and leverage that as you move forward?
Yeah. Our reinsurance business for anyone has been, though we don't break it out and give specific revenue numbers quarter by quarter, those who've been listening to what we've said in terms of its revenue performance over the last few years will recognize that it's been doing very well. It's been doing very well because of great people, great client service, et cetera, but in particular because we have really integrated very advanced analytics with our placement and brokerage capability. The two have come together. That has been a distinguished offering out in the marketplace, a very successful offering. I think we believe that it has a good way to run. That is, we can continue to win new business, take market share, which is what we've clearly been doing.
The headwind in that is that everyone can pick up any insurance rag and read about what's going on in insurance pricing, reinsurance pricing. Now, it would be a mistake to extrapolate from Florida wind cat rates, right, across the whole market. It's true certainly that reinsurance pricing is going to be weaker than we have seen in the last couple of years going forward. We still think we can grow that business. We still think we can grow our reinsurance business. Right?
What areas, Florida certainly the one that gets a lot of attention. What areas do you anticipate that the traditional capital that is undeployed and moves to, where does it go? As you think about your own franchise, obviously every market is different. You've probably identified certain parts of the business where you want to concentrate your attention. Is that a factor in kind of thinking about the capital flow as you think about where you want to direct your attention?
The capital flow spills out of reinsurance into the primary markets. Okay, that is the interesting dynamic I think we've all got to keep an eye on. Our G360 product, specifically it's focused on our London book, but we've said the purpose of G360 is to bring new forms of capital to underwrite in the London market where they've not been active to date. We've grouped into 3 types. Traditional London capacity that is entering new markets. Right? Reinsurance capacity which is entering the market, actually new foreign capacity. Right? We're actively talking to local market people who want to move into new markets. We have, at this point, Berkshire Hathaway signed up to be new reinsurance capacity effectively entering the primary market.
We have the Chinese coming in also through us to be active in the market in a way they haven't been in the past. I think when you talk about capital flows, we actually think this is a very important topic. It isn't limited to the reinsurance market. I think what we need to be looking at is actually how is capital going to be deployed and how is underwriting skill going to be deployed across the primary and reinsurance markets. We think that's an evolving story. We think that somebody like Willis with our analytical capability, our client relationships, our reinsurance relationships, and our ability to play in the ILS space is extremely well-positioned to help our clients navigate that changing world. Right? It is a changing world.
I realize that the word syndicated tends to be associated with the Lloyd's market, thinking about whether we're talking about whole risks or tranched up or syndicated risks just generally. When you talk about capital spilling over into primary markets, are you more talking about that hitting primary and excess layers or excess layers of that kind of business, or do you see it moving further into the traditional, more whole risk? That's it as well.
I think that's the interesting debate. I can tell you that as we have started to manage through the spillover and issues we're seeing and the development of the cat markets and the sorts of participants in those markets. We're starting to have conversations with people who are saying, "Actually, I do see insurance risk as a non-correlated asset.
Right? I'm not sure that just limiting our exposure to wind risk in the southeast of the U.S. is how I would necessarily want to play. It happens to be where the best analytics have been done, right?
That's why all of us players are concentrating there. If there were opportunities to have similarly analyzed exposures in other markets, we should talk. There's a lot of discussion and thinking going on all in the context of is insurance risk an uncorrelated asset, which is going to become a more and more legitimate alternative, like private equity or commodities in the portfolio of major institutional investors. For some, it is moving in that direction.
I see. Great. Okay. One question here. Stand up. I know, it's coming. Can you just give us an update on Gras Savoye?
Yeah.
Sort of kick the option can down the road, I guess. What would we be looking at to make a decision as we get closer to 2015?
Yeah. Just remind people, Gras Savoye is the leading French broker. France represents about two-thirds of what they do, and the rest is Africa, Eastern Europe, a little bit in Asia, and a little bit in the Middle East. We have an option now, which we would actually hand the cash over in the mid-2016 decision in the spring of 2015. We quote, "Kick the can down the road for a reason," which is that this is a nice business, but it doesn't operate at the margins we are familiar with. The management team needed to do a cost restructuring as part of improving the performance of the business. Doing that in France is an interesting enterprise. You need to have very skilled people who do it.
They have done a brilliant job, but it basically meant that 2013 earnings for them were going to be depressed by a restructuring charge significantly. It made sense for us to see if this was going to work, if they could actually do it properly, that we would inherit a much stronger business, and for them to be able to work that through just to move everything by a year. It made perfect sense. It's going very well. They've done an excellent job. The CEO of Gras Savoye is highly experienced in restructuring in France. Everyone thinks this is an impossible task. It is not an impossible task. You just need to know how to do it, right? He knows how to do it.
We're looking now, I think, at a business going into 2014 and 2015, which will have a leaner cost structure, and we'll have the opportunity to grow in line with these markets it's playing with. Why are we happy to have an option? Clearly, in some quarters, you use the word France and business in the same sentence, and they struggle to understand why they would be in the same sentence. We want to make sure that the French economy is operating properly, that it is going to recover with the rest of Europe because like it or not, France is two-thirds of what they do. Let me tell you, it is very, very rare in this business.
In fact, it's probably at this point unique in this business that you have the opportunity to buy the leading player in one of the top six insurance markets in the world. Doesn't come up. This is a very special asset. To have the leading player in one of the most important developing markets in the world. Very rare asset. We're obviously interested in it. We just want to make sure, in particular that France, you can see a path to recovery.
Just to pick up on last question. One question I had is how much leverage does Gras Savoye have now? Do we know?
It's not bad.
Okay.
No. One of the questions I do get a lot of is, can you finance this thing?
Yes.
Right? Let me assure you that as we model through how much we might have to pay under different conditions depending how it performs, we are very confident that the combined entity has the debt capacity easily to absorb this within our existing financing and rating arrangements. As I said in our July conference, it's not our plan to use equity to fund this thing.
Got it. In terms of debt to capital or I should say interest coverage, does your kind of tolerance, are you willing to take your tolerance a little bit higher temporarily in order for that to occur?
We shouldn't have to do that for Gras Savoye.
Okay.
Okay? To answer your generic question, if Gras Savoye came along and another great opportunity which started to stress some of the numbers, we obviously would want to be able to take advantage of that golden opportunity. As you can imagine, we have ongoing discussion with our bankers and rating agencies about if that were to happen, how would we do that, and would we have a temporary period when we perhaps started to go above some of the numbers, and here would be the plan to bring it down. At this point, I have to tell you, given the range of M&A opportunities of quality, which meet our financial targets that we are seeing, I'm not sitting in a position believing that our balance sheet is a constraint to our opportunities. Remember, we are a highly cash-generative business.
That every year our ability to replenish, pay down debt, et cetera, as required, which we haven't done, because I would rather us grow into our debt rather than use shareholder cash to pay it down. We are a cash-generative business, which enables us to fund acquisitions from cash as well.
Great. Then just one last one, I guess. A little devil's advocate. In terms of if your purchase price is based on trailing performance, and it seems like in some parts you're very interested in Gras Savoye, wouldn't maybe that turndown be an opportunity to ensure a better purchase price as opposed to maybe waiting for another year for them to recover? Which I would imagine, just given the way my understanding of the purchase price calculation is determined, would cost you something in terms of that option.
Yeah. You're absolutely right. At an extreme, the better they do, the more we pay, is what you're saying, right?
Correct.
Let me tell you, when you analyze the cash flows of this thing and do the NPV, we are much better off buying a well-performing, growing, robust Gras Savoye than trying to make sure it's weak so that we can pay a little less in 2016. It is much better for us to have them performing strongly, to have momentum in the marketplace, winning market share, using Willis products to differentiate themselves. The return to us over time is far better than us inheriting a weak company that we then have to desperately try and improve. Bad place to be, actually.
Got it. All right, I think we're out of time. Dominic, thank you so much.
Thank you.
Really appreciate it. Thank you everyone for participating.